Now, 35 foreign private equity firms in tax soup

Face Rs 1,000-cr minimum alternate tax demand, seek clarity in Budget

After foreign institutional investors, a host of foreign private equity (PE) firms have received income-tax notices for payment of minimum alternate tax (MAT). MAT is levied at 20 per cent on capital gains made on the sale of shares in India-listed companies. Experts estimate that a tax demand of Rs 1,000 crore (Rs 10 billion) has been made from about 35 private equity funds that took advantage of the Mauritius route while selling shares in Indian companies.

“It is worthwhile to note that foreign PE funds are generally covered by the benefit of the tax treaty in respect of capital gains earned from sale of shares by them,” says Himanshu Parekh, a chartered accountant practising international tax and regulations.

“Further, they are not required to maintain books of accounts as per the Indian Companies Act as they do not carry out any business in India. Thus, attempts to tax the income/gains under MAT provisions would be against the legislative intent.”

Budget 2015: Complete Coverage

MAT is an alternate income tax at the rate of 20 per cent to be paid based on the ‘book profit’ of the company, which is to be computed according to the Indian Companies Act requirements. MAT is payable where it exceeds the tax payable on income computed according to the normal provisions of domestic tax law (this typically happens in case of Indian taxpayers claiming tax incentives such as SEZ units).

MAT was originally introduced as a way to deal with companies that had very large profits but did not pay much by way of taxes due to various tax adjustments and incentives.

Nitesh Mehta, executive director, Walker Chandiok & Co LLP, says, “A notice to levy MAT on foreign PE/FPIs (foreign portfolio investors) does not go well with the scheme of taxation. Foreign companies are not required to prepare financials, including profit and loss accounts, as per Indian company law requirements and, as such, levying MAT on such companies, with no taxable presence in India, could mean an extended interpretation. Also, most of the overseas PE/FPIs could be entitled to tax treaty benefits, in which case issuing any such notice could mean increasing litigation and administrative burden on such foreign taxpayers.”

Budget 2015: Complete Coverage

In the past, around 200 FPIs have received MAT notices from the income-tax department.

The notices sent to the FPIs were with respect to the assessment years 2008, 2009 and 2010.

These FPIs, along with tax experts, from the Big Four audit firms have made representations to the Indian government and are expecting clarity in the Budget set to be presented by Finance Minister Arun Jaitley on Saturday. An appeal against the move is pending in the Supreme Court.

According to a CEO of a leading private equity firm, players who have made use of the Mauritius route while dealing in shares of Indian companies should not be taxed as the tax notices tend to reopen the Mauritius tax treaty. Market experts say these issues need to be resolved on a war footing as they could adversely impact foreign investment.

Budget 2015: Complete Coverage