GAAR not to target P-Notes: FinMin sources

The Sensex shot up about 230 points on news that GAAR, the General Anti-Avoidance Regulation, will not target foreign investors. Speaking to CNBC-TV18, finance ministry sources say that P-notes must not be taxed.

P-notes or participatory notes refer to the financial instruments used by investors or hedge funds that are not registered with the Sebi to invest in Indian securities. Indian-based brokerages buy the India-based securities and then issue P-notes to foreign investors.

FinMin sources say that GAAR will be invoked only if a company is found setting up plant in a country that has a DTAA with India for the purpose of tax avoidance. A Double Tax Avoidance Agreement is signed between two countries to mitigate problems of taxing a company twice, a condition that may arise when the tax laws of the land considers the company to be resident in more than one jurisdiction. India has a DTAA with few nation, but majority of foreign investments come from Mauritius.

According to sources, there are four tests that will apply, including main purpose test and abnormality test. At least one out of four tests need to be satisfied for applicability of GAAR. Sources say that GAAR will be invoked only if a transaction fails the main purpose test, after which the I-T department will have to prove one of the other. The department will have to prove commercial purpose test, bonafide purpose test, misuse and abuse test and abnormality test.