Apr 28, 2012 11:42 AM IST | Source: CNBC-TV18

FIIs ready to pay reasonable tax than uncertainty: KPMG

Dinesh Kanabar, deputy chief executive and chairman, tax, KPMG, tells CNBC-TV18 that the finance ministry‘s proposal will ensure a degree of certainty

In an interview to CNBC-TV18, Dinesh Kanabar, deputy CEO and chairman, tax, KPMG says that the finance ministry’s proposal will ensure a degree of certainty. Most FIIs come from treaty-protected countries and not all FIIs have short-term capital gains as they are long-term investors, he explains.

Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Does it seem plausible to give FIIs the benefit of business income and a lower tax rate on the business income as opposed to short-term capital gains tax? How will the FII community react?

A: If you are looking at business income and assuming that the income which is earned by FIIs as business income versus capital gains, remember that under the Direct Taxes Code there was a proposal to say that the income to FIIs will only be capital gains and not business income.

 But assuming that the new proposals were to state that it is business income, the government has to provide a degree of certainty because nobody wants to face the vagaries of General Anti-Avoidance Rules being applied and having business income classified at a higher rate.

But a very important question which will arise if one comes form a country where the tax treaty is protected and one does not have a permanent establishment in India.


In a situation like that you will be able to contest that the gains, which arise to you as business profits, are not liable to tax in India at all. The developments are very much at the proposal stage, but whatever the degree of certainty, if it is provided, it is welcome.

Also read: Fin Min may cut short-term cap gains tax for FIIs: Sources

Q: It might give you certainty, but will it be fair and do the job of not driving FIIs away, which is what seems to be the stance of the finance ministry in trying to be more consolatory?

A: If the FIIs were taking a relook, the over-arching issue is regarding overseas transfer and P-notes, which nobody seems to be focusing on.

But if one has to pay tax, a reasonable tax rate is a far better than living with uncertainties. Most FIIs would come from treaty-protected countries and not necessarily from tax havens like Mauritius or Singapore. Most FIIs are unlikely to have permanent establishment income and in that light probably they might not have to pay any tax at all.

Q: The success of such a proposal if it were to pan out in the Finance Bill would be contingent on the business income tax rate's reduction to 15%. Do you think that is the better rate available?

Will this not be unfair to Indian investors because they will still come under short-term capital gains tax and will still have what a higher rate of business income tax or will they also benefit from a lower rate?

A: There are two limbs to that question. Firstly, its overall fairness and secondly, the fairness vis-à-vis Indian investors.

Now if you look at FIIs, not all of them have short-term gains. Many of them are long funds and therefore they earn income, which is long-term capital gains and the proposal, which is in the offering, seems to suggest that even on long-term gains, which otherwise would have been tax exempt.

So now you have to end up paying a rate of tax of 10%-15%, which is under negotiation at this point of time.

The government is telling FIIs that you will not pay the highest rate, but you won’t get away with zero. That answers the question as to its compare vis-à-vis an Indian investor.

Potentially, an Indian investor on a long-term gain will continue to pay zero tax and on business profits, pay will pay higher rates of tax. There is an attempt to equate both of them.

Q: Do you think the government is softening its line and will it reflect in the Finance Bill? Are you hopeful that what we end up with will be a milder General Anti-Avoidance Rules(GAAR) than what we had anticipated when Pranab Mukherjee spoke on Budget Day?

A: I have heard the finance minister speak on the floor of the Parliament that he will consider some of the recommendations of the Standing Committee on the Direct Taxes Code Bill and ensure that there is a softening of the GAAR and whatever heard today is also a step in that direction.

But there are some very interesting things. To say that you will have GAAR, which is not discretionary, I must say to my logic, is absolutely counter-intuitive. The profession has for long, been advocating that there should be no GAAR, but Specific Anti-Avoidance Rules (SAAR), which is specific in anti-avoidance regulation.

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