With government proposing to come out with the controversial general anti-avoidance rule (GAAR), which would affect foreign institutional investors (FIIs) routing their funds through tax haven Mauritius, the African island nation?s foreign and international trade minister Arvin Boolell has met Prime Minister Manmohan Singh and external affairs minister SM Krishna to express his concern on the proposed rule.
GAAR ? which is based on the ?substance over form? doctrine ? is likely to come into effect from April next fiscal. It will allow Indian tax authorities to go behind the legal structures created by foreign investors to invest in India despite protective tax treaties, like the India-Mauritius treaty, and check if these structures lacked ?commercial substance?. If the arrangement is found to be merely to camouflage the real purpose and avoid tax on capital gains, the investor could practically be deprived of the treaty benefit.
The draft guidelines on GAAR said, ?Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be invoked in the case of the non-resident investors of the FII.?
This means that even though participatory note (PN) holders won?t be directly taxed, the FIIs will have to pass on only the post-tax gains to their clients. So there is no real relaxation.
Boolell is also unhappy with the Budget proposal under which government has made tax residency certificate as ?a necessary but not sufficient condition? for availing benefits under the double taxation avoidance agreements (DTAA).