Jaitley removes MAT from FIIs’ doorsteps, selectively

  • HT Correspondent, Hindustan Times
  • Updated: May 01, 2015 02:48 IST

In a move to soothe frayed nerves, finance minister Arun Jaitley on Thursday offered tax relief to foreign investors, exempting income from securities transactions, royalties and technical service from minimum alternative tax (MAT).

Replying to the debate on the Finance Bill, 2015, in Lok Sabha, Jaitley said Prime Minister’s social security schemes will be exempt from service tax, and also announced tweaks in indirect tax rates on raw silk, iron ore and rubber.

The exemption on MAT would apply in those cases where the normal rate is below 18.5%. This will likely bring relief to debt funds since interest income will also be exempt from MAT from April this year.

On the controversial “retrospective” demand of MAT from foreign institutional investors (FIIs), the finance minister retained the earlier position stating the issue was now pending in the Supreme Court.

“Yesterday (Wednesday), the matter was mentioned. The Supreme Court has said they will fix up after the summer vacation some date of hearing and that is not an issue I have announced today (Thursday),” he said.

He also dropped the controversial phrase “at any time” in the clause relating to taxation of foreign companies.

The Finance Bill had proposed that a foreign company would be liable to pay tax in India, if its effective place of management was in India during “any time” in the previous year.

This had triggered fears that even holding of a single board meeting in India would have attracted taxes, even though the company’s operations were overseas.

“Taking into account the concerns raised, I propose to drop the phrase ‘at anytime’ so that no ambiguity remains. Thus a foreign company will be treated as a company resident in India for a previous year if its place of effective management is in India in that previous year,” he said.

He also eased norms for offshore funds such as sovereign wealth funds (SWFs) and government funds.

“Conditions regarding minimum number of investors, threshold of participation of interest of members, etc will not apply in the case of investment set up by foreign governments, or its central banks or SWF subject to fulfillment of (certain) conditions,” he said.

India’s equity and currency markets have been rattled by anxieties over retrospective taxation of foreign funds.

About 100 foreign funds are reported to have been served with notices to pay taxes over the past years. This has spooked investors although the government has maintained that the notices were for taxes not paid till March 2015.

According to tax experts, Foreign Institutional Investors (FIIs) may end up paying nearly Rs 40,000 crore in past tax dues pertaining to Minimum Alternative Tax (MAT) on capital gains made by such funds.

The finance minister also exempted MAT on units of business trusts in REITs (real estate investment trusts) and SPVs (special purpose vehicles).

On the indirect tax side, export tax on low-grade iron ore was cut to 10% from 30%. The new duty structure will be applicable from June 1, Jaitley said.

He also exempted service tax on new social sector insurance and pension schemes such as Pradhan Mantri Jeevan Jyoti Bima Yojana, Suraksha Bima Yojana and Atal Pension Yojana.

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