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PM’s move will end uncertainty on FII,P-Note taxation rules,say experts

Experts said that the steps would bring certainty on taxation of FIIs and P-Note holders and will help in boosting investments in the economy.

Written by ENS Economic Bureau | New Delhi | Published: July 31, 2012 1:19:58 am

The move by Prime Minister Manmohan Singh to expand the terms of reference of the Parthasarathy Shome committee,set up early this month for finalising provisions of general anti-avoidance rules (GAAR),was hailed by experts on Monday.

Aiming to usher in clarity on taxation of participatory notes (P-Notes) and foreign institutional investors (FIIs),the Prime Minister has asked the panel to look into the taxation of such portfolio investments in light of the retrospective amendments announced in Budget 2012-13.

“It is necessary to have clarity on the tax liability of portfolio investors and FIIs as a result of this amendment particularly when the investment is made through a registered stock exchange in accordance with Securities and Exchange Board of India (Sebi) guidelines and purely in the form of portfolio investment,” the PMO statement said.

Experts said that the steps would bring certainty on taxation of FIIs and P-Note holders and will help in boosting investments in the economy.

“FIIs registered with Sebi issue P-Notes to overseas investors. These notes are issued by one non-resident to another non-resident outside India. These transfers were not subject to capital gains tax up to last year. Finance Act,2012,amended Section 9 of Income Tax Act wherein such indirect transfers are now subject to capital gains tax…. The government is now seeking clarity under GAAR circular about taxation of P-Notes stating that such indirect transfers would not be subject to capital gains tax and it will not be covered under GAAR,” Uday Ved,head of tax,KPMG India,told The Indian Express.

He said that the present draft guidelines on GAAR specify that if FII is subject to tax under the Act,GAAR will not be applicable. However,if FII seeks treaty benefit,it would be subject to GAAR. Through the statement,the Prime Minister has asked the Shome committee to look into this aspect and clarify taxation of such FIIs investing from countries with which India has a tax avoidance treaty.

Commenting on the issue,Rahul Garg,executive director at PricewaterhouseCoopers,said,“It’s a positive move as this will put uncertainty to rest.”

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