NEW DELHI: Tax consultants estimate that only about 100 of roughly 6,000 funds registered with Indian regulators have so far received demands for India’s minimum alternative tax (MAT).
But they predict that more funds will be targeted, prompting worries that investment groups will follow Vodafone and Cairn Energy into protracted legal battles with India’s revenue authorities.
India introduced MAT in 1997 as a means of combating tax avoidance among domestic businesses. Typically, the tax is levied on the profits of Indian companies at a rate of at least 20 per cent, but it has not been applied to foreign institutional investors (FIIs).
In its budget in February, the Indian government clarified that no FII would be liable for MAT after April 1 2015. However, tax officials believe a 2012 decision by India’s Authority for Advance Rulings — a body that provides foreign funds with advice on potential future liabilities — allows them to pursue older claims, dating back approximately five years.
Despite growing criticism over the MAT demands, Shaktikanta Das, revenue secretary, told the Financial Times that until the decision had been challenged and overturned, tax inspectors could seek payment from any fund investing in India.
“The government is committed to providing a non-adversarial and stable taxation regime,” he said.
“But when there is a judicial pronouncement which says that this much of tax is due, how can the government say: ‘No, no, no. I will forgo this tax?’. The process has to be followed.”
According to tax consultants, the demands received by funds so far range from $250,000 to $2m each — although some smaller or poorly performing funds have had demands for lower amounts.
Mr Das stressed that India’s government had introduced legislation to stop any funds facing MAT bills for this year. But he said that in cases dating back over the past few years, funds would have to launch legal appeals rather than expect an exemption.
“For the past period, naturally the FIIs will have to seek judicial remedies,” he said. “Prospectively, we have sorted out the problem. But it is not possible for the government to simply intervene and make this past problem go away.”
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