The MAT Controversy -Under the mat - Govt accepts AP Shah Committee Report
02 09 2015
Wednesday
THE Controversy: Minimum Alternate Tax (MAT) was effectively introduced in India by the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961, to facilitate the taxation of 'zero tax companies'. It had been observed that many companies, despite showing high profits in their books of accounts and paying substantial dividends, were paying marginal or no tax, by taking advantage of various tax concessions and other incentives, in a manner so as to avoid paying tax. MAT was thus envisaged as levying a minimum tax on such companies by deeming a certain percentage of their book profits, computed under the Companies Act, as taxable income. Section 115J was, however, made inoperative from Assessment Year 1991-92
The MAT provisions were subsequently reintroduced in 1996 by the Finance Act (No. 2) of 1996, through Section 115JA; and then by the Finance Act of 2000, which replaced Section 115JA with Section 115JB.
Section 115JB, which was recently amended by the Finance Act of 2015, provides that in case the tax payable on the total income of a company in respect of any previous year, computed under the Act, is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of such company. The tax payable for the relevant year for such company shall then be 18.5% of its book profit.
A controversy has recently arisen with respect to the applicability of MAT on Foreign Institutional Investors (FIIs) due to the inconsistent rulings of the Authority for Advance Rulings (AAR) on the issue. Most pertinently, in 2012, in Castleton Investment Limited (2012-TII-36-ARA-INTL) the AAR departed from its previous ruling in The Timken Company (2010-TII-25-ARA-INTL) and held that Section 115JB was applicable to foreign companies, even if they have no Permanent Establishment ("PE") or place of business in India. The effect and implication of this ruling was that FIIs could be liable to pay MAT. The Supreme Court admitted a Special Leave Petition filed by Castleton Investment Limited in May 2013 where the company challenged the correctness of the AAR ruling. Based on the AAR ruling in Castleton , the income-tax department, from December 2014 finalised assessments and raised MAT demand on various FIIs on capital gains made by them in previous years. These notices raised an alarm amongst FIIs, some of which approached the courts.
The 2015 Amendment: In light of the controversy generated, the Finance Minister proposed to rationalize the MAT provisions, vide the Finance Act of 2015, by excluding the income of foreign companies earned in relation to capital gains arising on transactions in securities, interest, royalty or fees for technical services etc. from the chargeability of MAT.
However, the 2015 amendments are only intended to apply prospectively from 1st April 2015 (the financial year 2015-16), which is the assessment year 2016-17; and, therefore, do not provide clarity on whether MAT provisions apply to foreign companies. This is clear from the Memorandum to the Finance Bill of 2015, which under the heading “Rationalising the provisions of section 115JB” states as follows:
"It is, therefore, proposed to amend the provisions of section 115JB so as to provide that income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to a Foreign Institutional Investor, shall be excluded from the chargeability of MAT and the profit corresponding to such income shall be reduced from the book profit. The expenditures, if any, debited to the profit loss (sic) account, corresponding to such income (which is being proposed to be excluded from the MAT liability) are also proposed to be added back to the book profit for the purpose of computation of MAT".
Constitution of the Shah Committee: The issue raised hot debate all over the world with the ‘tax terrorism' tag stuck on the Indian Government. The Finance Minister initially reacted rather firmly. But later budged under pressure. And the FM announced a Committee on 7th May 2015. The Committee consists of Justice (retd.) A.P. Shah as Chairman and Dr Girish Ahuja and Dr Ashok Lahiri as Members. The Committee submitted its report to the Government on 25th August 2015 and yesterday the Government accepted the report.
Tax certainty as a desirable goal: The Committee made certain important observations on tax certainty:
Most FIIs/FPIs are well-regulated investment funds or pooling vehicles, being "collective investment vehicles", that pool investments from different investors to access diverse Indian securities in a cost-effective manner. Notably, many FIIs are open-ended investment funds, which permit their investors to enter and exit daily, based on the Net Asset Value ("NAV") of the investment fund. Thus, investors in an FII keep changing on a daily basis. This makes the need for tax certainty even more important, inasmuch as the NAVs are directly affected by tax liabilities and the burden of an unanticipated tax liability relating to previous years has to be borne by the investors participating presently. The fear of an unanticipated tax liability, even without it actually being imposed, may be a sufficient trigger for investors to exit such open-ended investment funds based on a possible erosion in the NAV of the fund. Many such arguments were brought to the notice of the Committee.
