The Shome Committee on GAAR has suggested an increase in securities transaction tax (STT) to make good the tax revenue loss that may arise from abolition of tax on gains from transfer of listed securities.

The Panel has rested its case for abolition of tax on such gains — whether in the nature of capital gains or business income — on three planks.

One, it would put paid the vexed issue of characterisation of income of gains made by foreign institutional investors and other non-residents on sale of listed securities here.

FIIs have not been paying any tax here by ensuring that they do not have a permanent establishment in India.

Having a permanent establishment in India would mean that all the business income of foreign investors would be taxed in India.

Wherever their incomes were being characterised as capital gains, they have used treaty benefits to obtain tax exemption.

Another argument put out by Shome Panel is that the present revenue from taxation of capital gains from listed securities is less than Rs 3,000 crore.

The gains from removal of the tax would outweigh the benefits of this revenue collection. Moreover, the STT increase could also ensure tax neutrality.

The third and critical argument is that any abolition of tax on portfolio investment may encourage fund managers to shift their bases to India.

A significant outcome of the present tax regime is that fund managers of foreign investors do not base themselves in India as the presence of such managers would constitute permanent establishment of such investors in India.

Consequently, the business income of foreign investors would be taxed in India.

Getting more fund managers to shift their bases to India could lead to more flow of funds to India, the Shome Panel has said.

But increase in STT to substitute tax on capital gains will increase transaction costs in India, said Amit Singhania, Principal Associate, Amarchand & Mangaldas.

>srivats.kr@thehindu.co.in

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