BackMAT relief: Investors wary as litigation looms on tax tangle
Relief provisions will be applicable from 1 April 2015, leaving past deals open to litigation that may hurt investor sentiment
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New Delhi: Investors welcomed the relief provided on the levy of minimum alternate tax (MAT) in the revised Finance Bill, but expect litigation to continue as the government did not yield to demands for retrospective exemptions from the levy.
A prolonged legal battle is likely to cloud investor sentiment and stem the inflow of foreign investment—both short term and long term.
Finance minister Arun Jaitley on Thursday had moved amendments to exempt foreign investors’ capital gains from the sale of securities, interest income, royalty and fees for technical services from MAT, in cases where the tax rate is less than 18.5%, a move which is expected to benefit private equity, venture capital investors and debt funds.
This was in addition to the earlier clarification provided by the finance minister in his budget speech exempting capital gains accruing to foreign portfolio investors (FPIs) from levy of MAT. But these provisions will only be applicable from 1 April, leaving past transactions still open to litigation.
Levy of MAT on capital gains accruing to foreign investors is expected to be a long-drawn legal battle after five FPIs challenged the income-tax department’s demand for MAT, a tax paid by profit-making companies that do not pay corporate tax on account of exemptions and incentives, in the Bombay high court.
Mahendra Swarup, managing director of Avigo Capital, a fund manager and advisory firm, said private equity and venture capital investors had been looking for greater clarity, which has been provided with this amendment.
“Since the exemption is only prospective, the sword continues to hang over the investors. The problem is a bit more complicated for private equity investors as compared to FPIs because you are dealing with more than one investor. It is a pool of funds and in many cases the money would have been distributed among investors and overseas structures, through which the funds have been routed, may no longer exist," he said.
Foreign investors have been arguing that they do not maintain a book of accounts in India and hence MAT is not applicable to them. Also, capital gains are not subject to MAT. So far, the tax department has sent notices to 68 FPIs for payment of dues totalling ₹ 608.83 crore, but has largely spared private equity funds from the tax net.
As it is, more than 80% of the private equity funds coming into India are routed through countries such as Mauritius and Singapore. India cannot levy capital gains tax on funds from such jurisdictions as per the provisions of the double taxation avoidance agreements with these countries.
“Investor confidence does take a beating. Whenever the sentiments improve, one such issue crops up and investors become wary," said Swarup, who was also the former chairman of the Indian Private Equity and Venture Capital Association.
Sameer Gupta, tax leader for financial services at EY India, said the FM’s amendments will provide a relief to investors, but past cases will have to be decided by courts.
“All the announcements have prospective applicability effective April 1, 2015, and as has been indicated by the government, the past years will hence necessarily have to be decided by the judicial process through courts," he said.
In the amendments to the Finance Bill, the government also sought to introduce some measures to plug loopholes in the existing Income-tax Act by expanding the definition of income and making it mandatory for more companies with overseas interests to file tax returns in India
The definition of income has been expanded to include subsidy, grant, incentive or duty drawback or any other such concessions from the central government and the states, in a move which will have tax implications for companies.
“These are revenue enhancement measures that the government is taking. Clarification on the inclusion of subsidy and grants under income and its tax treatment will ensure that litigation is reduced," said Sunil Jain, a partner at J Sagar Associates, a legal firm.
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