Govt will clarify stance on P-Notes taxation: Pranab

The government today said it will clarify its position on taxation of investments from overseas, amid foreign institutional investors (FIIs) expressing concern on the proposed anti-tax avoidance rules.

"As and when the position will be clarified, you will come to know, don't worry," Finance Minister Pranab Mukherjee told reporters in reply to concerns of FII's regarding possible taxation of Participatory Notes.

Participatory Notes (P-Notes) are instruments that allow FIIs, which are not registered with market regulator Sebi, to invest in Indian equity market.

The proposals in the Finance Bill 2012 related to taxation of indirect transfers of assets and General Anti-Avoidance Rules (GAAR) have created concerns among the foreign investors.

Yesterday, the Asia Securities Industry & Financial Markets Association (ASIFMA) along with Securities Industry and Financial Markets Association (SIFMA) had written to the Finance Minister contending that "such onerous taxation or even the risk of such taxation could threaten this important source of capital for India's businesses".

Noting that FIIs are carefully evaluating these new tax risks, the letter said the proposals are too broadly worded.

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

As per the letter, it appears that market participants have already begun to reduce their positions in India.

In his Budget for 2012-13, Finance Minister Pranab Mukherjee has proposed GAAR in order to "counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel".

The fear of GAAR had spooked stock markets which tanked 2% on Monday on concerns that all short-term capital gains made by FIIs and P-Note investments would be taxed.

As per the Finance Bill, GAAR would be applicable from April 1.