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India Confirms MAT Exemption For Foreign Firms

by Mary Swire,, Hong Kong

25 September 2015

The Indian Finance Ministry has announced that the Income Tax Act will shortly be amended to exempt foreign companies with no permanent establishment in the country from the minimum alternate tax (MAT) retrospectively from 2001, in a move likely to be warmly welcomed by foreign investors.

The Finance Ministry announced on September 24 that with effect from April 1, 2001, the MAT shall not be applicable to a foreign company if it is a resident of a country having a double tax avoidance agreement (DTAA) with India and it does not have a permanent establishment in India as defined by the relevant DTAA. Foreign companies resident in countries that do not have a DTAA with India and that are not required to register under the Companies Act will also be exempted from the tax.

Under India's tax law, corporations whose tax payable is less than 18.5 percent of book profits can also face MAT 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 investors are indeed liable to the MAT, regardless of whether they have a permanent establishment or not. While the Government announced earlier this year that MAT would no longer apply to foreign investors from April 1, 2015, question marks remained over whether the tax still applied to them prior to that date.

The Indian Government has already clarified that foreign institutional investors and foreign portfolio investors are not liable for MAT prior to April 1, 2015.

The measure is a major signal that the Indian Government is determined to rebuild its bridges with foreign companies and investors after a period of much uncertainty about India's tax laws, which has done much to damage the country's reputation as an investment destination.

TAGS: Finance | tax | investment | business | India | tax avoidance | law | multinationals | legislation | legislation amendments | Tax | BEPS

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