Stock markets surged on Friday after the Finance Minister, Mr Pranab Mukherjee, clarified that the tough new ‘anti-avoidance' tax measures will not be used against Participatory Note holders.
Participatory Note is a derivative instrument that allows overseas investors to buy shares without going through the mandatory ‘know your customer' (KYC) norms in the Indian market and has been a key source of investment inflows into Indian stock markets.
The question of liability for tax in India of P-Note holders would “not arise” and necessary clarifications in due course will be issued, Mr Mukherjee told reporters.
The stock markets cheered the Finance Minister's clarification on taxation of P-Notes and the benchmark Sensex closed at 17,404.2 on Friday, up 345.59 points — a 2.03 per cent gain over the previous day's close.
He said that the Indian tax authorities will not go beyond the foreign institutional investors (FII) level to check any detail about the P-Note holders. Mr Mukherjee, however, said that the taxability of the FII that issued the P-Notes would be examined.
Simply put, Mr Mukherjee has assured foreign investors that the proposed General Anti Avoidance Rules (GAAR) would not be invoked against P-Note holders investing in Indian stock markets through FIIs.
While P-Note holders can take comfort from the Minister's assurance, the FIIs issuing these P-Notes are not really out of the woods. FIIs issuing P-Notes could be subjected to tax if GAAR is invoked against them, tax experts said.
The main fear of the FIIs is that the proposed GAAR, which would come into effect from April 1, provides for treaty override — any treaty benefits like the one provided by India-Mauritius double tax avoidance agreement could be negated by the taxman.
However, tax experts have mixed views on the Finance Minister's clarification. Mr Dinesh Kanabar, Chairman of FICCI Taxation Committee, said that the Finance Bill in the current form would independently bring both the FIIs and the P-Note holders into the tax net. The Finance Bill would have to be amended if the Finance Minister is keen to tax exempt the P-Note holders, he said.
FIIs on their part feel that the taxability should rest only with the P-Note holders, being the end beneficiary of the economic gain.
Referring to the question of retrospective amendments in Section 9, Mr Mukherjee said that he would like to “categorically clarify” that the intention of the Government is not to cause any harassment to genuine investors.
There is also a view that FIIs, if subjected to tax, would not bear the tax liability but would pass it on to the P-Note holders.
“If an FII has to cough taxes in India, the economic returns to its beneficiaries will get impacted,” said Mr Amit Singhania, Principal Associate, Amarchand & Mangaldas.