Corporate May 20, 2012
New Delhi: Foreign investors may be relieved over the controversial GAAR tax proposals being pushed back by a year but another new taxation framework could make their India investments riskier and expensive.
The proposals that are a part of the Finance Bill.
They state that capital gains arising from the transfer of shares or interest in a non-Indian company -- in case the share or interest derives directly or indirectly its value substantially from assets located in India -- will be taxable in the country.
The new rules could force foreign investors to re-examine their structures for investments in India, while impact would be visible also on global mergers and acquisitions involving Indian businesses to take in to account the potential tax risks from the indirect transfer rules.
The FIIs are of the view that their gains from India are as such taxed in the country, and any repatriation of gains to its investors by way of redemption of capital should not come under the offshore transfer provisions.
A number of foreign funds, including an European association of the FIIs, may soon approach the Finance Ministry to seek clarifications and certain changes in the rules, sources said.
The previously proposed GAAR (General Anti-Avoidance Rule), which could have caused foreign investors huge tax liabilities despite investing through so-called tax-friendly jurisdictions, is estimated to have led foreign investors to withdraw or put on hold investments worth over USD 10 billion within just over a month of being announced.
However, the impact could be much higher from the now- cleared 'restroactive taxation of indirect offshore transfers', which could lead to many more billions of dollars worth investments getting hit within a short span of time of their implementation in the current form, industry sources said.
Foreign Institutional Investors (FIIs) are hoping for certain changes and clarifications in the final form of the rules. Else, it is widely believed that they could consider exiting a vast majority their holdings in the country that are worth over Rs 11 lakh crore (about USD 200 billion), said a top manager of a leading foreign fund.
Asked for his views, consultancy giant PwC India's Executive Director Suresh V Swamy told PTI that the government needs to clarify that these rules would not apply to the FIIs, and small investors need to be exempted from any such tax liabilities.
"It is difficult to quantify the impact from these proposals on the FII investments, but such an impact has to be in billions of dollars," he noted. .
However, senior officials of various foreign funds with significant India exposure said that the new proposals could lead to exodus of overseas funds and the impact could be in high double-digit billions of dollars, depending on the level of clarifications and changes brought in by the government.
If no changes are made, and there are no clarifications either on various conditionalities of the rules, almost the entire FII holding of over USD 200 billion could see the impact, they noted.
Swamy said it was good that some important changes have been made to the proposed GAAR rules, such as setting up a committee of independent members and shifting the onus of proving the tax liability to the tax authorities from the taxpayer as proposed earlier.