Minimum Alternative Tax (MAT) - Features and Controversies

Minimum Alternative Tax (MAT) - Features and Controversies

Question: There has been much debate on MAT which FIs have been asked to pay for capital gains in the Indian stock market. Explain what MAT is and the main points surrounding the debate.

MAT/Minimum Alternative Tax: Key Features

• Taxation dispute between the Indian government and foreign investors has taken another turn with the FIs being asked to pay minimum alternative tax/MAT for capital gains made in the Indian stock market

• Estimates of MAT have been varying between INR 40,000 crore and INR 600 crore

• MAT was introduced in 1996. It was intended to ensure companies pay at least some tax

• MAT was introduced because many firms were paying little or no tax as they were benefitting from tax exemptions

• They were reporting profits and dividends for shareholders

List of MAT firms in India includes large companies such as:

• Godrej Consumer
• Shree Cement
• Dabur
• Power utilities/NTPC, JSW Energy and Power Grid Corporation
• Infra Developers like Adani Ports

Method of Calculating MAT

• MAT is computed at 18.5% on book profit or profit shown in profit and loss account

• It is also calculated on usual corporate rates and whichever is higher is payable as tax

• MAT payers are eligible for tax credit which can be carried on for another 10 years and set off against tax payable under normal provisions

Main Points Surrounding the Debate

• Foreign portfolio investors or foreign funds investing in stock markets

• Though the budget said MAT would not be relied on FIs, that is only effective from April 1st, 2015 and does not cover previous years

• FIs have agreed to pay 15 percent on short tern listed equity gains, 5% on gains from bonds and nothing for long term gains

• As per the CLSA, MAT will apply for long as well as short term capital gains and interest income

• Potential tax liability could stretch as far as 2008-2009

• FIs want MAT to only be levied on domestic companies and not foreign companies and/or investors

• They hold that MAT can be levied only on book profits for which there should be a requirement to maintain book of accounts

• As this requirement is absent, FIs say they should not be made to pay MAT

• Taxmen are saying that 2015 Budget did not provide for MAT relief in a retrospective basis; relief is only available from April 1, 2015

• Authority for Advance Rulings hold that international companies not having any presence in India are not liable to MAT provisions as per a 2010 case involving Timken and Praxis Pacific Ltd.

• In September 2014, Delhi’s Income Tax Appellate Tribunal delivered a similar ruling in a case involving Bank of Tokyo and Mitsubishi UFJ

• Intention of legislatures was that MAT cannot be applied for foreign companies

• SC judgement on the Castleton case is also awaited

• Finance Ministry has said FIs domiciled in countries with tax treaty pacts do not have to pay MAT taxes; this includes Singapore and Mauritius

• Central Board of Direct Taxes has also directed authorities to close treaty cases within a month; more than 30% of investments by FIIs come from treaty nations, according to an estimate by Deloitte Haskins and Sells

Facts and Stats

• Those outside of treaty countries could be involved in a long drawn legal battle

• A third of such investments are from US; India’s treaty with the US does not cover capital gains provision according to lobbies representing FIs

• FIs are the major drivers of the stock market

• They have injected over USD 50 billion in the Indian markets since PM Modi’s election last year