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MUMBAI (Reuters) - A new tax proposal by the government could hurt flows of anonymous foreign funds into shares, analysts said on Monday, dealing another blow to equity markets that have been buffeted by worries about slowing corporate earnings growth and stymied economic reforms.

Investments into Indian stock markets through participatory notes, or P-notes, is seen slowing if the government introduces the so-called General Anti-Avoidance Rule (GAAR) next month, they said.

Finance Minister Pranab Mukherjee in his budget presented on March 16 for the year starting on April 1 proposed to introduce the GAAR in order to "counter aggressive tax avoidance schemes." He said it would be ensured it was used in appropriate cases.

P-notes are issued by foreign portfolio investors registered with the SEBI, or by their sub-accounts, to investors overseas and they offer the buyer anonymity.

"P-notes generally avoid paying taxes in India and because of this GAAR the taxation of P-notes can definitely get impacted," said Sunil Jain, a tax expert with law firm J. Sagar Associates.

"If there is an adverse impact on the taxability of P-notes because of the wide power assumed by the government through GAAR, then obviously it can impact investments through P-notes and therefore general sentiment in the market," he said.

The BSE Sensex ended 1.8 percent lower on Monday hit by the uncertainty about the tax proposal, dealers said. The index fell nearly 2 percent during the day.

The benchmark index has fallen nearly 4 percent this month, after rising 15 percent in the first two months of this year on strong foreign fund inflows.

"We do not have clarity on the exact modalities, but this could have the effect of shutting down the P-note to invest in India," said Macquarie in an email to clients seen by Reuters, referring to the GAAR proposal.

The brokerage said stocks bought through participatory notes could be subject to short-term capital gains tax of 42 percent and long-term capital gains tax of 21 percent as a result of the new taxation proposals.

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GAAR tax proposal clouds foreign portfolio investment outlook

January 20 verdict has the effect of legitimising routing of transactions through tax havens

The Supreme Court will take up on Tuesday the Union of India's petition seeking review of its January 20 judgment that the Income Tax Department did not have the jurisdiction to levy Rs. 11,000 crore as tax on the overseas deal between Vodafone International Holdings and Hutchison Group.

The hearing, by a Bench of Chief Justice S.H. Kapadia and Justices K.S. Radhakrishnan and Swatanter Kumar, assumes importance in view of the proposed retrospective amendment to the Income Tax Act announced by the Finance Minister in the Union budget. For, any such amendment is likely to have an impact on Vodafone.

In its review petition, the Finance Ministry, through its Secretary and the Assistant Director of Income Tax, said the judgment suffered from an error apparent on the face of the record and the court had failed to consider the case submitted by them at least on 15 aspects. The finding that the offshore transaction, which gave the Vodafone holding company a 67 per cent stake in Hutch-Essar, was a bona fide, structured FDI [foreign direct investment] in India was a patent error.

The case did not involve any inflow of monies into India as would be clear from the characterisation of the transaction as an offshore deal and the incontrovertible fact that no investment or inflow into the country took place, the petition said. The FDI policy was in no way under challenge or scrutiny in that case and could not have been so as the FDI and interpretation of taxation statutes operated in two different realms. Justifying the imposition of capital gains tax, the petition said it was imposed on account of relinquishment of an asset and this was done by way of a specific amendment in the law which could be traced to a Bombay High Court decision.

Pointing out that the court had relied on the Direct Tax Code Bills of 2009 and 2010 while allowing the appeals in favour of Vodafone, the Centre said there was no judicial precedent to count on pending legislation to interpret the existing legislation. Further, these codes were not even presented as Bills in Parliament but were only under public discussion.

The judgment would undermine the existing legislative and regulatory framework that required approvals from competent authorities in India even for transactions routed outside the country through tax havens, the petition said. Such monies held in tax havens had the effect of compromising the state's ability to manage its affairs in consonance with what was required from a constitutional perspective. The January 20 judgment had the effect of legitimising the routing of transactions through tax havens and preventing the Income Tax department from looking at the substance of the transaction, it said.

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SC to hear today Centre's crucial review plea in Vodafone case

NEW YORK, NY--(Marketwire -03/16/12)- Thomson Reuters, the world's leading source of intelligent information for businesses and professionals, recently published its Sixth Edition of its corporate report, Brazil Tax, Law and Business Briefing through its WorldTrade Executive (WTE) brand.

