Indications from the finance ministry on subjecting participatory notes (P-notes) to taxation according to the changes brought in through the General Anti Avoidance Rule (GAAR) in the Budget, clearly suggest the government is not ready to budge on this count.
Apprehensions abound on the exact situation on taxability of P-notes in the GAAR regime, if routed through tax havens and countries that have double-taxation avoidance agreements (DTAAs) with India, like Mauritius. It is this island nation from where most P-notes are issued.
Finance ministry officials said the notion that all P-notes would not be taxed, in the light of finance minister Pranab Mukherjee's statement last week, was not appropriate. They added the GAAR had been introduced to tackle investments through tax havens only to avoid taxes. Profits by foreign institutional investors (FIIs) on P-note investments falling under this category would be subjected to tax.
The implication of this move is the profits accruing on P-note investments through FIIs from tax havens, including Mauritius, would now come under the ambit of taxes if the GAAR provisions are invoked.
However, the situation would remain the same for genuine investors from tax havens, as well as investors from normal jurisdictions already paying taxes in some country under a DTAA.
Currently, P-notes record profits after taxes through FIIs, when the investment is made from normal jurisdictions, said an official. Till now, P-notes from tax havens escaped taxes. In the new regime, FIIs handling P-note investments from tax havens to avoid taxes would also have to pay taxes before passing on the profit to the P-note holders, he said.
"However, such investments are expected to be a small percentage of the total P-note investments coming from tax havens," he added.
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During the discussion on the Budget in Lok Sabha last week, the finance minister had made it clear the GAAR was meant to check tax avoidance, it was not directed against any particular mode of investment, including P-notes. He had said he would look at making changes in the GAAR, if required.
However, finance ministry officials said any substantive change in the GAAR was unlikely.