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Concerns of GAAR leave foreign investors worried

Markets are reeling down, with the reports of the possible introduction of new rules that affect the Foreign investors significantly. Investors are seemed to be worried about the possible implications of the implementation of the General Anti-Avoidance Rule (GAAR), from April 2012, as announced by the Finance minister during the Union budget.

The concerns are that the government could take measures to tax Participatory notes (P-notes) issued by foreign portfolio investors who are registered with the SEBI, to overseas investors. They usually offer anonymity of the buyers. One of the benefits with them is that the P-notes generally avoid tax payments in India. With the new GAAR rule coming into effect, investors fear that this leverage would no longer be existing.

GAAR is said to be applied to cases of “impermissible avoidance arrangements” where the main purpose, or one of the main purposes, of entering into such an arrangement is purely to obtain a tax benefit. The arrangement could misuse the provisions of the tax laws and lack commercial substance.

But in essence the rules give tax authorities the ability to question expenses or transactions made by companies as well as individuals, causing the decreased the amount of tax paid and to ensure those transactions haven’t been done with the sole purpose of avoiding payment of tax.

The point of concern as most of the brokerage houses are raising is that the investors coming through tax havens such as Mauritius, would be affected. Most investments by FIIs and private equity funds into India are via Mauritius. India’s tax treaty with Mauritius gives an exemption from the capital gains being taxed. FIIs fear that if GAAR gets implemented in its current form, it could override India’s tax treaty with that country and thus the capital gains might become taxable.

Though, investors are not clear about the exact ways in which these taxation rules will be implemented and how much would they impact, the initial concerns have left many of them in a jittery position, so as to consider withdrawing the investments being made in India.



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