Ketan Dalal, Joint Tax Leader, PwC and Aliff Fazelbhoy, Partner - Tax, M&A and Employment, ALMT Legal think that the FM’s clarification that there will not be double taxation of both the FIIs and the P-Note holder. But it still remain unclear on the extent and the geographical limit of taxing the FIIs.
Clearing the air on the P-note issue, Finance Minister Pranab Mukherjee on Friday said that holders of participatory notes will have no tax liability and a clarification on these notes will be issued in due course.
Commenting on the government’s stance, Ketan Dalal, Joint Tax Leader, PwC and Aliff Fazelbhoy, Partner - Tax, M&A and Employment, ALMT Legal think that the FM’s clarification that there will not be double taxation of both the FIIs and the P-Note holder is comforting. But it still remain unclear on the extent and the geographical limit of taxing the FIIs.
Ketan Dalal, Joint Tax Leader, PwC said that the intention to not tax P-note holders is comforting. But the other concern is that it needs to be seen whether the FIIs would be hit as a result of the General Anti-Avoidance Rule (GAAR) provisions.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: The Finance Minister says that, ‘the purpose of the Indian government is not to cause any harassment to genuine investors. Indian tax authorities will examine the tax liability of FIIs, they won’t go beyond the FIIs to check further details of the participatory note (P-Note) holders and therefore there is no taxing of participatory note holders. Is the situation any clearer or does it remain pretty much as it was?
Dalal: I think there are two points. Firstly, the government’s intention not to tax P-note holders is obviously comforting. Of course, that has to be translated into either a clarification etc as we move forward because again a couple of years later, something else could emerge, some interpretation etc. One hopes that we will be operationalized. But there has been another concern that the FIIs in majority are coming in through Mauritius; it needs to be seen whether the FIIs themselves would be hit as a result of the General Anti-Avoidance Rule (GAAR) provisions.
As you know, there was a CBDT circular issued by the government on the tax residency certificate being adequate. In their latest Budget, they have said that it is necessary, though not a sufficient condition. So that uncertainty still remains. So I think I would put it in this way, one is at least on the P-Note part there seems to be at least a clearly manifested positive intend. On the second point which is the FIIs still remains uncertain.
Q: The FM clearly said that Indian tax authorities will continue to examine the tax liability of FIIs, but will not try to check further details of who the exact P-Note holders are. Therefore, they will not tax P-Note holders. Is this really a relief because wouldn’t the FII pass on the tax if it is extra or if it is retrospective back to the P-Note holders? Did people actually fear double taxation both at the hands of the FII level and the P-Note level?
Fazelbhoy: Yes, I think they feared double taxation at both levels but this is only a small relief. You are absolutely right. The FII will pass on the tax burden to the P-Notes holder. If the FII itself doesn’t know whether it’s going to be taxed or not, then how does it agree with the P-Notes holder or what sort of arrangement the FII gets into with the P-Notes holder? Does it take an indemnity? Does it keep some money in escrow? These are going to be nightmarish issues. So, the FIIs would also look for some sort of clarification more than what the FM has given right now.
Q: The Finance Minister has also said that they will issue further clarifications. What more are you waiting to hear from the Finance Minister? What do you think is a realistic thing that the Finance Minister might announce by way of a clarification on this issue now?
Dalal: I think the whole issue of GAAR vis-ŕ-vis Mauritius, or for that matter, Singapore. GAAR is, of course, much wider but since you are talking of FIIs etc. there has to be some clarity because business cannot function in such an uncertain environment. It needs clarity as to what is the situation in terms of entities which have a Tax Residency Certificate.
As Aliff mentioned, assuming that Participatory Notes are not intended to be taxed, FIIs will be taxed in relation to their whole investment including those with the Participatory Notes. They said that there could be an issue of passing on the liability and that will create its own set of issues. So it has to be broader than this. But at least some intent seems to have been manifested. As I said, more details and something translating on the ground is still needed.
Q: You agree with Mr Fazelbhoy when he says that the only thing that the FM’s clarification is that there will not be double taxation of both the FIIs and the P-Note holder but we are still unclear as to the extent and the geographical limit of the taxing of the FII itself?
Dalal: Yes, I think that would be a fair summary. One has to wait for far more details before coming to a conclusion one way or the other.
Q: If you try and extend the intent, which the FM has tried to lay out in these two-three lines that he has said, what would it be? Would it be the genuine investors via the P-Notes will not be taxed retrospectively or prospectively and what do you think will happen to FIIs who are investing via shell companies in Mauritius?
Fazelbhoy: All this will be subject to GAAR because any shell company in Mauritius, or even for that matter, Cyprus or any other jurisdiction will come under scrutiny. So any investment via tax haven will come under scrutiny. Now, who the ultimate beneficiaries are, on the face of it, are affected because if the FIIs investing for the P-Note holder, he will pass on the tax burden.
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