P-Note holders not liable to pay tax: FM

GAAR to be invoked only when FIIs seek tax benefit

Holders of participatory notes,or P-Notes,will have no tax liability and a clarification on these notes will be issued in due course,finance minister Pranab Mukherjee said on Friday. In a bid to placate jittery overseas investors,Mukherjee made it clear that the tax authorities in the country will go only after the P-Note issuers and not the holders.

Indian tax authority would not go beyond financial investor (FIIs) to check the details about the P-Note holders. Accordingly,a question of liability for tax in India of the P-Note holder would not arise. Necessary clarification will be issued, the finance minister told reporters here.

Participatory Notes (P-Notes) are instruments that allow FIIs not registered with market regulator Sebi,to invest in the Indian equity market and they offer the buyer anonymity. A lack of clarity on taxation of P-Notes,stemming from fears that the proposed amendments of inclusion of general anti-avoidance rules (GAAR) and section 9 of the Income Tax act,in the finance bill,2012,has contributed to the sharp volatility in the domestic share markets in the past week.

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Following the proposal,French brokerage CLSA announced that it has taken the position not to increase its current Indian P-Note book as a way of minimising the possible tax exposure.

According to officials,GAAR would be invoked only when the FIIs seek tax benefit under the double tax avoidance treaty. It would be applied when an entity fails,what is called,main purpose test. The department will have to then prove either of the four other tests abnormality test,misuse and abuse of provisions of law test,bonafide purpose test,and lack of commercial purpose substance test.

As per the Finance Bill,GAAR would be applicable from April 1. The BSE Sensex rose 285.66 to 17,344.27 points at mid session following the announcement. I would like to categorically clarify that the intention of the government is not to cause any harassment to genuine investors…the income tax department would examine the tax liability of the FIIs, Mukherjee said.

The Asia Securities Industry & Financial Markets Association (ASIFMA) along with Securities Industry and Financial Markets Association (SIFMA) had earlier written to the finance minister contending that such onerous taxation or even the risk of such taxation could threaten this important source of capital for Indias businesses.

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FIIs have assets under custody of more than over $200 billion or 17 per cent of the capitalization of Indias equity markets,according to ASIFMA.