 "Foreign companies without permanent establishment in India should not attract MAT: A P Shah")
Former law commission chairman A P Shah, who headed the committee that recommended doing away with past cases of minimum alternate tax (MAT) on foreign institutional investors (FIIs), says if MAT is imposed on FIIs, an anomalous situation will arise where minimum tax is higher than long-term capital gains tax. He tells Dilasha Seth and Indivjal Dhasmana that the panel's recommendations were also applicable to foreign companies with no place of business in India, because they are not governed by the regulatory regime of the Companies Act. Edited excerpts:
Your panel has recommended two alternatives to the government to do away with past cases of MAT on FIIs - legislative amendment or a circular by the Central Board of Direct Taxes (CBDT). The government has preferred the legislative route. Is the government's move in the right direction?
I would say the legislative route is definitely preferable, as it will put to rest this controversy and a simple clarification to Section 115 JB would serve the purpose. With a CBDT circular, there may be issues about its enforceability. But just with one simple clarificatory amendment, this MAT issue could be put to rest as far as FIIs are concerned.
FIIs are foreign companies, but they are not covered under the Companies Act under Sections 591 to 594. A foreign company having a place of business in India is supposed to file profit and loss accounts in accordance with the Companies Act. As an FII doesn't have a place of business, surely it is not going to file accounts in accordance with the Companies Act. If you see the scheme of 115JB (dealing with MAT), it talks about company filing accounts in accordance with the Companies Act and laying it before the annual general meetings, etc. But if there is no guidance for filing the accounts or there is no legislative framework for this, this would lead to some anomalous results: Which accounts to be filed by FIIs - the global account or the India-related account; how will this be bifurcated, etc. For this, there is no guidance in the Section. So the committee's finding is if a company is not governed by the regulatory regime of the Companies Act, it will not be covered by Section 115JB.
Also, for FIIs, there is a self-contained code in 115AD of the IT Act. This provision was brought into force much before 115JA (earlier version of 115JB) was reinvented in 1998. If MAT becomes applicable, just see the consequences. For a long-term capital gains on which the securities and transaction tax (STT) is paid by the FIIs, tax is nil under Section 115AD, but if 115JB is held to be applicable, tax will be 18.5 per cent and so on and so forth. Minimum tax cannot be more than the maximum tax. That is completely illogical. So 115JB doesn't override provisions of 115AD. These provisions must be construed harmoniously.
Are the panel's recommendations also applicable to foreign companies not having a permanent establishment (PE) or a place of business?
Naturally; as our reasoning is based on this reading of the law. Therefore, a foreign company which doesn't have a PE or a place of business in India will not be liable to pay MAT. We have also indicated the international regime, where broadly the same scheme works.
Will it be applicable to Castleton also? The case is coming up in the Supreme Court later this month?
I am not sure how it will play out in the courts, but at least by the committee's report, if Castleton has no PE or a place of business in India, it would be entitled to the same relief.
Was the ruling by Authority for Advance Rulings (AAR) on Castleton erroneous?
The committee has opined that Castleton case was erroneously decided. We have approved AAR's earlier rulings in Timkin and Paxair cases.
What's your take on divergent judgment of AARs on MAT?
An AAR ruling is binding on a party seeking the ruling and does not bind the department. Strictly speaking, the AAR ruling will cover only that particular case and not other cases. But the Supreme Court has said these rulings have persuasive value. In my opinion, as far as possible, consistency needs to be maintained.
In larger perspective, how do you see the practice by the government to change the tax policy in between, as happened in the case of MAT?
We took note of the concerns of foreign investors that they would expect predictability and certainty in the tax regime. We have stated that the tax certainty should be the goal. As a result of Castleton ruling, the department was almost forced to issue notices, as it was the only judgment in the field. My belief is this government is committed to bringing certainty and predictability in the tax regime.
The finance minister has said the government will also refer other legacy issues to your panel. Have those issues been referred?
There may be other legacy issues. As and when they are referred to the committee, it will look at those. The committee's tenure is one year. So if the government decides to refer any further issues to the committee, it will certainly consider them.
Why did the panel give two reports on the same topic of MAT to the finance ministry?
CBDT expressed some concerns about the impact of the report on the foreign companies having PE or place of business. In the meeting chaired by the finance minister and attended by all three members and the CBDT officials, we made it clear we have not expressed any opinion on foreign companies with PE or place of business. Then the committee again met, and in order to remove any ambiguity, made slight modifications to the report. But the conclusion remains the same.
Do you think your panel's recommendations would restore foreign investors' confidence in the Indian economy?
I am not an expert on this issue, so I won't be able to comment. The good thing is that the government has avoided huge litigation with 68 notices and the right signal has gone to the investors.
