MUMBAI: From Monday, foreign institutional investors (FIIs) remitting funds from sale of securities will have to deal with the possibility of a tax liability later. Many chartered accountants and audit firms will add a caveat when FIIs ask for a clearance chit required for remitting funds abroad.
As per Reserve Bank of India ( RBI) rules, FIIs have to furnish a clearance statement signed by professional accountants to custodian banks for transferring funds overseas.
“The dilemma is most accountants will prefer putting in a caveat since there is no full clarity on the tax issue. On the other hand, there is a fear that custodian banks may not remit funds if clearances come with the caveats,” said an advisor to one of the FIIs.
The big four audit firms, custodian banks and advisors to FII asset managers will meet this week to thrash out the format and language of the clearance certificate that will be acceptable to custodian banks, senior sources in the stock market told ET.
“The matter is under discussion and we hope to arrive at a decision soon,” said Gautam Mehra, executive director at PricewaterhouseCoopers. “It (clearance statement) has to be appropriately worded,” said Mehra, who leads the financial services tax and regulatory team.
Till Saturday, there were differences of opinion among audit firms and custodians on the issue. The choice before custodians is to accept a clearance statement with caveat or deduct tax before allowing fund transfer.
Many FIIs are already factoring in chances of a tax liability cropping up at a later date. For instance, asset managers inLuxembourg, a tax haven that also serves as an important base for FIIs, have decided to deduct tax before distributing gains to investors.
“The finance minister’s clarification that participatory note holders will not be taxed has raised a bigger concern: does this mean that FIIs investing directly will come under the tax net? Most accountants will not issue an unconditional certificate based on FM’s statement on television,” said an official of an FII brokerage.
In debt investments, where the margins are thinner and a part of the capital gains is actually accrued interest, a tax on short-term gains can be crippling, said the person while admitting that anti-avoidance rules are the order of the day and are being implemented by other countries.
Auditors Wait For Clarification
Participatory notes (PNs), which are offshore instruments to trade in Indian stocks, constitute about 15% of total FII inflows and have almost halved over the years.
“Till the time the Finance Bill becomes an Act, the current beneficial provisions should be applicable for such remittances. Also, one would need to wait for the rules and the guidelines relating to GAAR and TRC to evolve a final position on this issue. Till such time, appropriate references to that effect may have to be made by chartered accountants while signing the remittance certificates,” said Punit Shah, partner (tax & regulatory services) at KPMG.
Executives at Ernst & Young were not willing to comment on the subject. Meanwhile, over the weekend, law firms and FII advisors were circulating a Mauritius ministry of finance communique claiming that any entity operating there needs to have “commercial substance” – a key condition under GAAR – and the requirements in Mauritius are stricter than what other jurisdictions demand.
According to the note, global business companies have to be set up and administered by licensed management companies, must have resident directors, hold board meetings in Mauritius, and route banking transactions through Mauritius.
But most auditors ET spoke to think it’s difficult to take a clear stand as long as the rules are not spelt out in black and white, and the government does not explain what constitutes “commercial substance”.
“Accountants will have to mention in the certificates that their views expressed are based on the law standing as on March 31, 2012. Under the circumstances, it is up to a custodian bank and its compliance team to take a call on whether they would clear fund remittance,” said Anup Shah, partner at tax and transaction advisory firm Pravin P Shah & Co.