New Delhi: In a relief to foreign investors slapped with Rs 40,000 crore tax demands, the government Wednesday said such levies would not be applicable to the entities based in countries having double taxation avoidance pacts with India, while others can approach the courts for reprieve.
While making it clear that the government cannot withdraw the tax demands, top Finance Ministry officials told the aggrieved foreign investors that they can claim benefits available under the DTAAs, which would over-ride such demands.
The assurances came during meetings and conference calls the foreign portfolio investors had today with Minister of State for Finance Jayant Sinha, Revenue Secretary Shaktikanta Das, Central Board of Direct Taxes (CBDT) Chairperson Anita Kapur, among others.
Sources said the assurance can be a major relief on this issue, as a large number of such investors are from countries like Singapore and Mauritius that have DTAAs with India.
The development assumes significance as the government has been so far refusing to relent on the issue, which arose after levy of a 20 percent Minimum Alternate Tax (MAT) on untaxed capital gains made by the FPIs over the past three years. So far, these investors were subjected to only short-term capital gains tax of 15 percent.
Spooked by the tax claims, stock markets had tanked yesterday with BSE Sensex losing 555 points while the plunge continued early this morning till the time assurance came from the government.
After talking to investors, who have already made several representations against tax demands totalling about Rs 40,000 crore, Sinha said the government was responsive to the investors' concerns.
However, for the foreign investors from countries without DTAAs, the only remedy left is to challenge the tax demand.
Goldman Sachs, Morgan Stanley, Deutsche Bank, Standard Chartered, Citi, RBS and J P Morgan were among the foreign investors present in the meetings.
According to sources, Das told investors that MAT will not be applicable to investors hailing from jurisdictions with which India has signed DTAAs on the premise that they would have already paid tax in their own countries.
Sources said CBDT chairperson Anita Kapur informed the FIIs that AAR ruling in Castleton case was limited to legal point regarding applicability of MAT to foreign entities.
She said there was no judicial pronouncement on treaty benefits and as such, the tax department has taken internal view that treaty benefit will prevail.
FIIs were also told that applicability of MAT on coupon interest on fixed income securities and other streams of income is under examination and would be addressed before passing of the Finance Bill.
The Finance Ministry officials further said that all foreign investor categories, including FDI and private equity, will also enjoy treaty benefit if coming through DTAA jurisdiction.
For past period liability of closed funds or zero-asset entities, case-to-case view will have to be taken later, after the litigation is completed.
Sinha said the government cannot intervene after judicial body, Authority for Advance Rulings (AAR) order that MAT was payable on capital gains earned by FIIs.
"The problem arose because AAR ruled that MAT is to be applicable. This no longer is a policy issue, but it now is a judicial issue, which has gone to court. So the solution to the past cases of 2-3-4 years... Whether tax is applicable or not, is now a judicial proceeding.
"If you want relief, the remedy lies in appeal. There cannot be any policy action. You will have to appeal in the Supreme Court and when Supreme Court ruling comes, it will be clear," he said.
Sources said foreign investors were told tax notices for MAT were issued to all investors, whether coming from DTAA nations or otherwise. DTAA country investors need to file their replies claiming benefits under the applicable treaty, which will be examined and decided by the assessing officers.
Government made it clear that MAT will not be applicable on capital gains made by FIIs from the current fiscal. A provision to this effect has been included in Finance Bill and once it is approved by the Parliament, the tax will not be applicable from April 2015.
Sinha also assured the investors that the government has no intention to make any retrospective changes and the issue has been addressed by making a prospective exemption declaration on future capital gains.
Sinha said the NDA government is a responsive one and if investors have problems or complaints, they can come and discuss those with the authorities.
When asked if the government would help in the appeal process, he said the government will see what case is presented and what arguments are there.
"If there is any help that can be given, we will see," he said.
Sinha also said that informed and sophisticated investors understand that if a judicial branch in a democracy takes a decision, executive cannot interfere with it.