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Apr 02, 2012, 03.14 PM IST | Source: CNBC-TV18

FM has created more confusion than clarity on GAAR: Expert

Finance Minister Pranab Mukherjee 'clarification' on Friday has created more confusion rather allaying fears among foreign investors, believes Bhavna Doshi, president oif Indian Merchants Chamber.

Bhavna Doshi, President, Indian Merchants Chamber
Moneycontrol Bureau

 Finance Minister Pranab Mukherjee “clarification” on Friday has created more confusion rather allaying fears among foreign investors, believes Bhavna Doshi, president oif Indian Merchants Chamber.

Holders of participatory notes, or P-notes, will have no tax liability and a clarification on these notes will be issued in due course, Mukherjee said.   

“The Indian tax authorities would examine the tax liability of the said financial institutional investors (FIIs). However, the tax authorities would not go beyond the FIIs to check any further detail about the participatory notes holders,” Mukherjee told reporters.

However, according to Doshi, the finance minister has only stated that he will not look at the source from which this funds have come in and who are the people who have invested in the P-note. She feels still there is no clarity as to the taxation of these people. 

P-notes are issued by foreign portfolio investors registered with the Indian market regulator, or by their sub-accounts, to investors overseas and they offer the buyer anonymity.

Analysts said the uncertainty about taxation for foreign investors extended beyond participatory notes, or P-notes, which are derivative products sold to overseas investors that ape the performance of an underlying Indian security.

Doshi feels that the government is perhaps indicating to investors that even though an FII is coming from a tax-friendly jurisdiction, unless it finds that there is significant commercial substance to that transaction, it is going to look at it and we are going to investigate.

“If that is the situation, then whether you come from Singapore or Mauritius etc, the question would still be open,” she reiterated.

Overall, the entire operation is targeted at the Vodofones, Vendantas and Cairns of the world. But perhaps what is worrisome is the uncertain tax policy exhibited by the government.  

Let's not forget that these international business operators or investment operators have a lot of choices to make for selecting a jurisdiction for their investors, highlights Daksha Baxi, executive director (Taxation) at Khaitan & Co, adding, "…they are completely answerable to their investors in terms of the returns that they give to them." 

Baxi said the factoring taxes should be prospective and cannot be retrospective. "We need to be certain about what we want to do and not create an atmosphere of uncertainty," she told CNBC-TV18.

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