SKP Tax Alert
28 April 2015 | Volume 8 Issue 2
Expeditious decisions expected for FIIs claiming exemptions from Minimum Alternate Tax on capital gains under tax treaty benefits

The Finance Bill 2015 proposes that income from capital gains arising on transactions in securities (other than short-term capital gains on transactions on which Securities Transaction Tax (STT) is not chargeable), accruing to Foreign Portfolio Investors (FPIs)/Foreign Institutional Investors (FIIs), shall not be subject to Minimum Alternate Tax (MAT) with effect from 1 April 2015.

However, this has created some uncertainty with respect to the applicability of MAT for the period prior to 1 April 2015. The Indian tax authorities adopted the view that since FPIs/FIIs are not liable for MAT on capital gains on which STT has been paid with effect from 1 April 2015, it would imply that prior to 31 March 2015, they are liable for MAT on such capital gains. Accordingly, they issued notices asking several FPIs/FIIs to pay MAT on such capital gains made before 31 March 2015. Baffled by this move of the tax authorities, FPIs/FIIs made a strong representation to the Indian government that such notices were arbitrary and bad in law as they were foreign companies and not required to maintain books of accounts in India, particularly those FPIs/FIIs who otherwise also enjoy non-taxability of capital gains in India by virtue of a Double Taxation Avoidance Agreement (DTAA) signed between India and their country of residence.  

The Indian government has partly accepted the plea of the FPIs/FIIs and decided that they would not be liable for MAT on capital gains if the capital gain is otherwise exempt from income tax in India by virtue of a DTAA. It has issued a clarification vide its Instruction [F No. 500/36/2015-FTD.I] dated 24 April 2015 asking tax officers to decide the claim of the FPIs/FIIs seeking tax treaty benefits, within one month. Thus, tax officers would have to check if the FPIs/FIIs were eligible for the DTAA benefit and if yes, cancel the demand.

In light of this CBDT Instruction, the tax position of FPIs/FIIs investing from countries with which India has a DTAA and claiming treaty benefits is expected to be settled expeditiously, within one month from the date the claim is filed. However, such investors may still have to undergo administrative procedures of responding to income tax notices and proving that they are eligible for treaty benefits.

On the other hand, FPIs/FIIs investing from countries that do not have a DTAA with India or such income is not otherwise exempt in India would continue to be taxed for MAT, and it is left to the Indian courts to decide the matter. The same applies to private equity investors.

Thus, at this juncture, it can be said that the Indian government has respected the sovereign agreement entered into with another country and granted relief to the relevant FPIs/FIIs; however, for other FPIs/FIIs and private equity investors, a long legal battle lies ahead. 

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