MAT-Minimum Alternate Tax was introduced back in 1998. The Finance act 2000, inserted section 115 JB of Income tax Act, 1961 providing for levy of 20 % tax if the regular tax payable falls below 20 % of book profits. The intention of government was clear to tax so called zero tax companies which had significant book profits, paid dividends but paid little or no tax because of various tax holidays and deductions. FIIs began investing in India in 1993. Technically applies to all companies. It was widely believed that MAT only applied to domestic companies as the stance on the issue in the formal law was ambiguous. In fact the Authority for Advance Ruling, a tax body to determine issues on foreign tax liability concluded in 2010 that MAT did not apply to companies without a permanent establishment in India. This changed in 2012 when the same body contradicted its prior ruling stating for the first time in Castleton case that foreign investors were required to make MAT payments. The issue laid dormant as the company against whom ruling was passed sought an appeal.
Our honorable Prime Minister began his tenure at the helm of one of the world's fastest growing economies with special focus on foreign investment. Everything seemed to be in place. The new and jubilant era had commenced apparently. Moody changed its outlook on India from stable to positive. India was hailed as 'bright spot' in Asia by none other than IMF chief Christian Laggarde. Bushels of foreign investment over flowing in.The the World Bank pegged India's estimated growth at 7.5 percent. To cut a long story short, party was on for India until the MAT issue caught fire. The issue got rekindled when finance minister exempted FII income from MAT after apple 1 2015 on the budget day. But what about the FII income before April 1, 2015?
The tax department issued demand notices to the tune of Rupees 6500- 7000 crores for payment of MAT on capital gains much lower than $ 6-7 billion as claimed by overseas investors to pressurize government. During January to April investments by FPIs totaled Rupees 94,241 crores but the bad news is that investors have pulled out nearly Rs. 17,000 crore from Indian capital markets in the first week of May amid taxation worries.
Though statements have been issued to allay foreign investors that MAT won't be levied in countries with whom India has double taxation agreements.Arun Jaitley issued statements to justify Income tax department's actions to quell tensions between foreign investors and tax department. Legal stance on the issue is vague as a result of which two schools of thought have emerged corroborating and criticizing the tax department's actions.
Indian markets are on tenterhooks waiting for the final decision to come on the issue. However, apart from the legal position, we need to look at broader logical and coherent perspective. India is now more of a liberalized economy intertwined with global nerves. Hence retractmemt of funds from Indian stock markets will destabilize the economy and the sweet period will soon come to an end. Rupee which was enjoying stability till now will become volatile. India will lose its competitive edge when the the position is so much favourable for India as India's growth rate is predicted to be higher than China by international agencies. Moreover, the money will move to Chinese markets especially when India is facing the dreaded fear of China a shares being enlisted in MSCI emerging market index .Some will argue that relieving foreign investors of the tax will imply India ceding to foreign pressure. Well for those remember that - "Taking one step back sometimes means preparing for a big jump "to reassess the things for a better and clear perspective.