GAAR was introduced by the then finance minister Pranab Mukherjee in his budget speech in March 2012. But ambiguity surrounding some of its provisions spooked foreign institutional investors who feared that wide powers given to local taxmen to scrutinise returns would increase harassment by some bent on increasing revenue collections at all costs. Several threatened to pull out of India and the government set up a committee which recommended deferment.
"This is a huge boost for investments coming from Singapore and Mauritius as FIIs would continue to benefit from double tax avoidance treaty," said Dinesh Kanabar, tax expert and CEO of tax advisory firm Dhruva.
On Saturday, the government also clarified that foreign portfolio investors would not pay minimum alternate tax and relaxed rules allowing FIIs to set up shop in the country. "The Budget is a big positive for foreign institutional investors. It has cleared a lot of uncertainties," said Sanjay Sanghvi, partner at law firm Khaitan & Co.
Tax practitioners and lawyers said the MAT exemption is the biggest takeaway. The tax department had issued notices to several foreign portfolio investors (FPIs) earlier this year on MAT causing frantic investors to knock on the doors of the government and tax consultants and complain about arbitrariness. The levy would have resulted in FPIs paying 20% tax making the capital gains tax regime irrelevant. India taxes short-term capital gains at 15% and there is no long-term capital gains tax on investment beyond one year.
"The announcement would remove the uncertainty and anxiety created due to the recent tax notices to FPIs asking them to pay MAT," said Rajesh H Gandhi, partner (tax), Deloitte Haskins & Sells. The IT department had issued notices to about 400 FPIs in the last few months.
The government has also made it easier for foreign fund managers to set up base in India by tweaking the permanent establishment (PE) norms. PE refers to a situation where a non-resident entity becomes liable to pay taxes just by having an office or a fund manager in that jurisdiction. Jaitley said PE would not apply to foreign institutions whose fund managers are located in India.
"Earlier, funds would have a contrived arrangement with their India managers to operate as otherwise their gains would be treated as profits and taxed accordingly. With the new arrangement, the FPIs returns would be treated as capital gains," said Kanabar.
The Finance Bill states that the proposed new Section 9A seeks to provide that in the case of an eligible investment fund, any fund management activity carried through an eligible fund manager acting on behalf of such a fund shall not constitute business connection in India of the said fund.
Sub-Section 2 of the new section provides that an eligible fund shall not be treated as resident just because an eligible fund manager is doing fund management activities on behalf of the fund in India.
Concern over taxation of such entities had prompted many fund managers, who manage India-centric portfolios, to handle operations from Singapore and Hong Kong.
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