Applicability of Minimum Alternate Tax (MAT) on foreign companies for the period prior to 01.04.2015.

Union Budget 2016: Under the existing provisions contained in sub-section (1) of the 11 5JB in case of a company, if the tax payable on the total income as computed under the Income-tax Act, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee for the relevant previous year shall be eighteen and one-half per cent of its book profit. Issues were raised regarding the applicability of this provision to Foreign Institutional Investors (FIIs) who do not have a permanent establishment (PE) in India. Vide Finance Act, 2015 of the provisions of section 11 5JB were amended to provide that in case of a foreign company any income chargeable at a rate lower than the rate specified in section 1 15JB shall be reduced from the book profits and the corresponding expenditure will be added back.

However, since this amendment was prospective w.e.f. assessment year 2016-17, the issue for assessment year prior to 2016-17 remained to be addressed.

A Committee on Direct Tax matters headed by Justice A.P. Shah, set up by the Government to look into the matter, recommended for an amendment of section 11 5JB to clarify the applicability of Minimum Alternate Tax (MAT) provisions to Foreign Institutional Investors/ Foreign Portfolio Investors (FIIs/FPIs) in view of the fact that FIIs and FPIs normally do not have a place of business in India.

In view of the recommendations of the committee and with a view to provide certainty in taxation of foreign companies, it is proposed to amend the Income-tax Act so as to provide that with effect from 01.04.2001, the provisions of section 11 5JB shall not be applicable to a foreign company if –

  • the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assesse does not have a permanent establishment in India in accordance with the provisions of such Agreement; or
  • the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above and the assessee is not required to seek registration under any law for the time being in force relating to companies.

This amendment is proposed to be made effective retrospectively from the 1stday of April, 2001 and shall accordingly apply in relation to assessment year 2001 -02 and subsequent years.

Clause 53 of Finance Bill 2016

Clause 53 of the Bill seeks to amend section 115JB of the Income-tax Act relating to special provision for payment of tax by certain companies.

Item (a) of sub-clause (I) of the said clause seeks to insert a new clause (fd) in Explanation 1 to sub-section (1) of the aforesaid section so as to provide that the book profit shall be increased by an amount or amounts of expenditure relatable to income, by way of royalty in respect of patent chargeable to tax in accordance with the provisions of section 115BBF.

It is further proposed to insert a new clause (iig) in the long line to the said Explanation 1 so as to provide that the amount of income, by way of royalty in respect of patent chargeable to tax in accordance with the provisions of section 115BBF, shall be reduced from the book profit, if any such amount is credited to the profit or loss account.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.

Item (b) of sub-clause (i) of the said clause seeks to insert an Explanation so as to provide that the provisions of the said section, shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if––

(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub¬section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or

(ii) the assessee is a resident of a country with which India does not have an agreement referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.

This amendment will take effect retrospectively from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.

Sub-clause (II) of the said clause seeks to insert a new sub-section (7) in the said section so as to provide that in case of a company, being a unit of an International Financial Services Centre and deriving its income solely in convertible foreign exchange, the rate of tax under section 11 5JB shall be nine per cent. and also to define certain expressions used therein.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.

[Clause 53]

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Tags : Budget 2016 (434) Good Budget (16) mat (101) Minimum Alternate Tax (68)

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