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Need clarity on place of biz aspect in MAT issue: Khaitan

The Finance Minister on Thursday clarified the applicability of minimum alternate tax (MAT) on foreign companies . In a note, the FinMin today said those companies that do not have a permanent establishment will be exempted from the purview of MAT.


Foreign companies, irrespective of whether they belong to a country with which India has a Double Taxation Avoidance Agreement (DTAA), has been exempted from minimum alternate tax (MAT) on profits from April 2001 if they do not have a place of business in India, a Finance Ministry statement said.


The government further added that it would amend the Income-Tax Act with retrospective effect.


While this is hailed as a positive, given that it had caused tremors among foreign investors and worrying fall in Indian equity markets when announced first by Finance Minister Arun Jaitley in Union Budget 2015-16, experts say some more clarity is required.


Daksha Baxi Executive Director, Khaitan & Co says the government should explain the second part, that is the part that refers to the place of business under Section 592 of the Companies Act 1956 and 380 of the Companies Act 2013.


“Now this is where I have a slight concern in as much as even a liaison office which is not really permitted to generate revenue in India is required to be registered with the registrar of companies under section 592 and 380 of Companies Act 2013,” she explains.


Below is the verbatim transcript of Mukesh Butani and Daksha Baxi’s interview with CNBC-TV18’s Menaka Doshi.


Q: I am not sure that this was a conclusion that the CBDT could not have arrived at a very long time ago based on previous AAR rulings as well which have said exactly the same thing. If you have no place of business in India then how could you compute your financials as per the Companies Act and if you couldn’t do that on what would we levy MAT? However we finally do seem to have resolution in sight you would say, this is good news for all foreign investors. The exemption for  foreign portfolio investors came in earlier and now it is here for those foreign companies that do not have a place of business in India including do not have a permanent establishment?


Baxi: I think it is a very good  news. I think the step that the government took immediately after the notices were issued and the government wanted to bring clarity but they weren’t able to bring the clarity backdated in their Budget 2015 but they took the step of setting up AP Shah committee.


While the AP Shah committees terms of reference were obviously limited to giving recommendations for FPIs and FIIs, because those were the  entities who had been given notices and that is where the nervousness was the maximum, obviously while interpreting the applicability of 115JB to FIIs, FPIs which essentially are foreign companies, it could not have been avoided by the AP Shah committee that they could not analyse  whether it applies to foreign companies or not.


So, they analysed it and they have absolutely threadbare  at several places mentioned that foreign companies were never intended to be included in the applicability of 115JB, especially if they do not have a presence.


The press release today also accepts that the only concern that I have is the second part is referring to the place of business under Section 592 of the Companies Act 1956 and 380 of the Companies Act 2013, now this is where I have a slight concern in as much as even a liaison office which is not really permitted to generate revenue in India is required to be registered with the registrar of companies under section 592 and 380 of Companies Act 2013.


Q: I have checked the language of the text in both acts and they both seem to suggest that only those foreign companies which have a place of business in India need to register and then they lay out all the documentation that is required?


Baxi: Right, so, place of business of even a liaison office is a place of business, except that they are not – that is under the Reserve Bank of India (RBI) Foreign Exchange Management Act that they are not permitted to earn or generate revenue but it is still a place of business.


Q: But if they are not permitted to earn or generate the revenue then what would the matter ply on?


Baxi: That is precisely the reason why I am a little concerned about that and it would have been a little bit better for the government to clarify that aspect as well and I hope it is clarified in the law when we see the fine print of the law.


Q: I am sure you would welcome this as very good news. I know you do represent several foreign companies and I know they were very anguished when the distinction was made between Foreign Portfolio Investors (FPI) and those foreign companies that did not have a place in India. So, this is broadly speaking at least for those foreign companies that don\’t have a place of business in India very good news?


Butani: Absolutely, no doubt about it. And as you rightly pointed out that a plain reading of the law coupled with successive decisions of the authority on advance ruling pointed out that there is no case for levy of MAT on foreign companies, whether they are FIIs or non FIIs unless they have a place of business in India.


But the larger message that is going out in my view is that the government is keen to intervene. So, under ordinary circumstances you would have allowed this issue to linger on for years and years, tax payers would have won these appeals in tribunal, the tax department would have gone and appealed in a higher forum, so on and so forth.


So, that is something that has been put to an end and the government is really sticking to (interrupted..)


Q: You are being very generous. We have had almost a year and more of this controversy lingering and not just that. You will recall the Finance Minister himself saying when making the AP Shah Panel report public that in the first submission of that report the CBDT went back to the panel and asked for the panel to circumscribe its commentary only to foreign portfolio investments. So, if there was the intent that we would clarify for all foreign investors, all foreign companies included, that intent has not been visible so far. Though I will admit and agree with you like I said, right on top, better late than never.


Butani: Well this could have been an afterthought. I have no doubt in my mind that – and based on the quality of depositions that happened before Justice Shah panel that the panel was really looking on the MAT levy on foreign companies. Though the trigger could perhaps have been the FIIs because they constitute a major investment community within the class of foreign companies and were impacted the most in an adversarial manner to the detriment of many investors in the FIIs but this issue was there for other forms of foreign companies as well.


I also feel that the Shah Panel did deal with a broader issue but the report that was submitted to the government dealt with the limited issue and it did strictly adhere to the brief that was given by the government. So, as an afterthought the government realised that no, this whole controversy needs to be put to rest and the best way to do that is to go beyond what was stated in the second version of the Shah Panel report and to clarify this once and for all.