It is in this context, therefore, that the sudden change in the interpretation of Section 115JB to apply to FIIs/FPIs has to be viewed. In the 19 years since MAT was introduced in the IT Act (in 1996), it had never been levied on FIIs/FPIs. Instead, the beneficial tax scheme under Section 115AD was always applied to FIIs/FPIs. The Department accepted the Timken ruling and did not file an appeal. Even after the 2012 ruling in Castleton , which significantly did not deal with an FII/FPI, no notices were issued by the Revenue authorities in the financial year 2012-13 and 2013-14. At no point of time did the Registrar of Companies under the Companies Act, 1956 call upon FIIs/FPIs to file their global accounts the RoC; evidencing that despite the Castleton ruling, FIIs/FPIs were not intended to be liable under the MAT provision. The situation, however, changed in August 2014, when notices began being issued to FIIs/FPIs calling upon them to pay MAT. A change in this settled position so late in the day is unfortunately perceived as a retrospective amendment to the law.
While acknowledging that the Department has been constrained to issue MAT notices to FIIs/FPIs as a consequence of the Castleton ruling, the Committee believes the ruling to be completely wrong. Ultimately, the Committee took notice of the fact that while this is not an actual case of retrospective levy of tax on FIIs/FPIs, the Castleton ruling and subsequent Department action has raised significant concerns in the foreign investment community.
Summary of the Committee's Findings:
The obligation under Section 115JB exists because of the regulatory requirements of the Companies Act and not independent of it.
The term 'company' as defined under Section 2(17) of the IT Act includes foreign companies.
If Section 115JB is held applicable to FIIs/FPIs, they would be required to compile their global accounts in accordance with the Companies Act. However, such an obligation is absent in the legislative intent, as is evident from the insertion of Explanation 3 by the 2012 amendment, which failed to provide any computation mechanism for foreign companies' book profits.
The expression "place of business" has been judicially interpreted to mean a permanent and specific location in that country from where a company habitually and regularly carries on its business. The Committee has come to a finding based upon established precedent that having an “established place of business” is different from merely carrying on a business in India.
Section 115JB of the IT Act is an integrated code and the charging provision contained in sub-section (1) cannot be read in isolation of the computation mechanism under sub-section (2). Thus, where the computation of a tax against such income is impossible to calculate, the charge of tax against must also resultantly fail.
Section 115AD of the IT Act, introduced in 1993 (when FIIs entered the Indian market) provides for a separate scheme for taxing the income of FIIs/FPIs, arising from Indian securities at a concessional rate. A perusal of this scheme clearly indicates that applying the MAT provisions under Section 115JB would render this separate scheme under Section 115AD otiose inasmuch as FIIs/FPIs will be taxed at a higher rate under Section 115JB and will not be able to avail of the benefits of the set off provisions and MAT credit.
FIIs/FPIs are not governed by the regulatory regime of the Companies Act, and thus Section 115JB is inapplicable to them. The 2015 amendment was only clarificatory in nature, and was not actually required to exempt them from MAT liability. Therefore, its prospective nature cannot be used to apply a different interpretation pre-2015.
A change in this settled position in August 2014 is extremely late in the day. While this may be a consequence of the Castleton ruling, the Committee believes the ruling to be completely wrong.
