Big deal about MAT

Is it really such a major issue for FPIs, after all?

The total amount of MAT payable by FPIs is Rs.602 crore. That really makes me ponder! FIIS brought in close to $44 billion last year and almost a third of that in the first 3 months of 2015. Their total investment in India is over $250 billion. Then why does a penalty of $90 million really rankle. The issue is something much larger.

Flip flops don’t go down well…

That is the major objection of most FPIs. First the government decided to impose MAT on FPIs with substantial presence in India. Then the budget clarified that MAT on FPIs will not be applicable with prospective effect. Almost at the same time, FPIs started getting notices from the Income Tax department pertaining to retrospective MAT payable. These kind of regulatory flip-flops create an uncertainty in the minds of institutional investors. As an FII representative said, “These kinds of sudden surprises means that all our budgets, plans and projections go for a toss”.

But retrospective is past…

There are two essential problems that FPIs face in these kinds of retrospective cases. FPIs typically invest their own proprietary funds or their client funds, which may come through the P-Note route. In case of proprietary funds, this kind of retrospective taxes creates problems for the bank’s capital planning, capital adequacy, risk metrics etc. Reworking them backwards or providing for them may entail a higher cost, which they may not have factored into their calculations in the first place.

The issue of P-Notes is slightly more tricky and convoluted. Let me explain. P-Notes are typically pass-through securities and are issued by FPIs to their end clients; who may be a hedge fund, an individual or even an endowment trust. In many cases an end client like a hedge fund may have taken the profits and redistributed the same to its clients. How to recover in the name of retrospective taxation? It may also require disclosing the identities of the end P-Note customer, something most FPIs will not be comfortable with.

It is arbitrary and discretionary…

This is probably the biggest area of concern for the FPIs. A system of sudden changes in pronouncements and interpretations creates a system that is arbitrary and discretionary. Most FPIs prefer to use the legal option only as last resort. But an arbitrary system forces them to increasingly resort to the legal recourse. Secondly, a system of arbitrary tax administration will mean that the FPIs will always be skeptical about going the whole hog investing in India. For an economy that depends on portfolio inflows to bridge its fiscal deficit, that is not comfortable. A little more predictability is called for! ©

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