)
FIIs are seeking clarity on another proposal, which tag would categorise foreign investors with less than 10 per cent in a company as FIIs and the remainder would come under the foreign direct Investment (FDI) category.
"…The worry being that a broad brush approach of characterising all foreign investments under 10 per cent as FII and those above as FDI, disregarding the specific needs and types of investors could lead to more confusion and hardships for such investors," said Siddharth Shah, partner, Khaitan & Co.
FIIs could also be facing tax demands for transactions entered into even during FY13, since a change on requirement of more than a tax residency certificate for avoiding tax is being brought in with retrospective effect.
Rajesh Simhan, head, international tax practice at Nishith Desai Associates stated that the taxman would now have greater powers to examine such entities.
"Earlier, for FIIs situated in Mauritius, the tax residency certificate would have sufficed to avail of treaty benefits. Since this is no longer the case, it may expose FIIs to potential tax demands even if they are based out of jurisdictions like Mauritius," he said.
Neeru Ahuja, partner, Deloitte Haskins & Sells too, noted that the tax residency certificate would no longer be the final word in such issues .
"There was an earlier CBDT circular which the Supreme Court had ratified on the tax residency certificate. ..they have expanded the powers with regard to such arrangements," she said.
Anish Thacker, partner, tax & regulatory services at Ernst & Young stated that the government can now question arrangements in such treaty jurisdictions.
"A tax official will be empowered to question and examine the commercial substance of an entity in a tax-friendly jurisdiction, for example, Mauritius," he said.
The finance minister however suggested that the implications of asking for more than a tax residency certificate may not be so dire.
He stated in a press conference later that this merely means that for certain jurisdictions you may require an additional condition to be met such as providing a document on beneficial ownership, if the DTAA that India has with the jurisdiction requires one.
The Budget also provided some relief with regard to the General Anti-Avoidance Rules (GAAR) with more independent representation on a panel to determine if tax avoidance arrangements are permissible.
The new GAAR provisions would come into force from April 1, 2016, said the finance minister.
He also asked the stock market regulator, the Securities and Exchange Board of India (Sebi), to provide a simplified and uniform manner of entry into the country for foreign investors.
FIIs have also been permitted to use their corporate and government bond holdings as collateral to meet margin requirements.
Additionally, he stated that designated depository participants, authorised by Sebi, will now be free to register different classes of portfolio investors, subject to compliance with know-your-client guidelines.
