Since we published our Duane Morris Alert on 23 January 2015 relating to foreign portfolio investors (FPIs) and the Minimum Alternate Tax (MAT), the Indian Government has been engaged on multiple fronts to contain any adverse fallout from the issuance of tax notices under the MAT provisions to FPIs.
Story So Far
The retrospective levy of MAT on FPIs was reportedly behind a record dollar outflow triggered by FPIs last month. The government has now clarified that the tax department will neither pursue fresh MAT claims noract on previous ones until a committee headed by Law Commission Chairman A.P. Shah submits its report to the government on the applicability of MAT on foreign investors. On 7 May 2015, Finance Minister Arun Jaitley announced the establishment of this committee to explore the issue.
Until the committee headed by A.P. Shah opines on the applicability of the MAT provisions on FPIs, no further action can be initiated against the FPIs. Even though this is a stop-gap measure, it appears to provide breathing space for FPIs to plan their Indian investment strategy as most of the FPIs would have already distributed the funds back to the investors and it is likely to be impossible for them to recover the funds in order to discharge MAT liability given its retrospective application.
If a tax show-cause notice arrives requiring MAT on an FPI, it may be worthwhile to consider:
- Revisiting the calculation of "book profits" for the purposes of MAT as these calculations are frequently erroneous;
- Revisiting any Authority for Advance Rulings orders obtained at the time of structuring the fund into India; and
- Ensuring that all filing requirements with the Securities and Exchange Board of India are up to date and procedural formalities are completed, as they will become relevant in case further judicial proceedings are involved.
It is likely that this issue will eventually need to be pronounced upon by a court of law in India since it pertains to the interpretation of a key point of law, but most investors may hope that they will be spared protracted litigation in Indian courts by the outcome of the A.P. Shah committee.