NEW DELHI: Foreign institutional investors based in Mauritius will not be required to pay capital gains inIndiaif they have ‘substantial commercial interest’ in the island nation, a finance ministry official has clarified.
The official said the proposed General Anti Avoidance Rules, or GAAR, are very clear and there is no uncertainty for companies who have not entered into the arrangement purely for tax benefit.
“If you are not operating through a post box or a letter box company then there will be no tax,” he said. The proposed GAAR that will come into effect from April 1, 2012 once the finance bill is passed clearly specifies conditions under which an arrangement will be deemed to lack commercial substance.
The fear of GAAR had spooked stock markets last on concerns that all short-term capital gains made by foreign institutional investors and participatory note investments would be taxed. Markets recovered only after finance minister Pranab Mukherjee clarified that investments through participatory notes would not face any tax on capital gains in India.
“The Indian tax department would examine the tax liability of the FIIs. However, Indian tax authority would not go beyond financial investor to check details about the PN holder. Accordingly a question of liability for tax in India of the PN holder would not arise,” Mukherjee had said on March 30.
The Asia Securities Industry & Financial Markets Association (ASIFMA) along with Securities Industry and Financial Markets Association (SIFMA) has written to Mukherjee saying that “such onerous taxation or even the risk of such taxation could threaten this important source of capital for India’s businesses”.
The ministry, however, clarified that it had not received any representation from any industry body on the issue of tax on participatory notes. PNs are overseas derivative instruments with Indian shares as the underlying asset that allow foreign investors to invest in Indian equities indirectly without revealing their identity to Indian authorities.
FIIs are evaluating these new tax risks, the association had said. FIIs have assets under custody of more than Rs 10 lakh crore or 17% of the capitalisation of India’s equity markets. Further, these entities also invest in Indian government and corporate debt, as per the letter. It appears that market participants have already begun to reduce their positions in India, it said.