There will be no blanket use of the proposed anti-tax avoidance rules. They will be used only to counter “aggressive tax avoidance schemes”, the Finance Minister, Mr Pranab Mukherjee, said on Tuesday.
Mr Mukherjee's statement in the Lok Sabha is seen as an effort to soothe the nerves of FIIs that fear a tax hit on Participatory Notes (PNs).
P-Notes (PNs) are basically offshore derivatives instruments allowing overseas investors exposure to the Indian stock market . Such instruments offer the buyer anonymity. All overseas investors, not allowed to directly trade in Indian stock exchanges, buy PNs to gain exposure to Indian shares.
The proposed General Anti-Avoidance Rules (GAAR), which will come into effect from April 1, will not be used to harass honest taxpayers, Mr Mukherjee told Parliament. The first stage of Budget passage was completed in the Lok Sabha today.
The GAAR introduction and the Budget move to reverse the apex court's Vodafone ruling had deepened fears among the FIIs that their profits from dealings in securities market and also the indirect gains of the PN holders would attract the taxman's attention.
Despite some assurance that GAAR provisions may not be misused by tax authorities, there is a fear that PNs may be viewed as indirect transfer of shares/interest and hence may be subject to tax.
There is a view in certain sections of the FII community that the tax liability should rest only with PN holders, being the end beneficiary of the economic gain.
A Reuters report quoting several sources familiar with the situation said that CLSA, a foreign brokerage, has stopped selling PNs in the wake of recent uncertainty on taxation of these products.
“CLSA has taken the position not to increase its current Indian P-Notes as a way of minimising the possible tax exposure,” said the brokerage in an e-mail to clients.