India’s reputation as foreign investment friendly nation at stake. Know why

While PM Modi is inviting global companies to come and invest in India, the epic legal battle brewing between foreign portfolio investors (FPI) and Indian tax authorities is sending wrong signals outside the country—and is thus, putting India’s reputation as a foreign-investment-friendly nation at stake.

As per a news report by The Economic Times, five FPIs have teamed up to challenge the applicability of minimum alternate tax (MAT) to capital gains arising from trading in stocks and bonds. The FPIs plan to file a writ petition in the Bombay High Court on Thursday challenging the tax demand.

ET could not ascertain the names of the five FPIs and the quantum of MAT demand. However, demands ranging from Rs 1 crore to Rs 50 crore have been raised by taxmen in draft assessment orders to FPIs at the end of last month.

Junior Finance Minister Jayant Sinha has confirmed on written that 68 notices had been sent to FPIs for payment of Rs 602.83 crore towards MAT.

Earlier, in a statement that had caused considerable consternation, the finance minister had said the government could potentially collect around Rs 40,000 crore from FPIs.

The news report by the financial daily reads, the dispute, which has damaged India's international reputation, flared up when the I-T department started sending notices to FPIs about six months ago asking them to pay MAT for the financial year 2011-12. Many tax experts, ET spoke to said MAT cannot be applied to an entity that doesn't have a so-called permanent establishment in the country.

By March 31, assessing officers had sent draft assessment orders to FPIs asking them to pay MAT. Subsequently, demands were raised for two more years — FY10 and FY11 — in the first week of April. Indian income-tax laws allow assessing officers to go back seven years in the hunt for previous taxes.

During a conference call last Wednesday, Revenue Secretary Shaktikanta Das, Central Board of Direct Taxes (CBDT) Chairperson Anita Kapur and Minister of State for Finance Jayant Sinha told investors that MAT would not be levied on funds that have invested through countries such as Singapore and Mauritius, with whom India has double-taxation avoidance agreements (DTAAs).

A day later, CBDT issued a circular instructing tax officers that decisions should be taken in "...all cases of foreign institutional investors seeking treaty benefits under the provisions of respective DTAAs, decisions may be taken on such claims within one month from the date such claim is filed". Many tax experts have dubbed this order vague since it doesn't mention the word MAT or tell tax officers what action should be taken in this regard.

(Image: Reuters)