Despite assurances the overseas investors have pulled out nearly Rs 17,000 crore from the Indian capital markets in the first two weeks of the month due to apprehensions that the government would impose a 20 per cent Minimum Alternate Tax (MAT) on profits earned by overseas investors.

Foreign Portfolio Investors (FPIs) investments in January this year stood at Rs 33,688 crore, before dropping to Rs 24,564 crore in February), Rs 20,723 crore in March) and all most half in three months at Rs 15,266 crore in the month of April.

In May, the FPIs have withdrawn an estimated Rs 16,723 crore ($2.6 billion) so far this month, according to the latest data from depositories.

Investment by the FPIs was Rs 94,241 crore in January to April.

Expressing concerns over FPIs facing MAT demand, global rating agency Fitch has said the controversy may prompt FPIs to think twice before investing in India.

The Income Tax Department has already issued notices to 68 FIIs totaling Rs 602 crore over non-payment of MAT.

Some foreign investors have gone to court while the government has decided to set up a high-level committee to resolve the issue.

Government’s stand
The government had clarified that the revenue department will neither put up fresh MAT claims nor act on previous ones until a committee headed by Law Commission chairman AP Shah submits its report to the government on the applicability of MAT on foreign investors, said a circular issued by the tax department. The finance minister set up the committee last week.

The government has maintained that the decision to levy MAT on foreign portfolio investors was taken not by the government but by quasi-judicial bodies. The finance ministry had said that these rulings can be contested in higher courts, which will respect due process and have the power to quash faulty decisions. Some FII's have approached the courts.

Why FPIs are afraid?
For those foreign companies that do not have any permanent establishment in India, the effect of MAT can be high as these companies may not be able to claim credit of MAT in their home country.

The FPIs contend that MAT provisions should not apply to them since they do not have any place of business in India and so are not required to maintain account books in India.

What is MAT mess?
MAT was first introduced in 1988-89 to ensure that all companies pay a fixed percentage of their book profits as tax. Book profits are the profits made but not realised through a transaction. For calculating MAT, they are computed through a specific process. MAT was withdrawn in 1990 and then reintroduced from April 1, 1997.

As per the provisions of section 115JB of the Income-Tax (I-T) Act, if the income tax payable by any company on its “taxable income” under the normal provisions of the act is less than 18.5% of its book profits, then the company needs to pay MAT at 18.5% (plus applicable surcharge and education cess).

This tax is to be paid even if the companies’ tax liability, as per income tax laws, is lower than the mandated tax rate of 18.5%, owing to tax incentives and deductions availed by the company. MAT provisions were intended to tax zero-tax companies and companies paying marginal tax.