The Direct Taxes expert committee constituted by the Government of India under the Chairmanship of Justice A.P.Shah, on the controversial issue of applicability of Minimum Alternate Tax (‘MAT’) to Foreign Investors, submitted its report in last week of August [MAT is levied on the profit as appearing in the books of accounts, as opposed to a normal Tax levy, which is based on the ‘income’ as determined under the Tax laws].  As  widely expected, the report has concluded that MAT levy does not apply to Foreign Investors, which do not have a presence in India.

The Government has been quick to accept the recommendations of the committee and a Circular to this effect has also been issued by the CBDT. As of now, one could safely conclude that only certain last rites remain to be performed – in the form of legislative changes – to bury the controversy for good – atleast insofar as the same relates to the levy on a foreign Investor. But in the process of putting a lid to one controversy, one wonders if the ground has been laid for another one – that relating to levy of MAT on foreign companies per se.

Tracing the legislative history of MAT levy, the committee has noted quite unequivocally that this piece of legislation was introduced only to target domestic companies. So where does that leave foreign companies which have a physical presence –  a Permanent Establishment (Branch / Project office) in India? Logically, the finding of the committee based on ‘past history’ of the legislation would lead to a rather straight forward conclusion  that all foreign companies ought to be out of the MAT net. However, perhaps mindful of the far reaching implication of such a situation, the committee has refrained from expressing a view on such companies.

The committee has also implicitly sought to create a distinction between the two sets of foreign companies – one which are under the regulatory radar of the Registrar of companies (Branch/Project offices) and the other that aren’t (Investors) – and concluded that there is no case for levy of MAT on the latter. But that surely does not mean as a corollary that the former are under the MAT net – if anything, the committee leaves a lot of fodder for the former set too.

A key piece of analysis relied by the committee to support its final conclusion revolves around the interpretation to be applied to the MAT code. The committee has expressed the view that the procedure laid for MAT levy is also a key determinant of the constituency to which the code should apply. A raft of judicial pronouncement, including the ever-famous Apex Court ruling in B.C.Srinivasa Setty’s case has been quoted in this context. Since the foreign investors are not required to prepare accounts in India, the committee concludes that it is reasonable to infer on that basis, that they are not liable to MAT levy.

Now, another piece of the procedural requirement for MAT levy is that the annual accounts for the purpose of the levy should be prepared on a fiscal-year basis; and the company (the Taxpayer)  should follow the same key parameters (accounting policies, standards, depreciation basis) for these accounts, as that adopted in the accounts “which are laid before the Company at its Annual General Meeting”. A foreign branch or project office, does not have to convene a General meeting in India. Does that lead to the argument that such companies are also not contemplated to be brought under MAT ?  Watch out for the odds on this one.