Wednesday, 30 September 2015

Government clarifies non-applicability of MAT to foreign companies in the absence of place of business in India


Background

The Finance Act, 2015 (FA 2015) inserted a new clause to the Minimum Alternate Tax (MAT) provision, w.e.f. 1 April 2015, to exclude certain income of foreign companies from the MAT regime. These provisions are effective from tax year 2015-16 and are prospective in nature. The amendment was the subject matter of a lot of discussion and a three-member committee (Committee) headed by Justice (Retd.) A.P. Shah was formed by the Ministry of Finance (MoF) to give recommendations on the subject of levy of MAT on Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs) for the period prior to 1 April 2015. The Committee recommended that the provisions of MAT may not be made applicable to FIIs/FPIs for the period prior to 1 April 2015[1] . Furthermore, vide Press Release dated 1 September 2015, the Government of India (GOI) had expressed its acceptance of the recommendations and decided that an appropriate amendment will be carried out in the Indian Tax laws (ITL) [2]. However, the issue of applicability of the MAT provisions to foreign companies, other than FII/FPIs, not having place of business or permanent establishment (PE) was still perceived to be ambiguous.

The MoF has issued a Press Release dated 24 September 2015, expressing its intent of amendment to the ITL w.e.f. 1 April 2001. According to that, the MAT provisions shall not be applicable to a foreign company which does not have a PE/place of business in India. We are pleased to release a Tax Alert which summarizes the said Press Release.

Press Release by the MoF dated 24 September 2015

The MoF, vide its Press Release dated 24 September 2015, has announced that the provisions of MAT will be amended with retrospective effect from 1 April 2001 to provide that the MAT provisions will not be applicable to foreign companies in the following circumstances:

• Where the foreign company is resident of a country with which India has entered into a double taxation avoidance agreement (DTAA) and such foreign company does not create a PE in India as per the provisions of the relevant DTAA.
• Where the foreign company is resident of a country with which India has not entered into a DTAA and such foreign company is not obliged to seek registration under the relevant provision of the Companies Act, 1956 or the Companies Act, 2013[3] .
Comments

Foreign companies which do not have a PE in India or which do not establish a place of business in India in terms of the Companies Act, will now be out of the scope of MAT. This clarification from the MoF on non-applicability of MAT to foreign companies is a huge relief to foreign companies sourcing income from India without having a PE/place of business in India. Since the amendment will be made effective from 1 April 2001, a large number of cases into litigation on this issue will become academic. Furthermore, the entities having PE/place of business in India need to continue to evaluate applicability of the MAT provisions.

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