In a big relief to foreign firms, government has announced that the Income Tax Act will be amended with retrospective effect to exempt from MAT the overseas companies that are covered under double taxation avoidance agreements. Foreign companies that do not have a permanent establishment in India will be exempt from paying minimum alternate tax (MAT) on profits from April 2001.

The provisions of Section 115JB of Income Tax will not apply to foreign companies with effect from April 1, 2001, if they are resident of a country with which India has Double Taxation Avoidance Agreement (DTAA) and they do not have a Permanent Establishment (PE) in India.

In case the companies belong to countries with which India does not have a DTAA, the MAT exemption will apply if they are exempted from registration under Section 592 of the Companies Act 1956, or Section 380 of the Companies Act 2013.

These notices were based on a 2012 decision by Authority for Advance Ruling (AAR).

What is MAT?

The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders. Income arising from free trade zones, charitable activities, investments by venture capital companies are also excluded from the purview of MAT. However, foreign companies with income sources in India are liable under MAT.