Relief for FIIs, India allays fears on tax claims topping US$6.4 bn

The government on Wednesday assured over 1,000 foreign institutional investors (FIIs) across the United States, Hong Kong and Singapore they can avail of treaty benefits to ward off tax demands on capital gains booked over the years till March 31, reports the Financial Express. The development is significant given the uproar among foreign investors following around 90 tax notices slapped on FIIs by the revenue department.

While finance minister Arun Jaitley announced in the Budget that FIIs will not be required to pay minimum alternate tax (MAT) from April 2015, the tax department sent notices to FIIs claiming tax worth US$6.4 billion for past capital gains. About 41 per cent of investment into the Indian capital market happens through these countries.

The ministry, led by Minister of State for Finance Jayant Sinha, along with Revenue Secretary Shaktikanta Das and CBDT Chairperson Anita Kapur told the FIIs in an international conference call they can invoke the double taxation avoidance agreement (DTAA) to escape the tax demand.

“This means that FIIs from Singapore and Mauritius will not have to pay the tax as these countries have DTAA with India, while they have zero capital gains tax,” an official told The Indian Express. “We will also clarify if minimum alternate tax (MAT) would be levied prospectively from April 1 on other incomes like interest on bond, private equity and foreign direct investment. This clarification can be expected soon,” the official added.

Essentially the Indian authorities said the definition of permanent establishment as defined in the tax convention would help foreign investors. The MAT demand is applicable only on foreign investors deemed to have a permanent establishment in India. The ministry’s clarification means those entities claiming an establishment in these jurisdictions will escape the tax net.

Meanwhile, capital market regulator, Securities & Exchange Board of India (Sebi), too, has conveyed to the revenue department its concerns on the tax demands. The regulator’s concerns are that the demands can create a negative sentiment among the FIIs. These have been conveyed to the department of economic affairs in the finance ministry, which has also supported them.

While reiterating the government’s commitment to a non-adversarial tax regime, the Centre claimed the MAT for foreign portfolio investors is a legacy issue, currently sub-judice and therefore can’t be dealt with retrospectively. The CBDT chairperson told the FIIs that assessing officers have been instructed to “pass orders very quickly” in cases where notices have been sent. “As per the existing law, it was necessary to send the notices. However, when they are taken up, they may get quashed,” the official said.

Sameer Gupta, tax leader for financial services, EY said, “This is indeed a positive announcement. While re-assessment proceedings have been initiated, it would mean that if these announcements are given effect to, MAT should not apply to treaty protected cases.”