GAAR and P-Notes

GAAR (General Anti-Avoidance Rule)

GAAR is a taxation regulation that will make investors pay tax who otherwise legally avoid it. It must be kept in mind that legal evasion of tax is not the same as avoidance of tax. That GAAR will be introduced in India as a part of the Direct Tax Code was mentioned by the finance minister a year back. But this year's budget made it clear it will be applicable from 1 April. So under GAAR, the revenue authorities will get to tax transactions or arrangements which were conducted or set up just to get tax benefits. So routing transactions through Mauritius when there is no substantial purpose to route it from there other than achieving the tax benefit will not be allowed.

http://www.amchamindia.com/tax_tariff/AMCHAM%20session%20on%20DTC%20-%20Anti%20Avoidance%20GAAR%20Deloitte.pdf

http://www.firstpost.com/investing/gaar-why-do-marketsfiis-tax-evaders-care-so-much-257101.html

http://economictimes.indiatimes.com/opinion/interviews/gaar-proposal-will-be-a-dampner-for-fiis-and-other-strategic-investors-mahesh-kumar-nishith-desai-associates/articleshow/12424947.cms

P-NOTES

P-notes are financial instruments used by investors or hedge funds that are not registered with SEBI to invest in Indian securities. The investor does not have to fulfill KYC (Know Your Client) norms here and gets to invest whatever amount he wants by keeping his own identity hidden. There is confusion in the market whether the gains from these instruments will also be taxed. Now, with the finance ministry's statement, there could be temporary relief, but FIIs might not be wholly convinced. Sections 9 and 95 of the new Finance Bill (under which GAAR was introduced) says clearly that any transfer of shares in India which gives rise to income anywhere else will be taxable here. These sections will clearly have to be amended if cash investments of P-notes routed through tax havens like Mauritius will have to be exempted from tax.