But markets have not reacted to the report positively.
Frankly, the committee is not concerned about the fluctuations in the stock market. A legal issue was referred to the committee and it was answered.
Your panel has recommended two alternatives to the government to do away with past cases of MAT on FIIs - legislative amendment or a circular by the Central Board of Direct Taxes (CBDT). The government has preferred the legislative route. Is the government's move in the right direction?
I would say the legislative route is definitely preferable, as it will put to rest this controversy and a simple clarification to Section 115 JB would serve the purpose. With a CBDT circular, there may be issues about its enforceability. But just with one simple clarificatory amendment, this MAT issue could be put to rest as far as FIIs are concerned.
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You have based your recommendation of doing away with past MAT cases on FIIs, on the fact that they are not companies under the Companies Act. Is it a valid argument?
FIIs are foreign companies, but they are not covered under the Companies Act under Sections 591 to 594. A foreign company having a place of business in India is supposed to file profit and loss accounts in accordance with the Companies Act. As an FII doesn't have a place of business, surely it is not going to file accounts in accordance with the Companies Act. If you see the scheme of 115JB (dealing with MAT), it talks about company filing accounts in accordance with the Companies Act and laying it before the annual general meetings, etc. But if there is no guidance for filing the accounts or there is no legislative framework for this, this would lead to some anomalous results: Which accounts to be filed by FIIs - the global account or the India-related account; how will this be bifurcated, etc. For this, there is no guidance in the Section. So the committee's finding is if a company is not governed by the regulatory regime of the Companies Act, it will not be covered by Section 115JB.
Also, for FIIs, there is a self-contained code in 115AD of the IT Act. This provision was brought into force much before 115JA (earlier version of 115JB) was reinvented in 1998. If MAT becomes applicable, just see the consequences. For a long-term capital gains on which the securities and transaction tax (STT) is paid by the FIIs, tax is nil under Section 115AD, but if 115JB is held to be applicable, tax will be 18.5 per cent and so on and so forth. Minimum tax cannot be more than the maximum tax. That is completely illogical. So 115JB doesn't override provisions of 115AD. These provisions must be construed harmoniously.
Are the panel's recommendations also applicable to foreign companies not having a permanent establishment (PE) or a place of business?
Naturally; as our reasoning is based on this reading of the law. Therefore, a foreign company which doesn't have a PE or a place of business in India will not be liable to pay MAT. We have also indicated the international regime, where broadly the same scheme works.
Will it be applicable to Castleton also? The case is coming up in the Supreme Court later this month?
I am not sure how it will play out in the courts, but at least by the committee's report, if Castleton has no PE or a place of business in India, it would be entitled to the same relief.
Was the ruling by Authority for Advance Rulings (AAR) on Castleton erroneous?
The committee has opined that Castleton case was erroneously decided. We have approved AAR's earlier rulings in Timkin and Paxair cases.
What's your take on divergent judgment of AARs on MAT?
An AAR ruling is binding on a party seeking the ruling and does not bind the department. Strictly speaking, the AAR ruling will cover only that particular case and not other cases. But the Supreme Court has said these rulings have persuasive value. In my opinion, as far as possible, consistency needs to be maintained.
In larger perspective, how do you see the practice by the government to change the tax policy in between, as happened in the case of MAT?
We took note of the concerns of foreign investors that they would expect predictability and certainty in the tax regime. We have stated that the tax certainty should be the goal. As a result of Castleton ruling, the department was almost forced to issue notices, as it was the only judgment in the field. My belief is this government is committed to bringing certainty and predictability in the tax regime.
The finance minister has said the government will also refer other legacy issues to your panel. Have those issues been referred?
There may be other legacy issues. As and when they are referred to the committee, it will look at those. The committee's tenure is one year. So if the government decides to refer any further issues to the committee, it will certainly consider them.
Why did the panel give two reports on the same topic of MAT to the finance ministry?
CBDT expressed some concerns about the impact of the report on the foreign companies having PE or place of business. In the meeting chaired by the finance minister and attended by all three members and the CBDT officials, we made it clear we have not expressed any opinion on foreign companies with PE or place of business. Then the committee again met, and in order to remove any ambiguity, made slight modifications to the report. But the conclusion remains the same.
Do you think your panel's recommendations would restore foreign investors' confidence in the Indian economy?
I am not an expert on this issue, so I won't be able to comment. The good thing is that the government has avoided huge litigation with 68 notices and the right signal has gone to the investors.
But markets have not reacted to the report positively.
Frankly, the committee is not concerned about the fluctuations in the stock market. A legal issue was referred to the committee and it was answered.