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Corporate Services Blog

Indian Government Backs Down Regarding Tax on Foreign Funds

20/04/2016

Further to our blog on the 30th October 2015 where we reported that the Indian government had suspended its decision to allow retrospective levy’s of minimum alternate tax (MAT) following objections pending a report from a special government committee on the tax’s applicability to foreign investors we can now report that India’s finance minister has confirmed that they will no longer attempt to impose this retrospective MAT on overseas investors.
This decision has been brought about after receiving recommendations from the special government committee which was set up due to foreign portfolio investors instigating litigation against the tax.  This MAT was introduced in 1998 to target institutional investors that did not pay corporate income tax, but originally only included firms with a permanent establishment in India, but in 2012 was extended to include foreign companies that earn income or capital gains in India.  In 2014 large retrospective MAT assessments were sent out to foreign institutional investors causing a great outcry particularly as these claims were backdated and so many of these funds had already been distributed to investors causing great uncertainty as to whether these could be recovered in order to discharge the MAT.
It is hoped that this decision will reverse the negative impact that these retrospect demands had on the stock market where it caused great instability.  It is also reported that the decision to include foreign companies that earn income or capital gains in India to be liable for MAT will be completely reversed which is a welcome move as many foreign companies cite unpredictable tax regime as a reason against investing in India and therefore this governments commitment to reverse decisions it terms as ‘tax terrorism’ is hoped will help promote India as a more favorable destination for investment.
 



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