In a relief to foreign investors slapped with Rs 40,000 crore tax demands, the government on Wednesday said such levies would not be applicable to the entities based in countries having double taxation avoidance agreements (DTAAs) with India, while others can approach the courts for reprieve.
While making it clear that the government cannot withdraw the tax demands, top Finance Ministry officials told the aggrieved foreign investors that they can claim benefits available under the DTAAs, which would over-ride such demands.
The assurances came during meetings and conference calls the foreign portfolio investors had today with Minister of State for Finance Jayant Sinha, Revenue Secretary Shaktikanta Das, Central Board of Direct Taxes (CBDT) Chairperson Anita Kapur, among others.
Sources said the assurance can be a major relief on this issue, as a large number of such investors are from countries like Singapore and Mauritius that have DTAAs with India.
The development assumes significance as the government has been so far refusing to relent on the issue, which arose after levy of a 20 per cent Minimum Alternate Tax (MAT) on untaxed capital gains made by the FPIs over the past three years. So far, these investors were subjected to only short-term capital gains tax of 15 per cent.
Spooked by the tax claims, stock markets had tanked on Tuesday with Bombay Stock Exchange (BSE) Sensex losing 555 points while the plunge continued early this morning till the time assurance came from the government.
"After talking to investors, who have already made several representations against tax demands totalling about Rs 40,000 crore", Sinha said the government was responsive to the investors' concerns.
However, for the foreign investors from countries without DTAAs, the only remedy left is to challenge the tax demand.
Goldman Sachs, Morgan Stanley, Deutsche Bank, Standard Chartered, Citi, RBS and JP Morgan were among the foreign investors present in the meetings.
According to sources, Das told investors that MAT will not be applicable to investors hailing from jurisdictions with which India has signed DTAAs on the premise that they would have already paid tax in their own countries.
Sources said CBDT chairperson Anita Kapur informed the FIIs that AAR ruling in Castleton case was limited to legal point regarding applicability of MAT to foreign entities.
She said there was no judicial pronouncement on treaty benefits and as such, the tax department has taken internal view that treaty benefit will prevail.
FIIs were also told that applicability of MAT on coupon interest on fixed income securities and other streams of income is under examination and would be addressed before passing of the Finance Bill.