PE funds fearful of imposition of Minimum Alternate Tax
April, 24th 2015
Private equity funds are fearful that India's tax authorities could attempt to impose Minimum Alternate Tax on their profits when they exit companies and have turned to tax advisers for clarifications.
The income-tax department has not issued any notices to PE firms, as it has to about 150 Foreign Portfolio Investors, but some in the PE fraternity fear they could be next.
So on Wednesday, when Junior FM Jayant Sinha, Revenue Secretary Shaktikanta Das and Central Board of Direct Taxes Chairperson Anita Kapur held a conference call on MAT with FPIs and tax experts, some PE fund managers were listening carefully. ET has been able to confirm that at least two fund managers sought clarity on the matter from the revenue secretary.
"PE funds make investments in private companies under the FDI regime. Exits made by PEs are typically treated as capital gains and a question arises on MAT applicability to the gains on divestment," said Sameer Gupta, partner, tax and regulatory services, Ernst & Young.
Tax experts point out that in the notes to the Finance Bill (2002) that provided amendments to Section 15JB (MAT) it was mentioned that MAT was only applicable to "domestic companies".
"MAT was not supposed to apply to any foreign company whether coming from a treaty country or otherwise. Obviously, that will be true of a foreign private equity fund operating as a company as well," said Ketan Dalal, senior tax partner, PwC. Though foreign portfolio investors have been buying and selling Indian stocks and bonds since 1991, the tax authorities have never suggested — until now — that they could be liable to pay MAT. But now, the position of the tax authorities is that an FPI is a company whether or not it maintains a balance sheet in the country.
If a FPI's capital gains can be taxed, then going by that logic MAT could also be levied on the capital gains of PE funds, said industry officials. Sinha and Das had clarified during the conference call that MAT would not be levied on funds that have invested through countries such as Singapore and Mauritius with which India has a double taxation avoidance agreement (DTAA). That means any FPI coming through DTAA countries — mainly Mauritius and Singapore — would be exempted from MAT.
Officials of the two PE funds ET spoke to said the government needs to clarify whether PE funds would be taxed under MAT and whether the Singapore and Mauritius exemptions will apply to them. "Around 80% of PE funds that operate in the country currently come through Singapore and Mauritius.
The government must clarify whether PE funds would be treated on a par with FPIs on this aspect," said the fund manager of a US-based PE which entered India through a Singapore-based vehicle. He spoke on condition of anonymity.
"There is huge concern amongst the PE firms as to whether the I-T department would levy MAT on them as well. While the government on Wednesday clarified that FPIs coming from treaty countries would not be subjected to MAT provisions, it is still unclear if that is only applicable to FPIs investing in listed entities or every foreign company investing from a treaty-protected jurisdiction," said Pranay Bhatia, partner, direct tax and business advisory, BDO India. "Stray cases have been happening of tax officers trying to apply MAT to foreign companies. It has happened to 'normal' foreign companies, it has happened to foreign banks, and it could happen to PE funds too," said a person close to the development.
Budget 2015 clarified that MAT would not be imposed on portfolio investors from April 1, 2015, but it is not clear if this clarification applies to other classes of investors, such as PE funds.
"It is also unclear whether PE funds which do not come through treaty countries would continue to be taxed even after April 1 this year," another jittery fund manager, who is currently in the US, said over phone.
Analysts said there could be confusion in the coming months if the government does not clarify the applicability of MAT vis a vis FPIs. "So while the Finance Bill speaks about not levying MAT on gains made by FPIs from April 1, 2015, in its present form it makes it applicable to other classes of investors such as PE funds. However, as we see it, PE funds coming from Singapore, Mauritius and other favourable treaty jurisdictions should stand protected from a MAT charge, since treaties ought to override domestic law," said Gupta of EY.
"In any case, as clarified recently, MAT should not apply to PE funds coming from any treaty country, not necessarily Mauritius and Singapore," added Dalal.