Centre clears the air on MAT, reassures FIIs
The Union Government's decision to not levy the controversial Minimum Alternate Tax on foreign institutional investors comes not a day too soon. In recent months, as the harsh realities of legislative and electoral politics have hit home, there have been concerns about Prime Minister Narendra Modi's ability to deliver the big bang reforms he had promised. Foreign investors, hoping for an administration that would be serious about doing business with the world, have been unsure about how far and hard the Modi Government will push for change.
And given how the MAT was about to be levied in retrospect, some had feared that the NDA Government would be no different from its predecessor. Earlier this week, commodities trading guru and hedge fund manager Jim Rogers sold all his holdings in Indian companies and exited the country because he felt that the Modi Government isn't doing enough to fix the larger picture.
In August alone, foreign institutional investors had taken out a total of $2.5 billion from the stock market — one of the largest monthly withdrawals since the 2008 banking crash. Add the prevailing uncertainties in the global financial market and the whole situation seems depressing. The MAT decision does not radically change any of these factors, but it should go some distance in boosting investor confidence. In February, Finance Minister Arun Jaitley had said that the tax will not extend to FIIs from April 1 — which should have been a reason for cheer, except that the tax department interpreted it as an order to collect back taxes and promptly started issuing notices to FIIs. Thankfully, this has now stopped.
Still, it is expected that the Modi Government, having previously sought to justify the tax, will be slammed in certain quarters for changing its stance. In April, Mr Jaitley had said that not imposing the retrospective tax and letting millions of dollars slip away from the Indian treasury — especially after a tax tribunal had ruled that the Government could levy MAT on FIIs — would be akin to converting the country into a tax haven. At that time, some had also said that the FIIs were being unnecessarily fussy about MAT as they should have been aware of their tax obligations when they made their investments. Both arguments are flawed.
Since the MAT was introduced in 1987, it has historically been applicable only to domestic firms. In 2010, a tax tribunal ruled that foreign companies with no a permanent base in India do not come under the ambit of MAT. However, in 2012, another tribunal ruled, in the case of Mauritius-based Templeton Investment, ruled that all foreign companies have to pay MAT. This case is currently in the Supreme Court and scheduled to be heard on September 29. The Government's decision should strengthen Templeton Investments' case but an element of uncertainty will remain until the apex court issues its verdict.
The complications injected by the judiciary notwithstanding, the Government needs to take on some part of the blame. After taking a positive step forward in February, it slunk back and let the matter fester. It was only under immense pressure from the FIIs that the Government then set up a committee to look into the issue, and finally, based on the latter's recommendations which were accepted on Tuesday, did it announce that MAT will not be levied on FIIs in retrospect. Surely, it could have been more pro-active and issued the necessary clarifications earlier in the day.