S’pore, Mauritius FIIs still out of MAT net: Dinesh Kanabar

Dinesh Kanabar, CEO, Dhruva Advisors explains that there are three kinds of FIIs: protected by double taxation avoidance treaty, no treaty but physical presence in India, and no treaty and no presence in India. So far notices have been sent only to the second category of investors.

Minimum alternate tax or MAT has been a part of Indian taxes since 1987, but it was an accepted norm that unless a foreign investor has an office in India, he is not liable to pay MAT, says Dinesh Kanabar, CEO, Dhruva Advisors.

Also, as many as eight prior rulings clearly state that even a foreign company having a place of business in India is liable to pay MAT, but where an FII does not have a place of business here and does not maintain books of accounts – for calculating “book profits” under MAT, it is not liable to pay MAT.

At the moment, Kanabar says FIIs that have made investments from abroad have received MAT notices. However, investors from countries such as Mauritius and Singapore, with which India has signed Double Taxation Avoidance Agreements (DTAA), have been exempted or atleast have not received any notice as yet.

He further explains that there are three kinds of FIIs:

1) Protected by double taxation avoidance treaty

2) No treaty but physical presence in India

3) No treaty and no presence in India

So far notices have been sent only to the second category of investors, he says.

However, he worries that considering the Centre is seeking nearly Rs 40,000 crore from FIIs by levying this tax on capital gains made over the years till March 31, it appears that foreign investors from countries such as Singapore and Mauritius have also been factored in.

The Indian government has made it clear that minimum alternate tax or MAT will not be levied on foreign institutional investors or FIIs FY16 onwards.

Below is the verbatim transcript of Dinesh Kanabar’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: What is your sense, is the government on a weak legal wicket at all?

A: Before I answer that, just a factual correction. Foreign Institutional Investor (FIIs) who are coming from countries where India has tax treaty under which capitals gains is exempt and then there are other FIIs. It is believed tjay notices which have been received by FIIs are FIIs located in India and not outside India. It is not that.

If you are located in India then admittedly you are liable to minimum alternate tax (MAT) tax. So, the entire controversy really is that MAT has been around for the last several years, it has been more than a decade now that MAT is in existence. It was always sort of an accepted position both from the tax payers side as well as from the revenue side that unless you had a place of business in India you would not have MAT liability.

So, just as an example, if you are a foreign company, you supply technology to an Indian company, you had no business here but you just got a simple royalty payment you are not liable MAT, but you are liable to pay loyalty tax. Similarly, if you are an FII, no place of business in India, you made an investment in India then you are liable to pay capital gains tax, either you are exempt or not exempt. However, there was no question of a book profit tax because you did not keep books of account in India therefore there was no question of computing book profit and this was an accepted position.

There are about eight judgements; all of Authority for Advance Ruling (AAR) and tribunal on the subject. Consistent position in law has been that if you had a place of business in India, even if you are a foreign company, you are liable to MAT tax. If you did not have a place of business in India, you are not liable to MAT tax. There was a solitary judgement of the Authority for Advance Ruling in the case of Castleton and there are other judgements of the Authority for Advance Ruling including subsequent to Castleton which have held that there is MAT liability.

Coming to your question specifically, where FII does not have a place of business in India at all, does not maintain books of accounts because it is not so required to maintain books of accounts in India, the question of MAT liability would not arise. It is in recognition of this principle that the law was amended in this Budget. The logic that we are hearing is that we do not like to make any retrospective amendments; just as Vodafone was a negative retrospective amendment we do not want a positive retrospective amendment. Therefore for the past years, let the law take its own course which I don’t think is a correct situation, this amendment is a clarification of the law as it always stood.
Sonia: Now it seems like the government may not relent on this issue so what is the remedy for FIIs now? In my understanding there are two options, one, that they can refer to the Disputes Resolution Panel (DRP) which has been setup to expedite the process and two that they can go to the Commissioner of Income Tax (CIT). What in your own opinion is the best way or the best remedy for FIIs now?

A: Latha mentioned earlier very rightly that there are FIIs who come from Singapore, Mauritius where capital gains is exempt. Notices have not been issued there; notices which have been issued at this point of time, is in respect of FIIs who come from jurisdictions where there is no capital gains tax exemption.

Now, in their situation, they can either go to DRP which is a nine month window in which the DRP has to pass a judgement or they can go to Commissioner Appeals in which case the draft order becomes final and there might have to be on account payment of taxes which most people would want to avoid and therefore people will go to DRP.

However, the real issue which comes up is that should the government really reconsider its step. There are number of representations which are being made to the government at this point of time and we do hope that the government sincerely takes on board those representations because otherwise this is going to be a protected litigation.

One more issue is how do FIIs come together and tag along, along with the Castleton judgement which is pending for adjudication before the Supreme Court so the matter is decided quickly by the Supreme Court rather than wait for each and every individual case to be litigated over years.

Latha: I want to get back to the first statement that you made. Who have got the notices – guys situated abroad don’t get, it is the guys who are located in India who have got the notices, right?

A: No, it is the FIIs who have made investments from overseas who have received these notices. The notices maybe served on the custodians in India; that is a separate matter.

Latha: You mean the guys located in India were always paying MAT?

A: That is right. There was no doubt that Indian companies, people who have place of business in India are liable to MAT; I don’t think there is any dispute at all there.

Latha: You said protracted, normally how much time you wait if it is not fast tracked?

A: If you look at the pendency of matters in the Supreme Court at this point of time, it could take maybe two to three years before Castleton judgement comes up for regular hearing. If it does come in for an expedited hearing, it could come at any point of time.

Latha: There is a number that is doing the rounds, saying that it is Rs 40,000 crore of back taxes that the government might get. Really can they make so much money; that means if MAT is 18 percent – somebody should have made something like Rs 2 lakh crore plus in terms of capital gains. Those were not years when the markets did very well, Rs 40,000 crore looks like a wrong number?

A: I have no idea whatsoever how this number has been computed. However, I will give you two inputs on that. First is that if the tax office goes on asserting because the notices which have gone out are for the year which was getting 10-11 which was getting time barred. The tax office can go back six years as you know so they can reopen matters, so maybe that is one factor which is going into it.

Second, if the number is as high as Rs 40,000 crore and I hasten again to add I have no understanding on the basis on which this number is computed. However, then that also means that gains made by FIIs which are in Mauritius and Singapore have been taken into account.