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Foreign portfolio investors based in the US and the UK and many other countries will soon face heat from tax authorities in India and might be tempted to shift their base to Mauritius, Cyprus or Singapore.

Such foreign portfolio investors will now have to pay a 15 per cent tax on their derivative transactions, after the budget decided to classify income from all foreign portfolio investment as capital gains.

Many foreign portfolio investors earlier described such trades as ‘business income’ and paid no tax on these.

However, the General Anti Avoidance Rules (GAAR), under which the revenue department has the power to look into arrangements entered into only to avoid paying legally due taxes, could stall such migration.

Institutional investors might be unwilling to have a token presence in treaty jurisdictions for tax purposes if they can later be subject to review under GAAR, if and when the government decides to implement it.

Incidentally, the invocation of General Anti-Avoidance Rules (GAAR) from April 2015 will also make foreign institutional investors registered either in Mauritius, Cyprus or Singapore liable to pay capital gains tax at 15 per cent in India if they cannot prove their existence in Mauritius.

Earlier, foreign institutional registered in the US and the UK were exempted from paying business tax in India if they did not have a permanent establishment in India.

Under the income tax treaties India signed with at least 85 counties, business income of these foreign institutional investors was not taxed, noted TP Ostwal, a specialist in international taxation.

Three of the top-five sources for portfolio investments into India do not have a favourable treaty with India on capital gains. US tops the list, followed by the UK and Luxembourg.

Institutions based in Singapore and Mauritius, the other two countries in the top five, will not have to pay tax on derivative trades because of their treaties with India that exempt tax on capital gains.

Accordingly, Suresh V Swamy, Executive Director, tax & regulatory services, Pricewaterhouse Coopers said that investors could also explore setting up a proper commercial presence in countries with which India has a favourable tax treaty.

However, if the GAAR comes into place, it would take over the tax treaty and some investors that created shell companies in Mauritius will be exposed to paying more taxes.

As Krishan Malhotra, Head of Taxation at Indian law firm Amarchand & Mangaldas & Suresh A. Shroff & Co cautioned, the benefits of favorable jurisdictions would be taken away under GAAR.

To avoid double taxation, the investment company will have to show it has “commercial substance” in the country it is trading through.

This could involve showing that the company has a large staff in Mauritius or that it conducts business meetings there and makes investment decisions from there.

The aim of this move under the latest Budget is to encourage these fund managers to shift to India.

  said India’s Finance Minister Arun Jaitley.

Source: NDTV Profit, Business Standard

Image (Indian express): Institutional investors might be unwilling to have a token presence in treaty jurisdictions for tax purposes if they can later be subject to review under the General Anti Avoidance Rules (GAAR), if and when the government decides to implement it.

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