Tackling the MAT menace head-on

Minimum alternate tax
Minimum alternate tax

MAT ( minimum alternate tax) provisions were introduced in India around 17 years ago. Section 115JB of the Income Tax Act levies an alternate tax on the “book profits” earned by a company. It says that if the tax payable on the total income of a company is less than 18.50% of its book profits, then the book profits are deemed to be the income of the company and the tax payable on such income would be calculated at 18.50%. Although, MAT provisions were repealed in the past, it was re-introduced in Finance Act 1996.

WHY WAS MAT INTRODUCED?

In the past, several companies never paid tax because of various tax incentives. They would report zero or negative income, though they showed book profits and distributed dividend. So, in order to bring such companies under the tax net, the government decided to make them pay a minimum tax on their “book profits”.

DO COMPANIES MEAN LOCAL COMPANIES?

That’s the catch. The definition of companies under the I-T Act is broad enough to cover foreign companies, too. Tax experts say only under limited circumstances can it apply to foreign companies.

THEN WHY DID THE I-T DEPT IMPOSE MAT ON FOREIGN FUNDS?

In certain cases, the Authority for Advanced Ruling ruled in favour of the department and held that MAT provision also applies to foreign companies. It said that that merely because section 115JB of the IT Act refers to the Companies Act 1956, it does not mean it should be restricted to Indian companies. It also observed that practical difficulties for foreign companies to prepare an account cannot be a reason for reducing the scope of MAT provisions.

WHAT ARE FOREIGN FUNDS ARGUING?

According to them, MAT provisions were meant to apply to domestic Indian companies, and not foreign companies. This is because they are not availing any tax concessions provided under Indian tax laws. They quote AAR rulings that held that MAT is not applicable to foreign companies which do not have a “permanent establishment” in India.

WILL THIS HIT FUNDS FROM MAURITIUS?

No. They are exempted from capital gains tax under the tax treaty between the two countries. But many funds had shifted out of Mauritius to the US and other jurisdictions, thanks to occasional concerns on the status of Mauritius as a tax haven.

WILL MAT CONTINUE TO HAUNT THESE FUNDS?

No. Finance minister Arun Jaitley clarified in the last Budget that MAT will not be applicable to capital gains realised by foreign portfolio investors from April. But, according to the tax department, MAT would apply for previous years. “Regardless of other technical arguments, where capital gains of a foreign investor are exempt under a treaty, MAT should not apply,” said Shefali Goradia, partner, BMR Advisors.

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