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India To Exempt Foreign Investors From MAT

The Indian Government has announced that foreign investors will not be required to pay the country's minimum alternate tax (MAT) retrospectively, in a move designed to improve India's business environment.

Finance Minister Arun Jaitley said on September 1 that the Government had decided to take up the recommendations of a panel headed by judge AP Shah which was asked to clarify whether MAT applies to foreign companies, including foreign portfolio companies, after a u-turn by the previous government in 2012.

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 companies 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.

In its report, released in July 2015, the Shah committee set out two options with regards to MAT: that section 115JB of the Income Tax Act be amended to clarify that MAT does not apply to foreign institutional and portfolio investors; or that a Circular be issued clarifying that MAT does not apply to FIIs/FPIs.

In its statement on the matter, the Finance Ministry disclosed that an appropriate amendment will be made to the Income Tax Act. "Through the amendment the Government proposes to clarify that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to April 1, 2015," the Ministry stated.

Pending such amendment, the Central Board of Direct Taxes has been instructed to inform local tax offices of the Government's decision to amend the Income Tax Act.

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