Indian Government Accepts Recommendation Not to Apply MAT Retrospectively to Foreign Investors2 September 2015
The Indian Government has accepted a recent independent recommendation to clarify that India’s Minimum Alternate Tax (MAT) does not apply for the period prior to 1 April 2015 to Foreign Institutional Investors (“FIIs”) or Foreign Portfolio Investors (“FPIs”) who do not have a “place of business” or “permanent establishment” in India. The announcement by the Indian Government ends the uncertainty over retrospective tax liabilities that had arisen for foreign investment funds registered in India as FIIs/FPIs. The clarification follows significant engagement from Irish Funds and collaboration with other international investment fund associations to demonstrate why Indian MAT should not be applied to foreign investment funds.
Uncertainty arose in relation to the application of MAT following a provision in the Indian Budget 2015 which exempted foreign investors on a going forward basis from MAT from 1 April 2015. This exemption raised a question about potential retrospective tax liabilities prior to 1 April 2015, when it has always been previously understood that MAT (in force since 1996) did not apply to foreign funds.
Following submissions on this issue and the highlighting of the impact of retrospectively applying tax liabilities to foreign investment funds, the Indian Finance Ministry announced in May that a special Committee would be convened to consider the question of the application of MAT to foreign investors, chaired by A.P. Justice Shah (the “Shah Committee”).
On 25 August, the Shah Committee published its report concluding that MAT should not apply to foreign investors and recommending either a legislative amendment or the issuing of a circular to clarify “the complete inapplicability of the MAT provisions to FIIs/FPIs”.
The Indian Finance Ministry has now announced its intention to make the appropriate amendment to the Income Tax Act, 1961 to clarify the position as recommended by the Shah Committee. Pending the amendment, India’s revenue authority, the Central Board of Direct Taxation (CBDT), will convey internally to field officers the decision of the Government to apply the recommendation of the Shah Committee.