Foreign institutional investors (FIIs) have sought an unqualified exemption from the application of General Anti-Avoidance Rules (GAAR) proposed to be implemented by the government beginning April 2013.
Representatives of FIIs met finance secretary R S Gujral and the GAAR panel comprising key tax officials and submitted their grievances here on Monday.
“The FIIs want a full exemption from GAAR. They feel the exemption given to non-resident investors of an FII would amount to nothing if the FII itself was liable to pay tax,” said an official who attended a meeting of investors and finance ministry officials here on Monday. At least four officials of FIIs and their advisers were present in the meeting.
Investors are of the view that the FII - often a pass-through entity - will have to pass on the consequence to the end-investor. Further, they also sought clarity on the consequence of the applicability of the GAAR provisions. “For example, if an entity is found to be in violation of GAAR, it is not clear what the tax liability would be. Is it the tax plus interest or will there be a penalty in addition to this? The FIIs seek clarity on that,” the official added.
Representatives of the Indian Private Equity and Venture Capital Association (IVCA) also met the ministry officials on Monday and submitted demands of the private equity industry.
IVCA suggested that certain objective criteria be laid down for the definition of the term ‘commercial substance’.
“We have suggested three tests namely expenditure test, employees test and residency test. If an offshore entity fulfils any one of these tests, it should be enough to ensure that GAAR provisions and its consequential implications, including denial of treaty benefits would not be triggered,” said Mahendra Swarup, president, IVCA.
Under the expenditure test, IVCA has proposed that an annual expenditure of $50,000 on operations should be considered as an indicator of substance. For calculating the annual expenditure for this purpose, an average of expenses incurred in the preceding 24 months should be considered, the PE industry lobby proposed.
Under the employees test, the overseas entity should have at least one full-time employee who is a tax resident of the treaty country. Further, such employee should be actively involved in the investment and operating activities of the fund and should have spent at least 180 days in the country.
The conditions proposed under the residency test include appointment of at least two directors who are resident in the treaty country. All board meetings are required to be held in the treaty country. Further, bank accounts, accounting records should also be maintained in the treaty country and audited by a statutory auditor who is resident there. A tax residency certificate issued by the local tax authorities would also be necessary.
“Incorporation of the above tests will enable PE/VC players to assess their India tax positions with far greater certainty and confidence in the post-GAAR regime,” Swarup said.