Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Economy

Government Says Let the Courts Decide the MAT Issue for FIIs

The government has refused to budge on the FII tax issue, it seems. Recently, the tax department had started to issue notices for Minimum Alternate Tax (MAT) on gains made by foreign institutions (Read our post) after an Advance Ruling by the tax department that capital gains made by such investors, regardless of the tax treaty with Mauritius, is subject to MAT.

MAT is applied so that people who use loopholes to avoid taxes will still pay at least a certain minimum tax amount. It’s only for companies though.

Till now, companies didn’t include non-Indian companies (those who don’t have a base in India). But some ruling established that an FII –  a foreign based institution that invests in Indian stocks – is taxable in India, even on capital gains on shares. Such gains are otherwise untaxable because the Mauritius/Singapore treaties don’t allow them to be taxed in India, but the MAT concept is that if you don’t pay tax because of a loophole, you pay MAT. MAT adds up to about 20%.

Today, the government was supposed to clarify on this tax, which no longer applies to FII’s going forward (due to a tax change in the recent budget). The government has said now that:

  • Look, this is not a court issue, since the AAR ruling is like a judgement. Please appeal to a higher court.
  • We can’t introduce retro-active taxes or tax-freedom by policy; that would be silly.
  • Judicial actions should not be overridden by government policy, so let the courts decide.
  • If the FII comes from a tax-treaty state like Mauritius or Singapore, the tax department will “try to close those cases as soon as possible“. t

Letting the Courts Take The Blame

Let’s be honest: Indian tax systems suck. In 2010, the AAR said no MAT. In 2012, they said MAT will apply. From 2012 to early  2014, the tax department did NOTHING. Not ONE notice was sent. In the end of 2014, the tax department decides to use this AAR ruling to demand Rs. 40,000 cr. of past taxes – going back as much as 10 years – from FIIs, saying look we don’t care that long term capital gains was exempt from taxes, or if you were in a tax treaty state, or if you weren’t even in India: we still want you to pay taxes for everything in the past.

This is shoddy behaviour and it happened in this government. Make no mistake about that. They sent the tax notices knowing fully well that these are way overboard, and that this was aggressive tax collection.

But now, instead of fixing this issue and providing clarity, the government has decided to leave it to the courts to decide. If the court decides that yes, MAT does apply, then all those years where we told foreign investors that they won’t be taxed if they come from Mauritius or Singapore – we were lying.

If we lied then, we will be presumed to lie again. This government or any other will simply be considered non trustworthy.

You think today as a Indian individual taxpayer, that if you sold a stock more than a year later, you don’t pay any capital gains tax. But after a few years, some random court will say that MAT or it’s other avatar, AMT – applies to you as an individual too. Then, instead of clarifying the issue, the government will just send you tax notices and tell you to go to court. The court will take 10 years to decide your case. Meanwhile you don’t invest any more money because: you simply don’t trust the government.

Sure, Mr. Jaitley, you made FII gains free from MAT now, but you never know what that means if some other joker can use some stupid clause to violate the spirit of what you really are saying: that India will not tax capital gains of FIIs. Tomorrow you might choose some other head of tax to hit these FIIs with. No one trusts a government that shifts goal posts. What we have seen in the last year are promises of no retrospective taxation, but only examples of taxation that can only be called retrospective.

And yet again, we’re going to have a judge tell the government what to do.

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial