Foreign portfolio investors (FPIs) are waiting for the final fine print of the General Anti-Avoidance Rules (GAAR, on tax) from the finance ministry. They're hoping certain ambiguities, such as the definition of commercial substance and treatment of different streams of income, would be addressed.
According to sources, the ministry has taken the feedback from FPIs, consultants and lawyers. It is expected to notify the final regulations as early as next week, to be effective from April 1, 2017.
GAAR is part of the numerous structural tax reforms the Union government has undertaken with the aim of more clarity and certainty over how foreign investors would be taxed. The government has been tightening loopholes in tax laws, including the regulations pertaining to participatory notes (p-notes) and amendments to tax treaties with Mauritius.
From a tax perspective, GAAR would be one of the most important concerns for foreign funds; any ambiguity in the rules could impact India as an investment destination. "FIIs (foreign institutional investors) don't want tax officials to have a lot of discretion due to their experiences in the case of Minimum Alternate Tax," said a source.
The final GAAR regulations are likely to give more clarity on definition of "commercial substance", said a source. This is crucial for foreign funds availing of double tax avoidance agreements. In other words, the regulations will specify what a fund needs in a jurisdiction so that the arrangement is not considered a tax avoidance arrangement.
"FPIs are certainly expecting the government to enumerate conditions that would suffice for commercial substance. For instance, is it enough for a fund to have an office in the jurisdiction or does it need to have a minimum number of employees there as well or the fund manager also needs to be located in that jurisdiction? The government also needs to specify what structure the funds need to have in case of pooling," said Suresh Swamy, partner, PwC.
"One of the key clarifications the government needs to bring is how GAAR will be applied to different streams of investment --corporate investments, investments made by funds and royalty earned. It cannot be left open for taxmen to interpret, as it increases complications," said Siddharth Shah, partner, Khaitan & Co.
What FPIs are eyeing in the final GAAR
- Definition of commercial substance
- How different streams of investments are treated
- Whether GAAR would apply in case of a DTAA
- Extent of discretion given to taxman