Foreign portfolio investors approach government to iron out Singapore Treaty, GAAR issues
MUMBAI: Foreign portfolio investors (FPIs) are lobbying the government to resolve problems related to the India-Singapore tax treaty and general anti-avoidance rules (GAAR), worried about their investment in equities.
FPIs fear after April 1, 2017, when both the renegotiated India-Singapore treaty and GAAR come into force, they will face challenges.
One relates to double taxation in India and their home country. The Asia Securities Industry & Financial Markets Association (ASIFMA), a Hong Kong-based grouping of FPIs and global banks, has written to the government and sought a meeting with the revenue secretary.
They say there is ambiguity on the tax treaty and lack of clarity on how FPIs would be taxed under GAAR. One of the suggestions they’ve made is radical — abolish capital gains tax and increase securities transaction tax (STT) to make up for that.
Apart from this, FPIs are of the view that capital gains exemption must be retained even under the renegotiated India-Singapore tax treaty as otherwise investing in India through Singapore “will not be cost effective.”
The Indian government seems think otherwise, said people with knowledge of the matter. On the other hand, if exemption is retained, FPIs will still have the uncertainty concern of not knowing if it satisfies GAAR from April 1.
“Imposition of CGT (capital gains tax) will result in double taxation for many foreign investors,” Patrick Pang, head of fixed income and compliance, ASIFMA, told ET.
“This is because when funds distribute the income to their investors, the investors are subject to tax in their home country. There is a misbelief that any CGT paid in India can be used as foreign tax credit in the investor’s home country to offset their home country tax.” AUS teachers’ pension fund that invests in FPIs that in turn invest in India had faced a similar problem, said people with knowledge of this.
FPIs distribute gains from Indian stocks after paying capital gains tax in India to the teachers’ fund, which itself does not pay US taxes. However, when the retired teachers receive payments from the pension fund, these are subject to US taxes and can’t be offset against capital gains tax paid in India, said the persons cited above. Apart from the treaty issue, FPIs want answers on GAAR.
“Some issues that should be clarified include defining ‘commercial substance’ more objectively and providing clarity on extent of location of assets, people and functions to ensure treaty benefits are not denied,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.
“The government could also consider clarifying if expense threshold — as required under certain tax treaties such as India’s treaties with Singapore and Mauritius — is met (commonly referred to as limitation of benefits clause), GAAR would not apply.”
There is no clarity on how the government would define “substance” when FPI investments are routed via apooling vehicle in Singapore or any other destination. Many FPIs may be required to invest in infrastructure in Singapore and hire more people to manage funds that invest in India. FPIs say capital could shift to destinations that are more attractive.
That will mean greater returns need to be provided to investors to entice them to invest, resulting in higher cost of capital, said an expert. Indian companies could then opt for listing or raising funds outside India. Also, the secondary market trading may shift to the Singapore Nifty and flight of capital out of the country could weaken the rupee, he said.