Budget 2017 - Road ahead for foreign investors after tax treaties rejig
Tax Partner, EY India
If someone suggested couple of years back that all three investor friendly tax treaties - Cyprus, Singapore and Mauritius would be renegotiated in the same year, the thought would have been summarily brushed. But come 2016 and the mirage has become a reality!
For a very long time, foreign investors from these countries, have enjoyed India’s favourable tax treaty network to take home every penny of capital gains earned in India. However, over the last few years, India has made known to the international community that it can take aggressive steps of even blacklisting a jurisdiction (read Cyprus) if the jurisdiction refuses to co-operate with the Indian authorities.
After Cyprus renegotiations, Indian officials have exerted back breaking efforts to get Mauritius and Singapore to the negotiation table but once there, the tax treaties have been cleverly renegotiated to provide India a source taxation right. All three amended tax treaties provide for grandfathering of investments made upto 31 March 2017 ie such investments would be governed by the erstwhile beneficial tax treaty regime and thereafter a transition period of two years for new investments has been prescribed with reduced tax rate (Mauritius and Singapore) rather than giving a full tax rate scare to the investors.
With these developments, some FPIs and investors may migrate in search of greener pastures of India’s tax treaty network with certain European nations such as Netherlands, Spain and France which practically still provide an exemption from capital gains tax in India in certain scenarios. But the benefits could be short lived considering India’s implementation of the OECD Base Erosion and Profit Shifting project recommendations.
Even if alternative of European shores are explored, the looming fear of triggering General Anti Avoidance Rules (‘GAAR’) would continue to haunt any new setup formed mainly with the intent of obtaining a tax benefit. GAAR is slated to be effective from April 2017 subject to a monetary threshold of INR 30 million and once implemented, it would give wide powers to the tax authorities to probe any undue benefits being sought by the taxpayers from these tax treaties as well.
Back home, even Prime Minister Modi’s speech last month ruffled feathers when he hinted to levy additional taxes on the capital markets which had to be specifically denied by the Finance Minister. But there is no smoke without fire and it may be premature to rule out any reforms on the capital gains tax regime per se even if the rate and exemptions are left untouched. Government could consider measures like hiking the threshold for holding securities to qualify for long term capital gains exemption from the current threshold of 12 months and hiking the securities/ commodities transaction tax as well.
Going forward, foreign investors would need to look at increasing emphasis on the substance of transactions and this trend is consistent across multiple countries around the globe.
(Ronak Sethi, senior tax professional, EY also contributed to the article)
(Views expressed are personal)