Mar 28, 2012, 03.53 PM | Source: CNBC-TV18
HP Ranina, corporate tax lawyer spoke to CNBC-TV18 about the contours of applicability of GAAR.
HP Ranina (more)
Corporate Tax Lawyer, | Capital Expertise: Tax
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: We hear that the P-notes themselves are not getting targeted, but more importantly there will be several tests applied, one of the four test must be satisfied for the GAAR to apply, your reactions?
A: I am glad that they are clarifying this matter and that P-notes or participatory notes are not going to be targeted. I think it will certainly help to stabilize the market in the short run.
Q: The four tests have been mentioned and one of these four must be satisfied for GAAR to get applicable. Does it give you a sense that it will become applicable to a large number of cases because even one out of the four, if it is satisfied, the tax department can go ahead with anti-avoidance rules?
A: Yes, you are absolutely right. This will certainly create a lot of problems, for example in the case of companies set up in Mauritius, even if they just have a tax residency certificate that will not be accepted, they will have to prove that that company had some commercial substance, they are carrying on some activity, genuine bonafide activity and therefore, once the test is not satisfied, they will invoke the GAAR. Of course, that will happen from 1st April 2012, it will not happen in this week, but from next year, and that also it will happen only after the Finance Bill is passed and approved by the President of India, which would be happening in the third week of May. So from that day onwards, they will immediately start saying that you are not satisfying the condition of commercial substance in respect of your property, in respect of the company which you have, and therefore we will not give you the benefit of tax exemption of the treaty.
Q: The onus was so far on the FII to prove that the entity created was not primarily for tax saving purposes. The language that our team here is using is the I-T Department will also have to prove commercial purpose test, bona fide purpose test and misuse and abuse test. Do you think this is sort of passing on the onus now to the I-T Department to prove that the entity is not only for tax saving purposes?
A: Yes that will, but that doesn’t give any benefit because the income tax officer will simply say ‘I am not convinced that you are having any commercial substance in Mauritius, say you don’t have so many employees, you are not doing any other work, you are just operating from a lawyer’s office and therefore I am convinced that there is no commercial substance and therefore I am invoking GAAR.’
Q: So your sense is that a lot of investments out of Mauritius will not be able to hide under the DTAA and will become taxable you think?
A: Yes, it would mean that. In fact, it doesn’t help the FIIs at all. It only empowers the Income Tax Department to take their stand, even if they satisfy on one issue, they will invoke GAAR and that is why what I said yesterday, most companies will now shift to Singapore because that is where there is some stringency in the laws, they issue a tax residency certificate only if you show that you are some employee, you are doing some other activity, maybe trading activity or any other activity then they issue the TRC. So a lot of FIIs are now planning to shift there, that’s my sense.
Q: How much will FII investments be disturbed?
A: A lot of investments could come under a tax net if they still continue to operate from Mauritius because that is where the difficulties will arise. Unless they now change their position, they do some other activity in Mauritius as well and not just operate from a lawyer’s office. So maybe they can also change, then those companies which want to retain the Mauritian tax benefit will now start some other substantial activity because as I said, GAAR will come into effect only from sometime in May once the finance bill is passed. Therefore they have couple of months to set their things in order. It all depends on how they reorganize themselves and to what extent they are still interested in taking advantage of the Indo-Mauritian tax treaty.
Q: There is also news coming in that the government will try and classify the P-note as a separate asset class altogether. Do you think direct investments that the FIIs have through a structure that’s been created only for tax saving purposes could be hit, so does the focus now shift to direct FIIs and entities created for tax saving purposes and alleviates the P-note pressure?
A: Yes, it will now shift entirely to FII direct investments and P-notes obviously will be out of the tax, that will be for a time being, but we still have to wait and watch, things are pretty fluid at this point of time. We never know when the government may take a different view. So currently of course that clarification is helpful as far as P-notes are concerned.