Mumbai: The foreign institutional investors (FII) have been at logger heads, in the last ten days, with the income-tax department slapping a demand under the Minimum Alternate Tax amounting collectively to around $10 billion (Rs 60,000 crore) on 100 FIIs. More FIIs will join the list as the tax sleuths complete their assessment.
While the tax authorities maintain that the FIIs are eligible to pay MAT of 20 per cent, the FIIs maintain that they are only eligible to pay capital gains as they are not doing business here and are not even residing in India. They don’t even have fund managers in India. Mr U.R. Bhat, managing director, Dalton Capital Advisors said this demand has come like a bolt from the blue from the tax authorities. “If the tax authorities are sure that their demands will stand the test of an appeal against them, then it is worth the heartburn that this is causing. But if they are on weak grounds, then it will only mean the number of FIIs will be reduced in India and there will be less funds coming in,” he said.
There are an around 8,000 FIIs also known as foreign portfolio investors and have brought in nearly $226 billion (over Rs 11 lakh crore) till now. In this year alone, the FIIs have invested Rs 78,975 crore. Tax expert Gautam Nayak said, “The aggressiveness of the tax authorities in interpreting the law is a worrying factor. It is an extreme interpretation of the way the tax law has been interpreted.” Schedule 6 (115 J (b)B) of the Income-Tax Act in a reference to MAT was amended a few years ago to bring under the purview of MAT even those who were not preparing their accounts under Schedule 6.
This was intended to bring in entities like the banks and electricity companies. “This was understood to be meant for domestic companies. But they are now extending it to FIIs because of the ambiguity involved,” said Mr Nayak. He said “clarity is needed because everyone wants certainty. They need to plug the loopholes if any regarding investments coming through the Mauritius route.”
The FIIs and the business community are incensed by the latest move of the tax authorities, as it comes on the heels of the defeat it suffered in the Vodafone case where the Bombay High Court ruled in favour of Vodafone. During his budget speech, finance minister Arun Jaitley had assured the foreign investors that there would be no ‘tax terrorism’ in his latest budget, but both he and Prime Minister Narendra Modi have been silent on retrospective tax demands.
While Mr Jaitley said the earlier retrospective tax demands would be settled by the courts, the latest demands would seem to be out of sync, say tax sources.
