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Friday, 06 April 2012 00:00
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FIIs aren’t buying finmin’s vigorous arguments
The finance ministry doesn’t seem to be having too much luck trying to convince FIIs that its General Anti Avoidance Rules (GAAR) aren’t aimed at them, but are more of an enabling tool to catch really big tax-evaders. Finance secretary RS Gujral met FIIs and told them that GAAR would be invoked only in the case of impermissible arrangements. In his words, “if they are in a permissible arrangement, clearly they are governed by the particular treaty and GAAR does not get invoked at all”. That sounds good but the FIIs aren’t buying it since what is permissible to one taxman is impermissible to another, and that too will change over time. One definition of what is permissible seems to be that the FII has to have a significant presence in Mauritius (to avail of the Indo-Mauritius Double Taxation Avoidance Agreement, DTAA), but if the GAAR provision in the finance bill says a mere domicile certificate from the Mauritius authorities is not good enough, how is the FII to be sure this is ‘permissible’? Let’s face it, the DTAA and the Mauritius domicile is an arrangement arrived at solely to ensure FIIs don’t pay tax. Logically, any taxman should question the domicile certificate and tax them, but the reason why this has not happened so far is because the government needs FIIs—that’s the same reason why it gave away R5,29,432 crore of tax concessions to all manners of people in 2011-12. So, the government has to decide it wants FIIs, and if it does, it has to find a binding way to ensure they aren’t taxed; nothing less will satisfy them.
Nor is it just capital gains tax, as some analysts have pointed out; under GAAR, FIIs may have to pay a withholding tax of 20% which then lowers the effective return on government bonds to 7% or so as compared to the 8.7% official yield. Naturally then, the FIIs that the government is keen to attract to the G-Sec market will begin to have second thoughts. Having a GAAR is a great thing, and it was to be part of the Direct Taxes Code (DTC) anyway, but the government has to be clear about its eventual consequences and whether it wants to bear that price. Similarly, as in the case of retrospective tax amendments, while the government argues other countries have done the same—Ajay Bahl of AZB & Partners has argued, on these pages, that the Chinese example the Indian government was giving wasn’t anywhere as bad as what India has done—that is not the point. India probably has to tax FIIs at some point, but the issue is whether, especially at a time when the India appetite is less than what it has been in the past, such actions will deter investors.
Last Updated ( Monday, 09 April 2012 15:43 )

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