While the Parthasarathi Shome panel?s proposal to abolish tax on gains from the sale of listed securities is likely to cheer the stock market when it reopens on Monday, there is concern that even if the panel?s proposals are accepted by the government, foreign direct investments (FDI) flowing into unlisted securities would continue to be liable for short-term capital gains tax payment.
This is because the panel, which recommended the abolition of tax in the case of listed securities, which foreign institutional investors (FIIs) deal in, is silent on FDI that goes into unlisted securities. Experts said it is unfair to favour FII inflows that are often regarded as ?hot money? over FDI, which is more stable and goes into infrastructure projects executed by unlisted companies or special purpose vehicles. ?Most infrastructure projects are executed by unlisted companies,? said a tax expert, who did not wish to be named as he represents clients in both forms of foreign investments.
The Shome panel has proposed abolition of tax on gains from transfer of listed securities ? whether as capital gains or business income ? and added that if this was politically unpalatable, the government could retain circular 789 which allows investors using Mauritius route to avail of treaty benefit by producing the tax residency certificate (TRC). The panel has said the provisions of the General Anti-avoidance Rules or GAAR should not be used to verify the TRCs produced by investors.
Now India levies short-term capital gains tax of 10-30% on the sale of securities depending on the class of investors.
The panel, however, provided a saving grace to FDI saying that investments that have already come into the country before GAAR?s implementation should not be covered by the anti-avoidance rules when they divest their investments. The same benefit is proposed for FIIs too.
GAAR seeks to deny any tax benefit that is claimed by a structure the main purpose of which is tax avoidance. The Shome committee has granted significant benefit to investors by narrowing the scope of these rules, saying that they would apply only if the main purpose of an arrangement is tax avoidance, not one of the main purposes.
?Thus, any tax benefit that is incidental to an arrangement will not trigger GAAR provisions,? said Rahul Garg, leader, direct tax, PwC India.
Meanwhile, the government is trying to incorporate anti-avoidance rules in the form of a ?limitation of benefits clause? in the double tax avoidance agreement with Mauritius, which accounts for a large chunk of FII investments into the country. Once this is incorporated in the treaty, there is no need to invoke GAAR on investments coming through Mauritius. Such a clause is already part of some of the bilateral treaties like the one India has with Singapore.
