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The government on Friday went into a ‘crisis-defuse’ mode on the foreign institutional investor (FII) front, stating the tax demand from that community stood at Rs 602.83 crore so far. Earlier, Finance Minister Arun Jaitley had said the total tax liability of FIIs could be Rs 40,000 crore.
In a written reply to the Lok Sabha, the minister of state for finance, Jayant Sinha, said, “Tax notices have been issued in 68 cases to foreign funds to bring to tax the book profits, according to the minimum alternate tax (MAT) provision under the income tax Act. So far, total tax demand of Rs 602.83 crore has been raised.”
The statement was made in response to a question on whether the government had issued notices to 100 foreign funds for estimated tax evasion of $5-6 million (Rs 3,800 crore). Since 2007-08, FIIs have been at loggerheads with the tax department on the issue of MAT and this has affected market sentiment.
| A MAT(TER) OF TIME |
2014
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APR 23: MoS Jayant Sinha (right) assures the issue would be resolved soon
- APR 24: Says demands made to only 68 FPIs for dues totalling Rs 602.83 crore so far
“The figure of Rs 602.83 crore could be only for cases in which orders have been passed and the final demand has been made. The exact demand can only be quantified when the final orders have been passed. The earlier figure of Rs 40,000 crore might have been computed by estimating the demands from all FIIs for all the seven years. If that’s the case, the amounts are theoretical, especially considering one needs to exclude trusts/partnerships and treaty cases,” said Rajesh Gandhi, partner, Deloitte.
Meanwhile, the tax department has issued a circular to all principal chief commissioners of income tax, asking MAT claims against tax-treaty foreign investors be decided within a month.
The levy of MAT on foreign investors raised their tax outgo from zero to 20 per cent. Many foreign investors had protested against this, pointing out they came from treaty jurisdictions that were exempt from tax.
“It has come to the notice of the board that several FIIs receiving income from transactions in securities claim such income as exempt from tax under the Income Tax Act, 1961, by availing of the benefit provided in double taxation avoidance agreements (DTAAs) signed between India and their respective countries of residence,” said an April 24 note shared by a tax consultant. “It has been decided in all cases of FIIs seeking treaty benefits under the provisions of the respective DTAAs, a decision might be taken on such claims within a month from the date such a claim is filed.”
The clarification came as good news for those who had invested through Singapore and Mauritius, as the DTAAs with these countries exempt them from capital gains.
However, those investing through countries such as the US and the UK are still in dilemma, as the DTAAs with these countries do not have a capital gains exemption clause.
“Recent remarks by officials of the Indian finance ministry have not caused a change in ICI Global’s position. The US does not have a capital gains provision in its treaty with India, and we continue to have the concerns expressed in our recent letters to Finance Minister Jaitley,” said an ICI Global spokesperson.
ICI Global is a London-headquartered organisation that represents investors based of the US, the UK and Hong Kong.
Another global body, Asia Securities Industries & Financial Markets Association (ASIFMA), says despite clarity from the tax department, concerns linger. “ASIFMA welcomes the Indian government’s efforts to try and address the uncertainty in the tax law. The proactive approach taken by Jayant Sinha, Shaktikanta Das (revenue secretary) and Anita Kapoor (chairperson of the Central Board of Direct Taxes) in offering the government’s views on the matter is much welcomed by industry. A circular requiring expeditious resolution of tax notices sent to FIIs of countries with tax treaties is a positive step, as there are lingering concerns. For example, it is unclear why notices are being issued to such investors if the matter is clear-cut. Time-bar does not fully explain the situation because this applies universally to every taxpayer in India and notices, naturally, aren’t being issued to every Indian taxpayer. Further, we understand one of the issues being considered in a Supreme Court case concerns treaty exemption, which means there’s still residual uncertainty on what would happen if the court’s view is different,” said Patrick Pang an ASIFMA , spokesperson.
