All about MAT and FIIs

MAT stands for Minimum Alternate Tax, an additional tax levied by tax authorities, apart from income tax. The full form of FIIs is Foreign Institutional Investors who acquire shares and debentures of Indian companies through the stock exchanges in India. The concept of MAT was introduced for companies initially and became applicable to all other taxpayers later on in the form of AMT (Alternate Minimum Tax).

Why was MAT Introduced?

Before MAT came into existence, many people in business took advantage of various tax exemptions, deductions, and depreciation. They were not paying taxes and instead were making profits. Due to this, the number of ‘zero tax paying companies’ increased, and the government finance collection was reduced with increased financial shocks. This led to the Government of India introducing MAT.

MAT was introduced in India through the Finance Act 1983 vide section 80VVA of the IT Act. Later in 1988, Section 80 VVA of the IT Act was replaced by Section 115J through the Finance Act 1987 and became effective from 1988-89. In 1990, it was repealed and again reintroduced through the Finance Act 1996 in the financial year of 1997-98 w.e.f. 1st April 1997.

Objectives of MAT

The objective of introducing MAT was to demoralise tax evaders and bring the ‘zero tax-paying companies’ into the tax net. These ‘zero tax paying companies’ took advantage of tax exemptions, rebates, deductions, and depreciation. While not paying the taxes, they were involved in making huge profits and reaping handsome dividends. They were taking benefits of tax concessions, incentives, and reliefs provided under the income tax laws.

Hence, the objective of MAT is to reduce the avoidance of tax payments. It was enacted to restrict the practice of certain companies that avoided payment of income tax even if they could pay.

Basic Provisions of MAT

According to the provisions of MAT, any company that is showing the book profit as permissible under the IT Act by making some adjustments has to pay income tax on the profit earned (calculation of tax under Companies Act 2013).

According to MAT, companies must pay a minimum tax of a certain percentage of their book profits deemed taxable income computed under the Companies Act. In other words, the tax liability of a company will be higher in the case of the following:

• A company is liable to pay tax as per the normal provisions of income tax laws. It means tax computed on the taxable income by applying the tax rates as applicable to the company.
• MAT computed @15% (plus surcharges and applicable cess) on the book profits.

The MAT rate is varied; in 2000, it was 7.5%, which increased to 18.5% in 2015. In September 2019, the government reduced MAT from 18.5% to 15%.

Introduction of FIIs

FIIs/NRIs/PIOs(Persons of Indian Origin) are permitted to invest in primary and secondary markets in India through a Portfolio Investment Scheme (PIS). FIIs/NRIs/POIs are acquiring shares and debentures of Indian companies through the stock exchanges in India. The Government of India has put a cap on investment from these people.

Regulations for FIIs

The Government of India has put a ceiling on overall investment for FIIs as 24% of total paid-up capital of an Indian company. This 24% ceiling cap for FIIs may be raised to a sectoral cap or statutory ceiling. For this raising of the ceiling, the company must take approval from its board of directors, or the general body of the company has to pass a special resolution to that effect.

The ceiling limit for India’s public sector and state banks is 20% of the total paid-up capital.

Difference between FDI and FII

• FDI is the investment made by a parent company in a foreign nation, while FII refers to the investment made by an investor in the markets of a foreign country.
• FDI doesn’t have the freedom to enter and exit the stock market, while FII has the liberty to enter and withdraw from it.
• FDI targets a specific enterprise, while FII focuses on increasing capital availability.

FDI Investment in India

Foreign companies invest in potential, rapidly growing private businesses to take advantage of cheaper wages and change the business environment of India. FDI in India is a major boost for economic development in the country.

There are four types of FDI:

1. Horizontal

This is where a business expands its inland operation to another country.

Example: McDonald’s investing in an Asian country to increase the stores in the country

2. Vertical

In this FDI, a business expands into another country by moving to a different level of the supply chain.

Vertical FDIs are classified into two – forward vertical integrations and backward vertical integrations. Forward vertical integration occurs when a company invests in a foreign company ranked higher in the supply chain. Take, for example, an Indian coffee company that may wish to invest in a French grocery brand.

Example: The Nescafe coffee producer may invest in coffee plantations in Brazil, Vietnam, Columbia, etc. This type of FDI is known as backward vertical integration since the investing firm purchases a supplier in the supply chain.

3. Conglomerate

Under this type of FDI, a business undertakes business activities in a foreign country that are unrelated.

Example: The US conglomerate Walmart may invest in the Indian automobile manufacturer, TATA Motors.

4. Platform

Under this FDI, a business expands into another country, but the output is exported to a third country.

Example: Chanel, the French perfume brand, setting up a manufacturing plant in the United States and exporting products to other American, Asian or other parts of European countries

FII Investment in India

The Securities and Exchange Board of India (SEBI) regulates FII investment. Due to its developed primary and secondary markets, India has attracted many FIIs, and they are major operators of the Indian financial markets.

Hedge funds, sovereign wealth funds, foreign mutual funds, pension funds, asset management companies, trusts, etc., are some of the different types of FII investment in India.

Maintenance of Foreign Investment

The Reserve Bank of India (RBI) monitors the ceiling on FII investment in India and NRI/PIO investment in Indian companies. For effective monitoring purposes of FII investment in India, the Reserve Bank of India has fixed a 2% down cut-off limit of the actual limit of the ceiling. So the cut-off limit for FIIs is fixed at 22% for Indian companies, and that for public sector banks, including the State Bank of India, is 18%.

As soon as the aggregate net purchase of equity shares of an Indian company purchased by FIIs reaches the cut-off point, RBI sends cautionary notes to all the designated bank branches prohibiting further purchase of equity shares. In order to purchase more equity shares across this cut-off limit, an FII bank branch has to take prior approval from the Reserve Bank of India.

The bank branches must inform RBI about the total number and value of equity shares and convertible debentures of the company they propose on behalf of FII. On receipt of such proposals, RBI gives clearance.

The sectoral ceiling cap remains effective until investment in such a company reaches its actual limit, i.e., 24%. On reaching the aggregate limit, RBI advises all bank branches to stop purchasing on behalf of their FII. RBI also informs the general public about it and stops the purchase through a press release.

Conclusion

Minimum alternate tax is necessary for the economy of a nation. MAT deals with tax evaders who were earlier successful in hiding behind the different loopholes of tax exemptions, reliefs and deductions. The objective of MAT is to demoralise tax evaders and bring the ‘zero tax-paying companies’ into the tax net.

Foreign institutional investors are institutional investors who invest in assets belonging to a different country other than their country. FIIs/NRIs/PIOs(Persons of Indian Origin) are permitted to invest in primary and secondary markets in India through a Portfolio Investment Scheme (PIS).