India to Exempt Foreign Funds From Minimum Alternative Tax

  • FII's won't have to pay taxes on profts earned before April 1
  • This should resolve the tax ``confusion'': Finance Minister

Foreign institutional investors won’t have to pay a tax on profits earned before April 2015, Indian Finance Minister Arun Jaitley said, seeking to draw a line under a snafu that had contributed to selling of the country’s stocks amid the global market rout.

The government accepted the recommendations of an expert committee formed to study the so-called minimum alternative tax and will amend the Income Tax Act to clarify that foreign institutional investors will not be subject to the tax, Jaitley said in briefing late Tuesday in New Delhi. For now, tax inspectors will be sent a directive outlining this position before the law is amended by parliament, he said.

The decision may lend some support to a market that has been among those pulled down by concerns about the strength of the global economy. More than $5.7 trillion was erased from the value of global equities in August after China unexpectedly devalued the yuan on Aug. 11. Indian stocks slumped to a one-year low on Tuesday after data showed the country’s economy grew less than estimated in the April-June quarter.

The confusion over MAT erupted after India’s Tax Department served more than 50 foreign institutional investors notices to pay the tax. Jaitley sought to allay concerns by announcing in May the creation of panel led by retired justice Ajit Prakash Shah to study and clarify the issue.

“Since an ambiguity had arisen due to conflicting opinions, that ambiguity had to be resolved,” Jaitley said. “We have clarified that what applies post April 1, 2015 also applies” before that date.

The Shah committee recommended in its 68-page report that India’s Income Tax Act be amended to reflect the “complete inapplicability” of the minimum alternative tax provisions to foreign institutional investors and foreign portfolio investors.

The MAT hasn’t been the government’s only misstep affecting international investors this year. In April, Jaitley overstated the amount of tax demands on foreign funds to make a point about helping the poor. The comments triggered a stock selloff, wiping about $10 billion off investor wealth over the next four days.