New Delhi, February 3, 2018

According to the Finance Bill 2018, this amendment will apply in relation to the assessment year 2001-02 as well as subsequent assessment years

The government has drawn up plans to bring the curtains down on the minimum alternate tax (MAT) on foreign companies.

An amendment proposed by the Finance Bill 2018 seeks to exempt foreign companies that are engaged in shipping, air transport, oil exploration, and turnkey construction projects from the ambit of the MAT. Brought in with retrospective effect from April 1, 2001, this amendment would help abate pending litigation, said tax experts. Any tax recovered from these companies would, however, have to be refunded.

“The amendment proposed under MAT provisions to exempt foreign companies taxable under the presumptive taxation regime is encouraging,” said Amit Singhania, partner, Shardul Amarchand Mangaldas & Co.

According to the Finance Bill 2018, this amendment will apply in relation to the assessment year 2001-02 as well as subsequent assessment years.

The Finance Act 2016 had amended Section 115JB of the Income-Tax Act, to exempt certain category of foreign companies, which did not have a permanent establishment in India, from paying the MAT. This, too, was brought in with retrospective effect from 2001.

In the Finance Bill 2018, a new explanation has been inserted in this section to keep away more foreign companies from the provisions of MAT.

S Sriram, joint partner in law firm Lakshmikumaran & Sridharan, pointed out that in certain businesses undertaken by foreign companies, such as international transportation of goods and passengers by sea or air, oil exploration, and turnkey construction contracts, determination of permanent establishment is not an easy exercise.

Experts said such businesses generally do not have singular fixed place of business for a long term, but do carry on business from the source country on a continuous basis. “Even if permanent establishment can be established, it would be difficult to establish the profits attributable to such an establishment,” said Sriram.  

Internationally, such businesses are subject to tax in the source country on a notional basis.

Currently, shipping firms, companies providing services in relation to prospecting of oil, and foreign airlines operating in the country are taxed at concessional rates under the presumptive taxation regime. However, under the presumptive taxation regime, these companies are not required to maintain books of accounts. This results in uncertainty over whether such companies will attract the MAT, experts said.

“There is an uncertainty on whether the MAT is applicable to these companies. If it is, the concession rate provided by presumptive taxation regime becomes meaningless as the tax rate under the MAT is higher than rates provided under the presumptive taxation regime,” said Singhania.

According to Sriram, the proposed amendments are clarifications and would lead to reduction in pending litigation. However, India would have to refund any tax recovered from these foreign companies over the duration of the litigation, he said.

[The Business Standard]