FPI custodians, tax consultants in deadlock over GAAR liabilities
MUMBAI: Custodians for foreign portfolio investors and tax consultants are in a deadlock with both parties refusing to take the onus of potential liabilities of their clients in the new tax regime.
The custodians, mainly foreign banks, want a certificate from consultants such as the big four firms stating that General Anti Avoidance Rule (GAAR)-aimed at curbing tax evasion by foreign investors –have to prove it is not be applicable to their clients.
Tax consultants are unwilling to make such an undertaking as it could amount to giving a ‘judgment or direction’ to the custodians, which could later hold consultants responsible in client disputes with India’s income tax department.
This impasse has prompted custodians to hold back remittances from the sale of FPI assets in India. Custodians usually remit FPI money only after they get a certificate from the consultants. “Custodians are saying they will remit money only when there is extreme clarity on applicability of GAAR on any particular client,“ said a partner with one of the big four consulting firms. “If the issue is not resolved, FPIs could be staring at blockage of funds in coming weeks as remittances could be in jeopardy.”
GAAR has been GAAR has been introduced to check tax avoidance by FPIs coming from treaty countries, mainly Singapore and Mauritius, which account for a lion’s share of investment in India. The tax man can invoke GAAR in cases where it finds that a particular FPI is not the residence of country from where it is invest ing and its main purpose is to purpose is to avoid paying taxes on profits on sale of Indian assets.
Consultants said they are ready to issue a certificate stating `the clients have confirmed that GAAR may not be applicable to them as they have all the necessary provisions in place.’
CBDT has clarified that if the jurisdiction of FPI is finalised based on non-tax commercial considerations and the main purpose of the ar rangement is not to obtain tax benefit, GAAR will not ap ply. But the fear among FPIs is that the taxman has powers to question any structure of FPIs under GAAR. As a result, tax consultants do not want to take a risk as there is no clarity on kind of queries that may be raised by tax authorities.
“The custodians do not want to risk tax authorities knocking on their door, if they find that any particular FPI was non-compliant and invoke GAAR at a later date and ask why remit tances were allowed,“ said a head of a foreign bank.