Foreign Investors Begin to Feel GAAR Tremors

END OF ZERO-TAX REGIME FOR FDI VIA MAURITIUS ROUTE Tax department questions benefit claims of investors' nominees

Foreign investors using Mauritius to bet on Indian stocks are already beginning to feel the end of a zero-tax regime. The tax office has started questioning the claims of their nominees -special purpose vehicles and entities floated in the tax haven -for tax benefit.

In the course of recent arguments before the authority of advance ruling (AAR), the counsels of the tax department have challenged the Mauritius structures of at least four foreign private equity and strategic investors.

What has surprised these investors and their legal advisers is the aggressive stance of the Income Tax department even though the General AntiAvoidance Rule (GAAR) comes into effect next April, three persons familiar with the development told ET. Now, here are the new rules and the provisions of the changed treaty between India and Mauritius: capital gains on equity shares bought after April 2017 will be taxed while tax benefits can be claimed on earnings like interest and gains on bonds if the investment vehicle in Mauritius (as per GAAR) has a `substance'. However, stocks sold after April 2017 would not be taxed if these are either held today or bought prior to that date.

But since lawyers representing the I-T department are already questioning the lack of substance in the Mauritius entities, investors fear that the department may move the High Court in pursuing its stance in cases where rulings go in favour of the taxpayer.

“It is legally not tenable to apply GAAR provisions pre-GAAR in effect and, if applied, could lead to loss of trust by foreign investors,“ said Bijal Ajinkya, partner at law firm Khaitan & Co which is arguing on behalf of some of the offshore investors.

These investors who had bought shares of unlisted companies some years ago, approached the AAR to reconfirm the tax benefit. Some have either sold their shares or are about to strike a deal to book capital gains.

Recently, the AAR ruled that Mahind ra-BT Investment (Mauritius) wasn't liable to pay tax in India in respect of transfer of shares in Tech Mahindra (TML) to AT&T Intl USA that was done in 2010. In this ruling, the AAR dealt with the issue of residential status of the company, Mahindra-BT. The revenue authorities had argued that the control and management of the com pany was situated in India and this was the sole reason why the company was transferring shares of the Indian company to a US company.

“In the advance rulings in some ca ses, including one case we have recently dealt with, it was clear that for Mauritius-based investors investing in India through Mauritius, it doesn't at tract capital gains tax in India under India-Mauritius tax treaty. Also, an advance ruling can only be challeng ed by filing a writ petition in High Co urt either showing that the reasoning of the law in the ruling was patently wrong or that the ruling is otherwise perverse on facts, to persuade high co urts to exercise its writ jurisdiction,“ said said Sanjay Sanghvi, tax partner, Khaitan & Co.

The widely shared perception is that a tax residency certificate is the con clusive test for the availability of In dia-Mauritius tax treaty benefit.

ET VIEW

End Festering Disputes

Moves such as these run contrary to the promise held out by the government to have a non-adversarial tax regime, and end tax terrorism. However, investors need to prepare for GAAR, meant to curb sharp tax practices, but festering disputes must end too. The onus lies with the government to ensure that tax rules are simple and the process of interpretation transparent.Officers also must be trained intensively to handle GAAR.


The Economic Times New Delhi,12th September 2016