Tax issues, such as the imposition of a minimum alternate tax (MAT) on global fund managers, continue to dog the reform credentials of India’s one-year-old National Democratic Alliance (NDA) government. MAT has been imposed on domestic companies that made profits but were not contributing to the exchequer due to incentives and exemptions. In 2012, a ruling by a quasi-judicial body, Authority for Advance Ruling, stated that as the income tax law does not make a distinction between Indian and foreign companies, MAT was applicable to the latter as well. Accordingly, tax authorities made demands on foreign investors for earlier years.

The NDA government budget prospectively abolished MAT to foreign investors from April 1, 2015, but companies that sold shares before this date will not be exempt from the tax. According to India’s finance minister, Arun Jaitley, these MAT demands on foreign investors are intended to raise $6.4bn. Foreign investors are surprised by the decision and have been paradoxically asking for a retrospective tax exemption. Mr Jaitley has not yielded but has clarified that MAT will not be leveled at investors from countries with which India has a double taxation avoidance treaty. He has also made some concessions by exempting the income that foreign firms earned from securities transactions and interest, royalties and fees for technical service.

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The government has set up a panel to expeditiously suggest ways to resolve this tax dispute. The Central Board of Direct Taxes has also directed its field officers not to undertake what it calls "coercive action" for recovery of MAT demands raised on foreign companies, and put on hold the reopening of new cases. 

Mr Jaitley also indicated that these tax demands can be contested in higher courts, which respect due process and have the power to quash faulty decisions. He said that India’s tax treaties cannot be overridden by these rulings and that the NDA government will respect their rulings. There have been examples of this happening previously, such as in the case of the favourable decision that Vodafone India Services secured from the Bombay High Court on a transfer pricing tax demand in October 2014.

Five foreign investors have already filed a writ petition to the Bombay High Court challenging MAT. The court has also served a tax notice on Luxembourg-domiciled investor, Aberdeen. Moreover, a petition challenging this tax in the supreme court by Mauritius-based Castleton Investments has been pending since 2013. Both the NDA government and Castleton have agreed to expeditious hearings on this matter. The outcome of the case may set a precedent for such disputes.