After the foreign institutional investors (FIIs), a host of private equity (PE) firms have received income tax notice for payment of minimum alternate tax (MAT) at the rate of 20 per cent on capital gains made on the sale of shares in India-listed companies in the last few years. Experts estimate that a tax demand of Rs 1,000 crore has been made to around 35 private equity funds who took advantage of the Mauritius route while selling shares in the Indian companies.
“It is worthwhile to note that foreign PE funds are generally covered by the benefit of Tax Treaty in respect of capitals gains earned from sale of shares by them. Further, they are not required to maintain books of account as per Indian Companies Act as they do not carry on any business in India. Thus, attempt to tax the income/gains (which is otherwise exempt from tax under Tax Treaties) under MAT provisions would be incorrect and unfair,” said Himanshu Parekh, a chartered accountant practicing international tax and regulations.
The 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 as per Indian Companies Act requirements. This is payable where it exceeds the tax payable on income computed as per normal provsions 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 in the way of taxes due to various tax adjustments and incentives.
In the past, around 200 foreign portfolio investors (FPIs) received MAT notices from the Income tax department. The notices were sent to the FPIs were with respect to the assessment years 2008, 2009 and 2010.
These FPIs, alongwith tax experts, from the big four audit firms have made representations to the Indian government and are expecting clarity from the Budget set to be presented by Finance Minister, Arun Jaitley this Saturday. An appeal against the move is pending in the Supreme Court.
According to a CEO of a leading private equity firm, the PEs -which have made use of the Mauritius route while dealing in shares of Indian companies should not be taxed as the tax notices tends to reopen the Mauritius tax treaty. Market experts say that these issues need to be resolved on a war footing because it will adversely impact foreign investment into India.