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About Thomson Reuters Thomson Reuters is the world's leading source of intelligent information for businesses and professionals. We combine industry expertise with innovative technology to deliver critical information to leading decision makers in the financial, legal, tax and accounting, healthcare and science and media markets, powered by the world's most trusted news organization. With headquarters in New York and major operations in London and Eagan, Minnesota, Thomson Reuters employs more than 55,000 people and operates in over 100 countries. Thomson Reuters shares are listed on the Toronto and New York Stock Exchanges (symbol: TRI - News). For more information, go to http://www.thomsonreuters.com.

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Thomson Reuters Releases New Edition of "Brazil Tax, Law and Business Briefing"

Tweak in tax residence certificate, GAAR can narrow inflows

March 16, 2012:

Provisions in the Budget can have serious implications for flow of foreign institutional investor funds in to India.

The change in stance with relation to Tax Residency Certificate (TRC) and providing for General Anti Avoidance Rule (GAAR) in the Income Tax Act may both impede the flow of money camouflaged as FII funds into the Indian market through tax havens.

It is no secret that a large portion of FIIs investing in to India are domiciled in Mauritius. The double taxation avoidance agreement (DTAA) that India has signed with Mauritius enables tax on securities transaction to be taxed in the country where the company is resident. Since capital gains tax rate in Mauritius is zero, foreign investors buying or selling Indian stocks through the Mauritius route get away by paying no capital gains tax.

The TRC issued by Mauritian government forms the basis for judging if a company could avail itself of the benefits of DTAA with Mauritius. The criteria that Mauritian government applies for issuing these certificates are fairly lax, resulting many shell companies availing themselves benefits under this treaty.

The Budget lays down that submission of Tax Residency Certificate is necessary but not sufficient for availing benefits under these treaties. This could spell trouble for FII money coming in from tax havens as it gives the tax authorities the power to overlook the tax residency certificate and demand further proof of commercial substance.

Implementing General Anti-Avoidance Rule (GAAR) in this Budget can also impact some FIIs investing in India through tax havens. Tax authorities will now impose GAAR on arrangements that lack commercial substance or are carried out in a manner which is normally not employed for bonafide purpose. The budget document goes on to say that an arrangement will be deemed to lack commercial substance if it includes round trip financing.

While genuine foreign investors will not be impacted by the change in TRC or GAAR, the flow of illegitimate or black money in to stocks through such conduits will be seriously deterred if not stopped, with the threat of tax-men going after these entities.

lokeshwarri_sk@thehindu.co.in

Excerpt from:
FII flows from tax havens may be impacted

12 March 2012

The Democrat-led Senate has adopted an amendment, which would provide a range of further measures for the Treasury Department to take against foreign governments and financial institutions that "significantly impede United States tax enforcement, to the bill to provide for an extension of the United States highway-related taxes.

The provisions of the amendment offered by Carl Levin (D Michigan) and Kent Conrad, (D North Dakota) had previously been included in the Cut Unjustified Loopholes Act, which they had introduced in February.

While the proposals would give the Treasury a set of tools to combat foreign governments or financial institutions that impede US tax enforcement, it was said that those jurisdictions and banks that are complying with the Foreign Account Tax Compliance Act will be viewed favourably. However, for example, for other jurisdictions considered as tax havens, the Treasury could prohibit US banks from accepting wire transfers or honouring credit cards from banks found to significantly hamper US tax enforcement efforts.

"This legislation will grant Treasury a new tool to combat offshore tax havens and financial institutions that stand in Treasurys way of enforcing our tax laws. More must be done to clamp down on these tax havens and other schemes that are often solely designed reduce tax bills, said Conrad, Chairman of the Senate Budget Committee.

I have fought against offshore tax havens for years, and I am glad the Senate has taken another strong step in the fight against foreign governments and offshore banks that help privileged individuals and corporations dodge taxes, added Levin, chairman of the Senate Permanent Subcommittee on Investigations.

The Joint Committee on Taxation had calculated that a similar version of the amendment could reduce the deficit by USD900m over 10 years.

The underlying highways bill looks to renew the excise taxes that finance the Federal Highway Trust Fund (FHTF) programme. As most of those taxes are scheduled to expire after March 31, 2012, action by Congress is now considered to have some urgency.

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US Highways Bill Takes Aim At Tax Havens