)
Such a statement is normally filed by companies. The move is being seen by tax consultants as part of a larger push to levy on FPIs a tax called the Minimum Alternative Tax (or MAT) which generally applies only to companies and not portfolio investors.
The tax department has asked for the financial statements of at least 200 FPIs structured as corporate entities. They have been asked to re-file their returns for the financial year ending in March 2014, said a person familiar with the matter.
The tax department levies MAT on companies to ensure a minimum tax payment by those earning a substantial income but escaping taxation due to various exemptions. This levy works out to around 20 per cent of profits. Requiring FPIs to furnish the P/L statement would help the tax department calculate the MAT that they could now charge FPIs who are structured as as corporate entities, said experts.
Suresh Swamy Partner, Financial Services, PwC Tax and Regulatory Service said that the requirement has put clients in a position where they could face an issue either way.
"Funds have been asked to refile their returns with a balance sheet and profit and loss account. If they do it, then they could be subject to MAT based on the P/L amount. If they do not do it, their tax filing is invalid and they could be subject to penalty proceedings. This makes it a catch-22 situation," he said.
Sunil Badala, Partner - Taxation, KPMG said that such accounts are not part of normal filings.
"Foreign portfolio investors are not required to provide P/L statements. It could be because of the MAT push for Foreign Portfolio Investors(FPIs)," he said.
Also, the number of FPIs who have been asked to explain why MAT should not be levied upon them has gone up to at least 50, from a handful reported in September; according to two people familiar with the matter. They said that foreign funds have filed their representations in this regard, and are waiting for further action from the tax department.
"It is our position that there is no MAT payable by foreign portfolio investors, and we have given a representation accordingly," said Badala.
Experts point out that a MAT regime also effectively acts against the 0 per cent long-term capital gains tax and 15 per cent short term capital gains tax that is now said to apply. If a MAT regime is to apply, the effective rate of stock market taxation becomes 20 per cent. This would mean that such foreign investors could end up paying a higher rate of taxation on stock market transactions than local ones.
"They are primarily relying on a recent decision which pertains to Castleton Investments which said that MAT can be levied on foreign corporate entities. However, this is an advance ruling which is not binding on other tax payers and might at the most have some persuasive value. However, interestingly in September 2014 the Delhi Tribunal in the case of Bank of Tokyo Mitsubishi has observed that MAT is only payable by companies which are required to maintain books of accounts under Indian law," said Rajesh Gandhi Director Deloitte Haskins & Sells.
The department is now seeking to apply this not just on corporate entities but on portfolio investors structured as corporate entities. This, say experts may not stand scrutiny as FPIs are not even required to maintain a book of accounts under Indian law.
Depository data shows that foreign investors hold a total of Rs.19.03 lakh crore in equity assets and an additional Rs.2.67 lakh crore in debt assets at the end of 2014.
A tax official confirmed sending notices of the nature to FPIs though the person did not comment on the number.
"The opinion of the department would depend on the assessing officer after examining the responses and facts of the case. The same would reflect in the order as and when passed," said one officer on condition of anonymity.
When contacted the income tax department said they cannot offer a comment on the issue.