Committee's Recommendations: The Committee recommended:
1. To bring an amendment to Section 115JB of the Income Tax Act, 1961 clarifying the complete inapplicability of the MAT provisions to FIIs/FPIs; or
2. CBDT may issue a circular clarifying the complete inapplicability of the MAT provisions to FIIs/FPIs.
Government accepts the report: The Government has graciously accepted the report of the Committee and announced, "The Government has accepted the recommendation of the Committee to clarify the inapplicability of MAT to FIIs/FPIs and has decided that an appropriate amendment to the Income-tax Act will be carried out. Through the amendment the Government proposes to clarify that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to 01.04.2015. Pending such amendment, CBDT will convey to the field formations the decision of the Government to accept the recommendation."
Finally, the issue attains certainty, but at what cost? The image of the country suffered a huge damage, all because the babus would not budge from what they thought was right.
DDT on MAT: DDT 2595 12 05 2015 observed,
In his budget speech, the Finance Minister said, In order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT. But the amendment to the Act is to come into effect from 1 st April 2016. This gave the much needed strength to the Department to issue Show Cause Notices to FIIs for the period prior to AY 2016-17. The theory that was circulated was that prospective exemption made it clear that there was tax liability for the past period. And what followed was perhaps one of the most watched fiscal dramas. The FIIs cried foul, the stock markets crashed, analysts took sides and loudly proclaimed their views. Even the FM announced that India is not a tax haven and whatever taxes are due have to be paid. Then they clarified that MAT provisions are not applicable to FIIs covered under the DTAA. Last week the Finance Minister announced in the Parliament that he was referring the matter to Justice AP Shah and now the CBDT puts on hold notices and recovery.
All fine, but are we not going in the wrong direction? When they announced the exemption in the Budget 2015, didn't the babus know that the question of taxability for the previous years would be an issue? Couldn't they clarify then itself that the exemption is only prospective and tax has to be paid for the past years? And what is the logic in exempting a tax from tomorrow, but taxing it yesterday, especially when yesterday you were not aware that it was taxable? Till this exemption was given, even the Government was not clear whether this tax was leviable. On the whole, they gave a lot of bad publicity to the Finance Minister and the Modi Government, as businessmen went around talking about India's tax terrorism. Taxing or not is your decision, but please be sure about it - don't confuse the foreigners as you have been confusing Indians all these years and making a fine art of litigation.
Poor Finance Ministers have to take the blame for the follies of babudom.
Take Pride in job - CBEC Chief to Staff
CBEC Chairman Najib Shah in a letter to the Chief Commissioners and Principal Commissioners states:
Discipline - punctuality: Integral to the ease of doing business and redressing public grievances is inculcating discipline and integrity amongst our officers. The issue of probity in public service cannot be emphasized enough. Quick decision making, monitoring of public grievances, evaluating performance of formations, visits to ranges ordocks/appraising hall etc. need to be planned. Equally important is for field formations to follow high standards in punctuality. The posting and transfer policy guidelines are also a key ingredient in the overall strategy of integrity management. I expect that these will be scrupulously followed.
GST: Introduction of GST will bring forth a tectonic change in the working of field formations. A lot of thought, planning and preparation is required to meet this impending change. The recent initiative of conducting workshops across India is a step in this direction. These workshops will provide an opportunity for thinking through re-organisation of formations and gearing for a new business environment. The supporting IT systems are also going to be completely new and will require officers to build compatible skills.
Infrastructure: I would like to assure you that the Board shares the concerns of the field formations on HR and infrastructure related issues. I am aware that there are a lot of vacancies at various levels and we are taking necessary steps to fill up these. I also trust that in the wake of the cadre review, proposals for enhancing infrastructural capacity have been sent to DG, HRD. Lack of residential accommodation in most places is a matter of concern, and therefore I request you to identify projects, liaise with the local municipalities /corporations, housing boards and send us concrete proposals at the earliest.
Take Pride: Let me urge all officers and staff of the CBEC to take pride in the job we are doing and the role we play in the nation building process. Be acutely aware of this and remember that the tax which we collect is crucial for India's development and hence we have to do our job well to ensure that all that is legitimately due is collected.
You know the field!
CBEC Chairman's D.O.Letter No. F.8/1/2015., Dated August 05, 2015
Until Tomorrow with more DDT
Have a nice day.
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