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P-notes may take hit on new tax treaties

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With the new tax treaty with Singapore and Mauritius coming into effect from April 1, inflows through participatory notes (Pnotes) could see a sharp drop.

According to Securities and Exchange Board of India (Sebi) data, nearly 90 per cent of P-note investments are routed through Singapore and Mauritius, with which the Indian government has reworked tax arrangements.

According to the changed double taxation anti avoidance agreements (DTAAs), all investments made from these jurisdictions would attract shortterm capital gains as  the exemptions would get removed.

Mauritius and Singapore are favoured by entities issuing P-notes also called offshore derivative instruments (ODIs), thanks to tax-treaty benefits, particularly non-applicability of Indian laws.

The new treaty says that capital gains that arise from shares purchased after April 1 by foreign investors based in these countries can be taxed in India.Accordingly, a capital gains tax of at least 7.5 per cent can be charged on short-term gains from equity of investors from Mauritius and Singapore over the next two years and 15 percent after that. Besides the higher tax outgo, issuers of P-notes are more worried about operational difficulties.

Interestingly, Sebi, in a letter to finance ministry, has raised concerns over foreign portfolio investors (FPIs) reducing exposure in Pnotes.Late last year, FPI body Asia Securities Industry and Financial Markets Association had warned that such tax changes could lead to a significant drop in flows.It had sought higher securities transaction tax instead of short-term capital gains tax a demand that was not met in the Union Budget.

Besides higher tax outgo, Pnote issuers are worried about operational difficulties

24TH MARCH,2017,BUSINESS STANDARD,NEW-DELHI

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