Experts on GAAR: Need clarity on tax evasion & tax planning

Foreign portfolios in India have been left shaken on implementation of certain provisions in the General Anti-Avoidance Rules (GAAR) by Income-Tax officials. The fear that FIIs will start pulling money out of India has left the market in turmoil.

Investments into our market are through participatory notes, or P-Notes. These P-notes are issued by FIIs registered with SEBI, or by their sub-accounts, to investors overseas which in turn offer the buyer anonymity. In the March 16 Budget, finance minister Pranab Mukherjee announced these new tax proposals which would lead to overseas portfolio investors paying a capital gains tax of 42% and a long-term capital gains tax of 21%. Also Read: 'All FII investments from Mauritius to be subject to tax' Siddharth Shah of Nishith Desai & Associates tells CNBC-TV18 that foreign players are now concerned and confused about the taxability of offshore derivative instruments (ODIs) as GAAR will be applicable on both FDI and portfolio investments. Shah says, "GAAR appears to override any tax treaty right now." The uncertainty over the issue could linger, impacting liquidity into equity markets for sometime. In his view, chances of a litigation risk even for the ODI holders would arise out of GAAR. Legal experts are also saying that all forms of investments from Mauritius will now come under the scanner. Ketan Dalal, joint tax leader, PwC finds that the Mauritius route has always been contentious, even before GAAR came about. These new provisions will tighten the noose around Mauritius as it comes under the scanner.