Minimum Alternative Tax

Minimum Alternative Tax

Minimum Alternative Tax is an addition to the Income Tax, levied by tax authorities. It was introduced in 1997-98 to prevent companies from using loopholes and exemptions in the Income Tax Act to avoid paying tax. So, MAT acts as a threshold tax rate. Every company has to pay tax at this rate of 18% even if its effective tax rate is lower. However, there has been confusion over whether MAT is applicable for capital gains by foreign investors in the Indian markets. Under the regime, companies are required to pay tax at a specific minimum rate if their effective tax rate comes out to be below the MAT rate after using the aforesaid incentives. The Before the introduction of MAT, companies were able to use creative ploys to completely avoid paying taxes by qualifying for these incentives. MAT was introduced to bring such companies back into the tax net.

Double Taxation Avoidance Agreements

Foreign institutional investors (FIIs) from countries with which India has double taxation avoidance agreements (DTAAs) that specifically exempt them from capital gains tax may escape minimum alternate tax (MAT) demands from the income tax department. “If there is an FII which has made investments from a country with which India has a tax treaty, it can present the facts while giving its reply to the income tax officer. It can explain the point and the tax officer will certainly take it into consideration. The treaty benefit will be applicable in this case.

India has DTAAs with 88 nations, of which 85 are in force. DTAAs with Mauritius, Singapore, Cyprus, France and the Netherlands exempt funds from capital gains tax in India, while those with the US, the UK and Luxembourg allow India to impose capital gains tax the way it wants to. FIIs from Cayman Island, Hong Kong and BVI may however continue to be hit by the MAT provisions as India does not have a tax treaty with these countries.

Why no exemption for DII’s

• MAT is levied on the book profit which FPI’s are not maintaining in India but DII’s are maintaining in India.
• FPI comes through P-Notes, which are issued outside India. The investor in P notes does not own any underlying Indian security, which is held by FII who issues P notes hence transactions are outside the review of SEBI. However, DII’s are holding the underlying Indian Security in which capital gains are taxable under Indian Law. Also DII’s comes under SEBI rules.