FIIs meet FinMin officials on GAAR

Amid concerns of foreign investors over the tax treatment of investments, FIIs met senior finance ministry officials for the second time within seven days, to discuss the provisions of anti-tax avoidance rules, or GAAR. “The meeting ended on a positive note. We are examining the FIIs’ concerns. Our people are working on the rules,” a senior finance ministry official said. The meeting was also attended by representatives from the market regulator, Sebi.

Last week, foreign institutional investors (FIIs) met Finance Secretary R S Gujral over the issue. During the meeting, finance ministry officials assured them that the General Anti-Avoidance Rule (GAAR) provisions would be invoked only in case of “impermissible arrangements”.

“If they are in a permissible arrangement, clearly they are governed by the particular treaty and GAAR does not get invoked at all. If it is an impermissible arrangement, then GAAR gets invoked and the treaty does not help them,” Gujral had said.

In the Finance Bill 2012, Finance Minister Pranab Mukherjee has proposed to include GAAR provisions, which is aimed at targeting deals whose purpose is to avoid tax. Foreign investors fear that the proposed rule could apply to holders of Participatory Notes (P-Notes), the instrument through which foreign entities not registered in India could invest in the stock market, issued by FIIs.

Mukherjee has said that people investing through P-Notes would not be liable to tax in India, and the finance ministry has indicated that clarification on the GAAR provisions would come when the Finance Bill is passed by Parliament.

FIIs have assets under custody of more than Rs 10 lakh crore, or 17 per cent of the capitalisation of India’s equity markets. Further, these entities also invest in the Indian government and corporate debt.