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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.

  • Sankar says:

    Make in India? Even buy in India seems tough.

  • JustSaying says:

    – MAT or AMT do not apply to individuals and won’t apply too because individuals can’t report different profits. You have briefly mentioned that MAT was introduced for taxing the companies who use loopholes to pay taxes. This was the case with lot of companies like Reliance, etc. They used to show very high tax depreciation/ provisions, etc as per tax laws and show minimal taxable profits, thereby pay very less tax or no tax. However, depreciation in the books was very low resulting in higher profits in books. This helped them to pay high dividends and maintain good share prices.
    – On contradicting rulings, there are multiple cases where there are differing decisions by same Tribunals, High Courts or even Supreme Court. Even after Azadi Bachao Andolan, there are contradicting rulings by various courts and AAR on Mauritius capital gain tax. Judges are also human and they may have different interpretation and views based on the facts presented. You cannot hold them responsible for that. Again I would say that AAR rulings are binding only on the person to whom it is issued and it cannot be applied to other person.
    – World over you will find examples where there are contradicting positions are taken by Governments. EU happily sold Irish Sandwich structure and now with Base Erosion and Profit Shifting all those structures will be invalid. Will you curse EU or OECD for that matter. What do we make of check the box regime in USA? FIIs will happily comply with BEPS guidelines. But when it comes to India, everyone wants to blame the Government. Come-on get real!
    – On the point about lying, the Government said FIIs are not liable to capital gains tax and the consultants happily sold it as ‘Not liable to tax AT ALL’. Did government say that capital gains are not liable to tax in India ‘AT ALL’? Favourable misinterpretation cannot be made a rule as it is convenient!
    – AARs is not part of Government – it is a judicial body and has retired judges as their members. So one cannot say AAR ruling is a Government ruling.
    – If Government did not issue notices to these FIIs, then some CAG in 2020 will say that the Governments decision of not issuing notice to FIIs caused loss of 40k crore to the exchequer and we will be discussing the non-action by the Government in some other post. This is a cruel world and media. Hence, from a political point of view it makes sense for the courts to decide the matter.
    – If some other joker comes and uses some other head of tax to tax the gains, there are courts to help them! Have we not seen the battle in Vodafone and other so many cases. Though at the end Government won by retrospective amendment, which was unfair and I don’t support that. But in this case, collective misinterpretation cannot be made a rule. Let the Courts decide the matter!

    • The tax treaties say you cannot charge cap gains taxes at all. The only income of these FIIs in India is the cap gains. MAT is a roundabout way to get out fo the treaty which is basically: lying.
      AAR is quasi judicial and therefore not part of the judiciary. It has retired judges. But it can be made subject to IT rules (not requiring changes in IT act) when the act is unclear. This is what was required.
      FIIs needn’t have been given notices. A simple rule saying “while the treaty is in force, no MAT can apply on capital gains” is enough to remove any confusion. A majority govt can do this. Being afraid of the media is one thing, but there is an international agreement in force.
      Courts shouldn’t have to decide small things like this. A court is not hte place for such definitions. A definition should be clear in the law.
      AMT does apply to individuals btw. If you have >20L income and have claimed certain deductions (infra, SEZ, hotels etc) then yes you get hit by AMT. 115JE is clear on that subject.
      Irish change of law is a big problem. Why do you think they are so concerned about any proposed changes? Investors will leave.
      The US tax authorities are one of the most aggressive in the world, but they get FDI because their courts are also very effective and deliver judgements fast. And while they do change goalposts it is NEVER for the past, and even then they allow time. Look at when they said future citizenship exits will result in taxation of property above $1 million, even then they said that will apply only after 6 months (I think After Jan 2013). Even though they knew that it was a loophole people have used to avoid tax, they didn’t tax them retrospectively, or misinterpret past laws to do so (there were some they could have abused). Similarly, they want to tax companies that keep cash abroad, but they will give time, and they will say that only for amounts parked after the start date will be taxed. THey are aggressive, but not retrospective.
      Can’t have Indian courts decide. Our judgges are simply too slow. We need better laws, so that we give less lawyers our money to decide every little thing in teh court. That’s what a government should be focussing on.

