GAAR provisions will be used only in appropriate cases: Pranab Mukherjee

With confusion over the applicability of taxation provisions proposed in the Budget for the new fiscal beginning April 1, which has led to sell-off on the bourses during the week, Finance Minister Pranab Mukherjee on Friday sought to assure overseas investors that entities investing in stock markets through P-Notes (participatory notes) would not be required to pay taxes in India.

In a bid to set at rest the prevailing uncertainty over tax dues of overseas investors, Mr. Mukherjee said: “Indian tax authority would not go beyond financial investor [FIIs] to check the details about the P-Note holders. Accordingly, a question of liability for tax in India of the P-Note holder would not arise. Necessary clarification will be issued”.

Under the P-Note mechanism, even those foreign institutional investors who are not registered with the market regulator — Securities and Exchange Board of India (SEBI) — are permitted to invest in the Indian equity market. Mr. Mukherjee pointed out that as P-Note holders make their investment in stock market through FIIs, “the Income-tax Department would examine the tax liability of the FIIs”.

The Finance Minister's detailed clarification to the media has ostensibly come in the wake of a written communication to him by the Asia Securities Industry & Financial Markets Association (ASIFMA) and the Securities Industry and Financial Markets Association (SIFMA) which pointed out that “such onerous taxation or even the risk of such taxation could threaten this important source of capital for India's businesses”.

In particular, the associations noted that since the tax proposals were worded “too broadly”, the FIIs were carefully evaluating the new tax risks involved in further investment.

Seeking to allay apprehensions over the tax provisions on overseas investments contained in the Finance Bill 2012, Mr. Mukherjee said: “I would like to categorically clarify that the intention of the government is not to cause any harassment to genuine investors”.

GAAR provisions

In fact, what has spooked the market over the past week are the proposals with regard to taxation of indirect transfers of assets and General Anti-Avoidance Rules (GAAR). Mr. Mukherjee clarified that while the Budget introduced GAAR provisions to “counter aggressive tax avoidance schemes,” it would be ensured that “it is used only in appropriate cases, by enabling a review by a GAAR panel”.

Following the Minister's assurance on GAAR that is to be applicable from April 1 as per the Finance Bill, the markets sought to touch new highs for the last week of fiscal year 2011-12.

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