NEW DELHI: The finance ministry on Thursday said it would give foreign institutional investors (FIIs) time to convert their “impermissible arrangements” into “permissible” ones to escape the provisions of the proposed General Anti-Avoidance Rule (GAAR).
Finance Secretary R S Gujral said, “FIIs had raised concern that if currently these are impermissible and become permissible in three months, would GAAR be applicable even then? We want to clarify we will take care. If you are operating genuinely, you will not be harassed.”
On whether the government would apply the GAAR in case of income generated in the past, he said, “We have said very categorically the Bill says the GAAR would be applicable on income from April 1, 2012. We are not talking about income of previous years.” He added only those arrangements of FIIs which were entered into with the intention of tax avoidance, or “impermissible arrangements”, would invoke the GAAR. “If you are saying you are operating from country A or B, then you must have your establishment there, you must actually operate from there. We would say start trading from India. But if you don’t want to trade from India, at least trade from the country you are contending you have an establishment in,” he said.
Concerned over the impact of the GAAR, FIIs have held three rounds of discussions with the finance ministry’s committee on the GAAR and had suggested changes in certain phrases they felt were vague and could be interpreted in different ways. “We have asked them to be in touch with our GAAR committee. Whatever those small concerns are, we will address those,” Gujral said. He added the standing committee, too, had said the onus of proving the intent of tax avoidance should be entirely on the Revenue Department. According to the proposed GAAR provisions, while the Income Tax Department has the liability to prove tax avoidance intention, it is on the part of the assessee to show the arrangement is aimed at tax avoidance.
In the Finance Bill 2012, Minister Pranab Mukherjee has proposed to include the GAAR provisions, which are aimed at targeting deals whose purpose is to avoid taxes. Foreign investors fear the proposed rules could apply to holders of participatory notes (instruments through which foreign entities not registered in India can invest in stock markets) issued by FIIs.
Mukherjee has said those investing through participatory notes would not be liable to taxes in India and the finance ministry has indicated GAAR provisions would be clear once the Finance Bill is passed by Parliament.
FIIs have assets under custody of Rs 10 lakh crore, or 17 per cent of the capitalisation of India’s equity markets. These entities also invest in the Indian government, as well as in corporate debt.