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New Delhi, March 30: The government will not go after P-note holders but can tax foreign institutional investors (FIIs) issuing promissory notes in case they are not genuine residents of tax-free havens.

However banks and FIIs with actual operations in tax-free havens will be allowed to operate in the stock markets without attracting taxes.

Indian tax authorities would examine the tax liability of the said financial institutional investors. However, the tax authorities would not go beyond the FIIs to check any further detail about the participatory notes holders, finance minister Pranab Mukherjee clarified here today.

Accordingly, the question of liability for tax in India of participatory note (P-note) holders would not arise.

The statement came after a week of market turbulence with stock market punters reacting negatively to new tax provisions which sought to impose taxes on investors who routed money through shell firms in tax havens.

Finance ministry officials said they wanted to allay fears of P-note holders who have as much as $20 billion of Indian stock assets in their portfolios. Many investors who want to invest in the Indian stock market or who wish to play without the bother of registering themselves with Sebi use these participatory notes which are certificates with underlying Indian shares. Its estimated that FIIs have invested about 10 per cent of their approximately Rs 10,00,000-crore portfolio in India through P-notes.

Mukherjees statement is being read to mean that the government will not try to check on the persons who hold the P-notes. We are not out to uncover the seven veils of P-note holders, provided the bank or FI certifies that know your customer norms have been followed, said a top revenue official.

The 30-share Sensex ended up 312 points at 17370 and the 50-share Nifty ended up 103 points at 5282 after this announcement. However, independent tax consultant Sudatto Sen said FIIs remained liable to taxation on earnings from P-notes, unless they could prove genuine residence in tax havens.

Top finance ministry officials agreed on this analysis but pointed out that most FIIs playing in India were actually operating out of tax free jurisdictions such as Singapore, Mauritius and Luxembourg.

Taxes will be due from persons or firms who are operating through shells in tax havens, say from a lawyers office or from an address where twenty firms are registered in one single small flat! any sane person will agree these are shady operations and need to be investigated and taxed, they said.

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Pranab puts P-note worry to rest