GAAR may not apply to Singapore, Mauritius investments

Govt will also spare FIIs who route investments via tax havens, if they are genuine residents of those tax havens

Investors coming via Mauritius and Singapore may breathe easy, as the provisions of the General Anti-Avoidance Rules (GAAR) may not apply to their transactions. The government will also spare investors of foreign institutional investors (FIIs) who route their investments through tax havens, provided the FII is a genuine residents the tax havens. To end uncertainty, a clarification will also be issued on retrospective amendments.

A decade-old circular that prohibits the tax department from probing the veracity of a person claiming to be a resident of Mauritius to avail of treaty benefits may not be withdrawn. Earlier, the finance ministry was planning to withdraw it or provide a clarification that GAAR would override circular 789.

“Mauritius is causing some revenue loss, but there are also advantages. It is our good ally for a long time. Moreover, India currently needs foreign investments,” said a finance ministry official, adding it would be difficult to withdraw the circular keeping in mind the strategic interests of the country. “Mauritius has Supreme Court judgment in its favour (with regard to the circular).”
 

DIFFERENT TAKES ON DRAFT GUIDELINES

WEDNESDAY

• 6.00 pm PM tells top finance ministry officials to address tax concerns

THURSDAY

• Afternoon Finance and revenue secretary R S Gujral consults CBDT officials
• 10.00 pm Finance ministry issues GAAR draft guidelines

FRIDAY

• 10.00 am PMO clarifies PM has not seen draft guidelines, final guidelines will be approved by him
• Afternoon Gujral says PM has yet to vet the draft guidelines

GAAR may not be invoked in case of treaties with some countries where there is Limitation of Benefits (LoB) clause, such as India-Singapore double taxation avoidance agreement. The LoB provisions limit the residents who may be granted treaty benefits and, thus, prevent treaty shopping practices.

“If limitation of benefit is there in the treaty, GAAR is not applicable. So, if you are incurring expenditure in Singapore, we believe you are a genuine resident of that country,” the official added.
 

The draft GAAR guidelines have not been seen by the prime minister, who also holds the finance portfolio. It will be finalised with the his approval, only after considering the feedback received
PRIME MINISTER’S OFFICE (in a statement)

Don’t read too much into the release by the PMO... These are draft guidelines. Obviously, the final guidelines will be after consultation with PMO. Suggestions from stakeholders will be taken into account and it will finally be decided by the minister in charge
R S GUJRAL, Finance & Revenue Secy

No policy step has been diluted... What we were giving for last couple of months, including during the time when Pranab Mukherjee was the FM, is still the message... that we want industry to do well; we want to be as cooperative as possible
KAUSHIK BASU, Chief Economic Advisor

However, GAAR would be invoked even with LoB in exceptional cases if it is apparent that an investor has abused the treaty. The finance ministry will provide further clarification on this point.

The official clarified various FIIs, such as P-note holders or pooled funds, would not be required to pay any tax in India on capital gains on sale of Indian assets, even if they were routing their investments through low-tax jurisdictions to claim treaty benefit. The tax department will just check the credentials of an FII coming from a tax haven and tax it if it is established that the structure was mainly created to get tax benefit. In that case, the investors of FIIs would get post-tax profits.

The same logic would also apply to Section 9, which provides for retrospective taxation on indirect transfer of Indian assets.