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Foreign Investors Await Court Ruling On India's Minimum Tax

by Mary Swire,, Hong Kong

29 July 2015

The Indian finance ministry has received a report from a committee set up to study the applicability of India's minimum alternate tax (MAT) to foreign companies, although the Government remains tight-lipped on its intended course of action.

The 66-page report of the government-appointed panel, headed by judge AP Shah, is intended to clarify whether MAT applies to foreign companies, including foreign portfolio companies, after a u-turn by the previous Government in 2012 and a new interpretation of the tax by authorities earlier this year.

Under India's tax law, corporations whose tax payable is less than 18.5 percent of book profits can also face a Minimum Alternative Tax at that rate, plus surcharges where appropriate. Introduced in the 1980s, the MAT originally applied to domestic companies or those with a permanent establishment in India. However, the tax authorities changed this position in 2012, ruling that foreign companies are indeed liable to the MAT, after foreign investment firm Castleton Investment sought clarification from the Indian tax authorities in 2010 on whether MAT was due on a particular transaction.

In 2015/16 Budget, Finance Minister Arun Jaitley announced that foreign companies would no longer have to pay MAT from April 1, 2015. However, the tax authorities have interpreted this decision to mean that foreign companies may owe MAT for prior years, leading to a spate of demands for back taxes from foreign firms earlier this year.

The Government does not intend to announce its position on the matter until it has studied the Shah report thoroughly. However, matters are complicated by an impending ruling by the Supreme Court in a case brought against the tax authorities by Castleton, with this hearing due to begin in early August. A separate case on the same issue is also pending in the Bombay High Court.

TAGS: Finance | tax | investment | India | law | transfer pricing | Investment | Invest | Investment | Tax

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