India's Tax Terrorism - Minimum Alternate Tax (MAT)

Every year, India finds itself in a new tax controversy. The Vodafone litigation consumed the early years of this decade, capped by the retroactive tax amendment in 2012. Then came the Shell shock & transfer pricing trouble in 2013. Last year, the BJP made the UPA’s tax terrorism a campaign issue. Only to find itself now facing similar allegations.

Minimum Alternate Tax (MAT) is an indirect tax. MAT is a way of making companies pay minimum amount of tax. It is applicable to all companies except those engaged in infrastructure and power sectors. Income arising from free trade zones, charitable activities, investments by venture capital companies are also excluded from the purview of MAT. However, foreign companies with income sources in India are liable under MAT.

For example, book profit before depreciation of a company is Rs. 7 lakh. After claiming depreciation and other exemptions, gross taxable income comes to Rs. 4 lakh. The income tax applicable Rs. 1.2 lakh at a rate of 30%. However, MAT would be Rs. 1.29 lakh (Rs. 7 lakh at 18.5%). The MAT paid can be carried forward and set-off  against regular tax payable during the subsequent five-year period subject to certain conditions.

In 2010, Mauritius based Castleton Ltd. Approached the tax body whether it was required to MAT or not. The body has ruled that even foreign firms are subjected to MAT. Castleton has appealed to the Supreme Court.

FIIs are in the view that MAT should be levied only on the domestic companies and not on foreign companies or foreign investors. One of their key arguments is that MAT can be levied only on book profits, to compute which there must be a requirement to maintain books of accounts. As there is no such requirement, foreign investors argue, they should not be asked to pay MAT.

The Ministry of Finance has said that foreign investors domiciled in countries that have tax treaty pacts with India do not have to pay MAT taxes. These countries include Singapore and Mauritius. Also, the Central Board of Direct Taxes has directed authorities to close treaty cases in a month. According to Rajesh H. Gandhi, partner, Deloitte Haskins and Sells LLP, more than 30 per cent of investments by foreign institutional investors come from treaty countries.

However, those outside of treaty countries, it could be long drawn legal battle. About a third of such investments come from the U.S. India’s treaty with the U.S. does not cover capital gains provision, according to London-based ICI Global, a lobby representing foreign investors.

Foreign investors have been the major drivers of the stock market. They have pumped in over $50 billion in the Indian markets since the election of Prime Minister Narendra Modi in May last year. Any uncertainty over tax is likely to hurt investor sentiment. The BSE Sensex is down by 2000 points in 9 days. Business hurdles like MAT act as a spoil sport in the days of glory.

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By - Chaitanya Kulkarni