MAT tangle: 5 foreign portfolio investors including National Westminster Bank, BNP Paribas, take I-T department, government to court

MUMBAI: Five Foreign Portfolio Investors (FPIs) on Thursday mainly from the US and the UK have dragged the Indian government and the Income Tax department to the court for levying Minimum Alternate Tax (MAT) on their capital gains for the year 2011-12.

The five FPIs — National Westminster Bank Plc, BNP Paribas L1, First State Asia Pacific Sustainability Fund, First State Indian Subcontinent Fund and First State Global Emerging Market Sustainability — filed a writ petition in the Bombay High Court. The Income Tax officers who had assessed these investors were also intimated of the petition on Thursday, people close to the development said. ET had reported on Wednesday that five FPIs were planning to file writ petition in the Bombay High Court.

The next hearing for the writ petition would be held on May 6. It is then that the Bombay High Court will decide whether to take the case on the bench or allow arguments in the case. Harish Salve, the well-known tax lawyer, would represent the FPIs while Khaitan & Co would be advocate on record in the case. The MAT issue arose when few IT officials decided to send re-assessment notices to few FPIs and demanded that MAT should be paid on their capital gains. This is for the first time that MAT is applied on capital gains of any investor. However, the brief respite came to the investors in February, when Union finance minister Arun Jaitley mentioned in his budget speech that MAT would not be levied on FPIs from April 1, 2015.

“The biggest problem for FPIs is that even if they want to pay MAT they cannot. Because the investors who would have invested in their funds for 2011-12 or earlier years, would have already exited. Now there are new investors who are present in the fund,” a person close to the development said.

Also, revenue secretary Shaktikanta Das, Central Board of Direct Taxes (CBDT) chairperson Anita Kapur and Minister of State for finance Jayant Sinha recently assured investors that MAT would not be levied on funds that have invested through countries such as Singapore and Mauritius, with whom India has double-taxation avoidance agreements (DTAAs).

The FPIs and most of the tax experts have held that MAT, when introduced in the late 90s, was meant for Indian manufacturing firms. According the regulations, any firm that pays less than 18.5% annual tax on their book profit is liable for 20% MAT. Tax experts have time and again argued that neither are FPIs domestic firms nor are do they maintain books in the country and their capital gains from Indian stocks are not book profit.

The Income Tax department on the other hand doesn’t buy this argument and maintains that they can levy MAT on FPIs. In the budget speech, the finance minister removed MAT on FPIs from April 1, 2015. Many tax experts say that more FPIs could become party to the case in the coming days.