In what is seen as another major market reform, the Indian government’s decision to waive Minimum Alternate Tax (MAT) on foreign institutional investors (FII) brought cheers from the investors and the markets. India’s Finance Minister Arun Jaitley announced on September 1 this major decision that the investors were waiting to hear. Mr Jaitley said, the government had decided to accept the AP Shah committee’s recommendations that was set up to examine the issue.
Once brought into legislation in the next Parliament session, the move is expected to boost the confidence of the investors in a major way. MAT was earlier imposed on FIIs after the Advance Authority Ruling (AAR) decision in 2012 that foreign investors in India should pay MAT on their book profits. As FIIs can enter and exit the markets at will, the 2012 decision had come as a big setback to many investors. It was because they don’t maintain books in accordance with the Companies Act as they don’t have a fixed place of business in India. Foreign investors have been arguing that MAT applies more to domestic investors than foreign investors and MAT acts as a disincentive to foreign investors.
The decision by the government is seen as a bold move despite the fact that the government would lose a lot of potential revenue. The decision also sends positive signals to investors abroad with commitment towards certainty in taxation. The move will help promote India as a favourable destination and the government’s image of discouraging tax terrorism (a term coined against the previous government) would strengthen.
After taking a hit due to weak global sentiments in recent times, the stock markets in India opened positively and the sentiment is attributed to this overnight decision on September 1 to waive off MAT for FIIs. The clarity on MAT will help prevent the exodus of foreign funds from the Indian stock markets and will also boost the sentiments of foreign investors who have traditionally complained of ambiguous tax laws in India. With foreign investors not having to pay MAT now, one could expect the investors to stay put for a longer time during favourable market conditions. This will reduce huge selloffs such as the one that happened in August which rattled the markets.
Anticipating hikes in interest rates by the Federal Reserve in the US, the MAT decision comes at a time when investors are apprehensive. The decision to waive of MAT may once again help the government regain its image as that of a more investor friendly government that is committed to market reforms.
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