  • kumar says:

    no one sees the irony?
    no need to pay tax, because of the reasons given in the tax code. BUT you have to pay a minimum alternate tax?
    i cannot say to my child “no need to eat carrots, but you have to eat carrot chips”. my kid would laugh in my face.
    only governments can make such rules.

    • kumar says:

      and on top of it, you have to pay lawyers, so they can argue in the courts on your behalf, for something we may not needed to have done in the first place.
      i wish that all Foreign players go find other places to play with their money.

  • kumar says:

    this issue gets sillier and sillier as the days progress.
    now it is a few crores, instead of a humongous 40,000 cr.
    is the government really so hard-pressed for money? if they are, i dread to imagine the next steps that are going to be thought up in the imaginative finance ministry lairs.
    one way it seems fair, they always said that they would make bringing money in easy. they never seem to have said that once it is brought in, taking it out was going to be that easy.
    there are other markets that international investors can put their money in, with much less hassle. i hope they go there, and make merry. maybe the returns will be smaller, but there will be fewer ‘glitches’ when they want to take their money out.
    i imagine it was a problem waiting to happen, once you define money in so many ways : income, capital gains, other income etc. then come the definition of ‘book of accounts’ etc…then come their resident status. the arguments seem to centre on the words and their meanings, in a legal context, which seems to be an entirely different language unto itself.
    all in all, a grand mess was inherited, and the current people are contributing their bit.

  • Phoenix says:

    Problem is that these laws were passed with BJP’s consent ! And they are scared of getting grilled by opposition. If the courts give a rapid ruling in 1 year, this will settle the issue.
    In course of time this tax madness worldwide will increase. The US judiciary is NOT EFFECTIVE. They got Rajat Gupta, Rajaratnam, now Navinder Serrao. All the guys are of non- American origin and non- New York based. For all the police atrocities on blacks and Asians, no white policeman has been convicted.
    This issue looks bad- yes, but maybe we should be a bit fair in judging the govt. They are following the law as passed in parliament.

    • kumar says:

      no one really objects to the government’s implementation of the law. that is its primary role, apart from adding its own ‘flavor’ to the current laws.
      6 years back is how far i expect them to now go, and start claiming their share of the flesh.
      to start with Rs 40,000 crores, then say only Rs 600 crores seems like a bargain, but what if the actual number was 0?
      that the government needs money should not be a reason to go hunting for prey. and to form committees to decide on issues such as this [retrospective taxation in a way] is to distribute/avoid the responsibility of decision making. all of this is word play.
      the government could reduce its expenses, and pay Rs 0 [as salary] to all politicians. after all, the claim is that they want to ‘service’ the country. i hope they could find it in their large hearts to do it for free.
      as to sarao, most, if not all, the trading companies use algo trading, and have paid the requisite parties. sarao’s mistake was that he wrote letters about his trading style, which seem like a manifesto. and he did not lubricate the system with his winnings. he is also an individual, so i would not expect the governments to care much about him.
      america is america, let it be. if you want to live under its laws, go there. no need to replicate the situation in all other countries. and if america wants us to follow its laws, i hope we all get their passports too. national boundaries are still a valid concept, although there is much blurring by the big power.
      i do not know enough about race relations in america to comment about the rest of your mail, but you are merging too many issues, and too much history for my comfort.
      this is my opinion, and i could be wrong.

  • Robert says:

    Govt lying ! Thats not breaking news.
    Govt lying to FII ! Thats not surprising.
    FII won’t invest in future, no problem.
    Indian govt is looking for FDI now.
    Name of the game is – I win, no matter what !
    It is being played by govts, all over.