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MAT to be waived off for FIIs

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Union Finance Minister Arun Jaitely announced that the government has accepted the recommendations of the Justice A.P. Shah Committee on MAT.

Minimum Alternate Tax (MAT)

  • The MAT is an indirect taxe. the customer bears the ultimate economic burden of the tax and it is collected by an intermediary such as a retail store.
  • All companies showing book profits under the Companies Act are liable to pay MAT @ 5% of the book profit.
  • Earlier (i.e. pre 1997-98), according to the provisions of the Income Tax Act, a company was liable to pay Income Tax as per the calculation method given in the Act. However, the profit and loss accounts of the companies were prepared as per the provisions of the Companies Act.
  • This loophole in the IT-Act gave an opportunity to the companies to conveniently skip paying Income Tax to the government under the pretext that they had nil or negative income and thus claim to be ‘Zero Tax’ companies. Meanwhile, they would show book profits on their profit and loss accounts and distributed huge dividends to their shareholders!
  • I-T Act allows many deductions and exemptions before calculating the taxable income. Also, the Depreciation rate under the act is much higher than the Companies Act. All these factors together reduced the taxable income of many companies to nil despite high book profits.
  • To bring such companies under the I-T Net, Section 115JA was brought into effect since assessment year 1997-98 and all companies having book profits under the Companies Act shall be liable to pay a MAT @ 18.5%.

Which companies have to pay MAT?

  • MAT is applicable to all companies except those engaged in infrastructure and power sectors. Apart from these, income arising from charitable activities, Free Trade Zones, Investments by venture capital companies is also excluded from the purview of MAT. However, under the I-T Act, companies with income sources in India are liable to pay the MAT.
  • FIIs were subject to a MAT @20%.

The issue raised by FIIs

The Government had exempted FIIs from MAT post April 1st, 2015 through a provision in the Budget 2015-16.

However, the I-T department slapped notices on as many as 68 FIIs (Foreign Institutional Investors) for non-payment of MAT on the capital gains made by the FIIs, to the tune of Rs. 602.83 crore for the previous year. The FIIs in-turn approached the High Court challenging the demand on the basis that they should be exempted from paying the MAT as it was applicable only to domestic companies that had their bases in India. They alleged inconsistency and called for avoiding such arbitrary demands.

Apart from this, a Mauritius-based company by the name Castleton Investment had also filed a case in the Supreme Court against a ruling by Authority for Advance Rulings (AAR) that foreign companies are also subject to MAT. The case is pending in the SC and for this reason; the A.P. Shah Committee report has not been made public by the government yet.

Justice A.P. Shah Committee on MAT

  • The Government had put forth some questions that the CBDT had regarding levy of MAT on FIIs prior to April 1st, 2015.
  • The Panel submitted its report in which it recommended that MAT was not applicable to capital gains of FIIs.
  • The provision that MAT on capital gains of FIIs will not be applicable post April 1st is also applicable for capital gains pre-April 2015.

What next?

  • Union Finance Minister Arun Jaitely announced that the government has accepted the recommendations of the Justice A.P. Shah Committee on MAT.
  • The I-T Act will be amended in the next session of the Parliament to exempt FIIs and FPIs from MAT.
  • The decision comes as a big relief to the FIIs in India and will be conducive to a stable business environment.