A contradictory approach

FOERIGN ENTERPRISE

The Economic Survey 2007-08 presented in the Parliament on 28th February 2008 has measured the GDP growth last fiscal at 8.8 per cent. However, the government realises that the challenges of high growth have become more complex. As the survey states, "There are two interrelated macro-economic challenges that we face in maintaining high GDP growth on a sustained basis. These relate to capital inflows and inflation. It is incumbent on the Central government to provide a conducive investment climate."

Thus the investments for economic growth of the country have acquired the government's top priority. It is in this context that the figures of foreign investment in India have to be perceived as more relevant today than ever in the past.

The amount of FDI inflows during the financial year 2007-08 (from April 2007 to December 2007) is Rs 51,243 crore which is 22 per cent more than the last year, which was Rs 42,138 crore. And net FII investment in equities on July 20, 2007 was Rs 58,702 crore in comparison to Rs 43,658 crore on July 20, 2006.

In fact, a tax-friendly regime introduced by the government has greatly helped in maintaining the upward trend in foreign investment The tax on short term capital gain on sale of shares was brought down to 10 per cent in all cases where STT is levied and Section 10 (38) fully exempts such transactions on long term capital gains.

The Finance Bill 2008, however, proposes a change in the rate of tax on short-term capital gain from 10 per cent to 15 per cent with effect from 1st April, 2009. It may be noted that the ambit of levy of capital gains tax also covers overseas transactions made between two or more non-residents outside India.

Section 115AD of the Income tax Act deals with the income of foreign institutional investors (FIIs). As observed by the Authority of Advance Rulings (AAR) in Universities Supperannuation Scheme Ltd (2005) (275 ITR 434 (AAR)): "Under the scheme for permitting FIIs in our capital market as is evident from the Budget Speech of the finance minister, a special provision "" Section 115AD "" has been inserted by the Finance Act, 1993, with effect from April 1, 1993. It deals with tax on income of FIIs from securities or capital gains arising from their transfer. It needs no elaboration to hold that Section 115AD, being a special provision for FIIs, overrides the general provisions."

The issue has been further examined by the Authority in case of Trinity Corporation, (2007) 165 Taxman, 272. The Authority held that: "The insertion of the clause, i.e., the situs of the capital asset being in India, has been ushered in the statute to take care of the situations like transactions between two non-residents taking place outside India. In simple words, even if the transaction relating to a capital asset takes place outside India but if the capital asset is situated in India, the profits or gains thereon, is accruing or arising in India in consonance with the provisions of section 9(1)(i) of the Act and is thus assessable under the head 'Capital gains' under the relevant provisions of Income-tax Act."

The Authority of Advance Ruling in the case of Vanenburg Group B.V., In Re (2007) (289 ITR 464 (AAR)) has also re-affirmed the same view.

In the above context it is really strange that the tax rates on short-term capital gains should be increased from 10 per cent to 15 per cent. This move is certainly in contradiction to the liberal policy of attracting capital inflows into India. This amendment therefore requires reconsideration.

agar@bol.net.in