Foreign Institutional Investors (FIIs) based in Mauritius will not be required to pay capital gains tax in India if they have “substantial commercial interest” in the island nation, the Finance Ministry has said.
The Ministry also reiterated that it had no intention to levy capital gains tax on participatory notes (PN).
The Ministry's clarification is significant as there was a lot of hue and cry over the proposed amendments to the General Anti Avoidance Rules (GAAR) in this year's Budget.
Foreign brokers were apprehensive about the provisions relating to taxation of indirect transfers of assets as well as GAAR. They felt that the broadly worded proposals could be interpreted as tax on FII investments in the Indian listed equity markets.
However, a senior Finance Ministry official refused to elaborate on what exactly the term ‘substantial or genuine business interest' means.
“It is difficult, at this moment, to set a physical target for substantial or genuine business interest. Our aim is to ensure that an FII does not take advantage of tax benefits if it just has a signboard in a country where it is registered,” he added.
According to the Asia Securities Industry and Financial Markets Association, FIIs have assets under custody of over Rs 10 lakh crore (over $200 billion) or 17 per cent of the capitalisation of India's equity markets. Mauritius-based FIIs have a substantial share in this amount.
Meanwhile, the official claimed that no foreign brokerage or industrial body had given any representation in writing on PNs. There is fear that with the imposition of the new GAAR provisions, capital gains on PNs will be taxed.
Allaying the fear, the official said when a PN is traded between two parties, only the contract note or derivative exchanges hands. There is no transfer of underlying assets or shares. The question of tax on capital gains will arise only when assets get transferred.
With such an assumption, there should not be any fear of tax on capital gains on PNs, he added.