The Government of India confirmed that it will not seek to recover Minimum Alternate Tax (MAT) on a retrospective basis from foreign investors, such as non-Indian investment funds. This announcement was undoubtedly welcomed by fund houses investing in India as it brings to an end a period of uncertainty over retrospective application of the tax.

Until recently it had been the case that MAT, a tax charged on profits of companies based in India, did not apply to foreign investment funds. Following a number of inconsistent tax rulings, a clarification was proposed in India’s Finance Act of 2015 to exclude the income of foreign investors from the chargeability of MAT.

As the 2015 amendments only intended to apply from 1 April 2015, uncertainty arose as to the retrospective application of MAT prior to that date. It has since been reported that Indian tax authorities advised a number of international asset managers of their intention to pursue MAT claims going back five years. Following widespread discontent among asset managers, a special committee chaired by Justice A.P. Shah was set up by the Indian Minister of Finance to consider the retrospective application of MAT.

On 25 August, the Shah Committee published its report which concluded that MAT should not apply retrospectively to foreign investors. The report recommended clarifying the complete inapplicability (prospective or retrospective) of the MAT provisions to foreign investors.

On 1 September 2015 the Government of India announced that it was accepting the Shah Committee recommendations and promised legislative amendments to clarify the inapplicability of MAT to foreign investors. The clarification may have come too late for the investors who withdrew a reported US$2.5bn from Indian stocks in the month prior to the announcement.