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India yields to foreign investors over income tax

The final version of India’s Finance Bill 2015 grants foreign investors a India wide-ranging exemption from supplementary income tax on their future profits.

The unpopular 18.5 per cent tax, called minimum alternate tax (MAT), is chargeable on the profits of companies that are otherwise exempt from corporate tax because of special incentives and reliefs. The original version of the Finance Bill imposed the tax on most forms of income and capital gains earned by investors, including foreign ones. The only exemption was to be for capital gains accruing from the sale of shares.

Moreover, considerable alarm spread among foreign institutional investors (FII) in March, when hundreds of them received tax demands from India’s tax authorities in the wake of a favourable ruling in the Castleton case. Some of these notices go back several tax years.

The resulting instability on India’s stock exchanges forced Finance Minister Arun Jaitley to announce a series of amendments to the bill. Last week, he conceded that MAT would no longer be chargeable on most foreign companies’ capital gains on disposals of either shares or bond, nor on income from interest, royalties and service charges. The exemption will apply prospectively only in those cases where the normal tax rate is below the MAT rate of 18.5 per cent. Private equity funds can now be reasonably sure that MAT will not apply to them in future.

In a further concession, Jaitley abandoned a clause in the Bill declaring that companies incorporated outside India could be declared tax-resident in a tax year if their place of effective management at any time in that year was in India. This meant that holding only one board meeting in India could make a company subject to Indian taxation. Clauses on minimum numbers of investors and investment thresholds for investors are also being dropped.

However, the government rejected calls for a retrospective MAT exemption, so the levy still applies to capital gains and profits earned up to 31 March this year. The number of such assessments sent to FIIs has been reduced from some hundreds to only 68, but these are being appealed to the Supreme Court. Petitions brought by five of the affected FIIs are to be heard this week. About USD1 billion is thought to be at stake.

The Finance Bill was passed in a session of the Lok Sabha house of India’s parliament, concluding the budget process.

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