Govt may go easy on FIIs, but not on Vodafone

NEW DELHI: Amid pressure from international investors, the finance ministry is planning to provide a lifeline to angry foreign institutional investors by keeping them outside the proposed General Anti-Avoidance Rules (GAAR) to ensure that they are not subjected to a higher tax burden or hardship. But so far, the government appears unrelenting in its pursuit to tax a dozen overseas deals -- including Vodafone -- through the proposed "retrospective clarification" on taxing MA deals involving foreign companies with assets in India.

Officials in the tax department told TOI that "carve outs" for FIIs, a majority of them route their funds into India through tax havens such as Mauritius, was being finalized and would be notified under the rules that will also provide safeguards against misuse by authorities.

"We are assuring investors that there will not be any need to provide details of their clients if the FII decides to pay the short-term capital gains tax," said an official.

The government, which had first stated its intent to put in place GAAR three years ago, incorporated it in the Finance Bill this year in a bid to ensure that foreign investors using Double Tax Avoidance Agreements do not escape without paying tax in either country. The agreements are meant to ensure that companies which have their parent in another country do not end up paying taxes in India as well as at home.

But the finance ministry has taken a view that several investors are using these treaties to avoid paying taxes anywhere. "It (GAAR) is essentially against those who go for treaty shopping. It is an internationally accepted practice and it is going to apply prospectively," an official clarified.

Already, finance minister Pranab Mukherjee has said that participatory notes, which are instruments used by overseas investors to invest in India and are often said to hide the real identity, will not be subjected to GAAR.

But FIIs are still jittery. On Monday, Macquarie decided to pull out one of its hedge funds from investing in the Indian market. Several other investors are also looking to relocate from Mauritius to Singapore to avoid scrutiny.

Officials, however, said the finance ministry has reached out to FIIs to clarify the government's stance and the investors have said that they are willing to pay tax provided there is clarity and certainty in tax policy.

Since the tax proposals were unveiled in the budget, the government has been under severe pressure from foreign investors and governments across the world, especially on its move to amend the Income Tax Act from 1962 to ensure it can tax mergers and acquisitions involving foreign companies with assets in India.

The plan is seen as an attempt by the government to get Parliament to overrule the Supreme Court order on the Vodafone-Hutch deal. The apex court had rejected tax claims of Rs 11,000 crore on the grounds that it was an "offshore" transaction and outside the jurisdiction of Indian authorities.

The ministry told Parliament on Tuesday the government could mop up Rs 35,000-40,000 crore by taxing such deals.

While tax experts and investors fear that the move will impact foreign investment into the country, the government has dismissed such apprehensions. In fact, several international lobby groups as well as the British and US finance ministers have taken up the issue with Mukherjee, who is under severe pressure to water down the proposal.

Vodafone has threatened to invoke provisions of the India-Netherlands bilateral investment protection agreement if the government does not withdraw the proposal.

Officials, however, said they have not received any indication from the finance minister about amending the clause. The finance ministry, too is said to be split on the move piloted by the revenue department. Sources said the economic affairs department has slammed the revenue authorities for the proposed tax changes, which it says may hurt investor sentiment.

Sources said even Mukherjee has expressed unwillingness to undertake any fresh "retrospective clarifications" to overcome court rulings due to the controversy generated by the Finance Bill.