23 April 2015
Economy
Expert Speak
MAT not to apply on FIIs operating through tax treaty countries
Decision on applicability of MAT on ‘other incomes’ expected shortly
We hosted a conference call with Mr Bhairav Dalal, Associate Director, Tax and
Regulatory, PwC to discuss the recent developments on the Minimum Alternate Tax
(MAT) liabilities to FIIs. Key takeaways:
Draft orders have been issued to FIIs of non-treaty countries on capital gains
arising on shares/securities for AY2011-12 (FY11). Such FIIs can seek relief by
appealing to the Dispute Resolution Panel (DRP). No amount has to be deposited
at the time of appealing to DRP, which will give its decision within nine months.
Tax treaties prevail over other provisions of the Income Tax Act. FIIs investing
through countries where India has entered into Double Tax Avoidance Agreements
(DTAA), will be eligible for treaty benefits, and hence no MAT will be applicable for
them. Mauritius, Singapore and Cyprus have capital gains exemption under the
respective treaties.
Interestingly, provisions similar to MAT are also found in some developed countries such as the US.
Industry has also sought a clarification if MAT will be imposed prospectively/retrospectively on other income
(interest income, royalty on technical fees/services etc). The Government has assured investors that a
clarification will be issued before the passage of the Finance Bill by May 8.
Mr Bhairav Dalal,
Associate Director, Tax
and Regulatory – PwC
Mr Dalal is a Chartered
Accountant and currently
the Associate Director in
Financial Services Tax
division in PwC. He
specializes and advises
clients on M&A, inbound
advisory and restructuring
MAT exemption
application…
prospective;
debate
continues
on
retrospective
In August 2012, the Authority of Advanced Rulings (AAR) in its decision for
Castleton Investments ruled that MAT should be levied on FIIs’ income of capital
gains on stocks/shares.
Post this AAR order, tax authorities started raising questions to FIIs for MAT on
capital gains income, though no orders were passed for the same.
Budget 2015-16 provided clarity on this issue by amending MAT provisions
prospectively (from Apr 1, 2015). However, it resulted in a larger debate on
whether FIIs/FPIs were liable to MAT on their income till FY2014-15.
Post Budget, tax authorities have issued draft notices to FIIs operating through
non-treaty countries for income arising on capital gains of stocks/securities.
These draft demands have been raised on the basis of AAR in Castleton
Investments and the argument by tax authorities that FIIs have a “place of
business or business connection in India”.
Tax authorities have interpreted “place of business or business connection in
India” on the basis that:
FIIs have regular activities being carried out in India.
These activities are carried out through bankers and custodians who are
present in India.
Ashish Gupta
(ashish.gupta@MotilalOswal.com); +91 22 3982 5544
Aditya Dakh
(aditya.dakh@MotilalOswal.com); +91 22 3982 5402
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Expert Speak
The Securities and Exchange Board of India’s (Sebi) regulations require FIIs
to maintain certain records and intimate where such records are
maintained.
…however, FIIs operating through tax treaty countries are safe
As per the provisions of the Income Tax Act, where an DTAA exists between two
countries, then provisions of the treaty shall have an overriding effect over
other provisions of the Income Tax Act.
Hence, FIIs/FPIs which are residents of countries that have DTAA with India
cannot be taxed by way of MAT.
Thus, funds investing through countries such as Mauritius, Singapore and
Cyprus, with which India has DTAA, will be exempted from MAT.
Way ahead for FIIs
As per media reports, tax authorities have issued draft orders to ~150 FPIs/FIIs.
FIIs can seek relief by appealing to DRP and no amount has to be deposited at
the time of appeal. The maximum time within which DRP should decide is nine
months.
Once an FII appeals to DRP, the tax department cannot serve a final tax notice
until DRP’s judgment comes through. In case the decision is against the FII/FPI, it
can appeal to the Tribunal.
Alternatively, the FII/FPI can choose to not respond to the draft notice and wait
for the final order. In such a scenario, it can appeal directly to the Commissioner
of Income Tax (Appeals). However, the FII/FPI will be required to deposit the
amount in this case.
Clarity of MAT on FIIs ‘other incomes’ expected shortly
The various bodies representing FII/FPI investors have sought clarification from
the Government whether MAT will be imposed on ‘other incomes’ too (interest
income, royalty on technical fees/services etc).
Government has assured investors that a clarification will be issued on this
subject before the passage of the Finance Bill by May 8.
5 March 2015
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Expert Speak
NOTES
5 March 2015
3

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