The finance minister's aim should be to remove uncertainties relating to investment climate rather than creating further confusions, says Daksha Baxi of Khaitan & Co reacting to a clarification issued by the ministry on the Tax Residency Certificate (TRC).
She believes that the government clarification is not enough to mollify foreign investors. "I do not think this is enough, because if that is the intention of the government then what was the need to add this additional statement in the finance bill, that TRC is necessary but not sufficient to claim the treaty benefit," she told CNBC TV18.
Baxi explains how proposals like tax residency certificate and general anti avoidance rule (GAAR) is shaking foreign investor confidence in the country.
Below is the verbatim transcript of the interview
Q: What do you make of the clarification in tax residency certificate (TRC), is this enough to allay concerns?
A: I do not think this is enough because if that is the intention of the government then what was the need to add this additional statement in the finance bill, that TRC is necessary but not sufficient to claim the treaty benefit.
It was enough to say that the TRC is necessary and that is it. It is clearly understood that treaty benefit would be given if TRC is there. So to say that it is not sufficient, thus indicate and give the ability to the tax officer to say 'look, yes, you are telling me that you are tax resident of a certain country, and you are claiming the Double Taxation Avoidance Agreements (DTAA), but let me see whether you are also the beneficial owner, that you are a genuine resident and that there are no other aspect of your transaction, which makes me feel that you are a dual resident etc.'
I do not think that just giving TRC or accepting TRC takes away the ability of the tax officer to check whether dual residency is there or not, whether there is a permanent establishment or not, all of that is anyway given. But to say that it is not sufficient, unnecessarily add to uncertainty which is already there, because of the lack of clarity on the indirect transfer of Indian assets. How they are going to be valued, what is substantial value, what part is going to be taxed in India etc. With regards to GAAR, as per the press release they were supposed to have a grandfathering, which is not there in the bill. All of these together put a little more uncertainty and send out a little more signal of uncertainty to investors. I think this could have been avoided. There is no need to spur up uncertainty, which already exists. There should have been statements which remove uncertainty rather than create uncertainty further.
Q: What about a situation in which benefits are exercised not directly by the owner but through representative structures, through agents and instruments? Could you possibly continue to see further confusions like this until that new framework is put in place?
A: I would tend to agree with you that there is more confusion, but I am not entirely sure whether the tax officer is not in a position to look at the structure. He is still in a position to look at the structure.
Recently, we have a very learned decision from the Andhra Pradesh High Court in the case of Sanofi, where they have gone into the entire practical reality of structures and they have said that creating structures, creating intermediary companies is a commercial right that any company has. A company maybe in multi verticals and it may only want a particular vertical in which it would invite a strategic investment. So for that the company will need to have intermediary. Now, if you say that intermediary is a camouflage or it is done with the purpose of avoiding taxes that is to say that I take away your ability to structure your transactions in the best suited commercial manner that you can do. I am not suggesting that there are aggressive structures, which have been used, which do erode the tax base that India has and therefore they need to be addressed but they need to be addressed in a particular manner without creating further uncertainty.
Now, GAAR has been deferred but already there was a statement made in the press release in January that the investments which were made till August 30, 2010 only will be grandfathered. Anything that will happen thereafter is going to be subject to GAAR. So are we suggesting that between today i.e. March 1, 2013 and April 1, 2015 there maybe so many transactions, which would be taking place which will erode our tax base. We are trying to invite for an investment, why are we only looking at them exiting, why aren't we looking at them coming in, we want the money and we want more certainty for them. I do not think the foreign investors mind having to pay taxes, they mind the uncertainty. That is what needs to be removed.