What is this MAT issue pertaining to FIIs, then?
This Rs 40,000 crore demand is a tax pertaining to years before Finance Minister Arun Jaitley announced scrapping of MAT. Therefore, the tax demand is legitimate although it is likely to hurt investment sentiments.
MAT
Minimum Alternate Tax (MAT) is a tax levied on short- and long-term capital gains and interest income.
The tax rate is 20% and goes back as far as Financial Year 2009.
What is the Government asking?
CLSA said, "Government officials are largely going by the precedent of the case of Castleton Investments, wherein the Authority for Advance Ruling (AAR) gave a verdict in August 2012, that Castleton is liable to pay MAT when it transferred shares from a Mauritius entity to a Singapore entity. The case is currently with the Supreme Court. If the Supreme Court upholds the AAR ruling then the case of the income tax authorities will become very strong. If the Supreme Court strikes down the AAR ruling, then the case will weaken considerably.
The government is simply asking funds to pay up the tax that is due to India. Finance Minister Arun Jaitley has said that total tax collection from this avenue could be in the range of Rs 40,000 crore and he could fund India's irrigation projects for farmers with that money.
Moreover, the new government had clearly said that no new retrospective taxation cases will be opened but the ones currently underway will have to reach their logical conclusions.
Since this tax demand is of a period prior to abolishing MAT, the demand isn't unjust.
Jaitley has reiterated that India is not a tax haven.
FIIs in India
Foreign Institutional Investors (FIIs) ownership in Indian equities was at an all time high of 20.7% as on December 31, 2014.
The investment jumped 40% from FY14 to FY15.
The US (32%) and Mauritius (22%) together account for 50% of the total foreign investments in India followed by Singapore and Luxembourg at 9% each.
