Govt move on GAAR spooks Dalal Street

The Government is planning to introduce short-term capital gains tax on equity derivative products sold overseas, stoking concerns that foreign capital inflows into the domestic assets will be adversely hit. The proposed new regulations would come through the introduction of the so-called General Anti-Avoidance Rule (GAAR) next month, according to reports. Finance Minister Pranab Mukherjee in his budget presented on March 16 for FY13 proposed to introduce GAAR in order to counter aggressive tax avoidance schemes. He said that it would be ensured it was used in appropriate cases. The Centre could tax participatory notes (P-Notes), which are issued by foreign portfolio investors (FIIs) registered with market regulator SEBI to overseas investors.

Indian shares dropped sharply on concerns that the Government could tax P-Notes but recovered on Friday after the Finance Minister said that there won't be any tax liability on the holders of P-Notes. “Indian tax authority would not go beyond foreign institutional investors (FIIs) to check the details about the P-Note holders. Accordingly, a question of liability for tax in India of the P-Note holders would not arise. Necessary clarification will be issued,” he told reporters in New Delhi on Friday. Referring to the provisions in the Finance Bill 2012 on overseas investments, Mukherjee said, “I would like to categorically clarify that the intention of the Government is not to cause any harassment to genuine investors.”

FIIs wanting to avoid the new tax would have to exit or shift to new locations that do not attract the new tax levy before the end of FY12 that ended this week, according to reports. Domestic brokerage IIFL said that the introduction of GAAR could give powers to the tax department to deny double taxation treaty benefits to foreign funds based out of tax-havens like Mauritius. A large proportion of foreign investment in the Indian stock market comes through companies registered in Mauritius and are exempted from tax in India under a Double Taxation Avoidance Agreement (DTAA) with Mauritius. Overseas portfolio investors, routing their investments via countries like Mauritius, currently do not pay any tax on short-term capital gains, IIFL said in a note to clients. "If the bill is passed as it is, then from 1st April 2012, FIIs domiciled in such treaty locations may have to prove that they have created this structure for genuine business purposes and not just for avoidance of tax," IIFL said.

Denial of tax benefits by the Revenue Authorities in different countries, often by disregarding the form of the transaction, has been a matter of conflict between the Revenue Authorities and the taxpayers, according to PwC. The proposed GAAR provisions would override the provisions of the tax treaties signed by India, it added.

P-Notes are financial instruments used by investors or hedge funds that are not registered with the stock market regulator - Securities and Exchange Board of India (SEBI) to invest in Indian securities. India-based brokerages buy Indian securities and then issue participatory notes to foreign investors. Many purchasers of P-Notes are believed to be overseas funds registered in countries safe from Indian taxes, such as Mauritius. India has a double tax avoidance treaty with Mauritius.

Tax on P-notes...FM tries to sooth frayed nerves

Bond yields rise on Govt's borrowing plan

The yield on the benchmark 10-year Government bonds climbed on Wednesday after the Centre said that it will borrow 65% money from the market in the first half of FY13. The Union Government plans to raise Rs. 3.7 trillion through bond sales during April-September 2012. The amount is in line with bond traders' expectations of Rs. 3.6 trillion to Rs. 3.8 trillion. The announcement came after market hours on Tuesday. The yield, which has risen nearly 22 bps since March 15 on concern about heavy debt supply, hit nearly a three-month high of 8.54% in intraday trade on Tuesday. In his Budget speech delivered on March 16, Finance Minister Pranab Mukherjee had said that the Government's gross borrowing target in FY13 would be Rs. 5.7 trillion. One reason for the Government to borrow heavily in the first half of FY13 is the heavy repayments worth Rs. 605.7bn that are due during April to June this year.

The Reserve Bank of India (RBI) issued the Government's borrowing calendar yesterday, and said that the Centre will borrow between Rs. 150bn and Rs. 180bn on a weekly basis. The Government will try to stick to the borrowing plan and not overshoot it, Economic Affairs Secretary R. Gopalan said after a meeting with RBI officials in New Delhi. "We have planned this very carefully. We had problems with income tax refunds last year (FY12), but this year we have taken care of that problem," Gopalan said. Net borrowing for April-September stands at Rs. 2.85 trillion after accounting for redemptions, he said. In FY12, the Government had increased its borrowing amount twice to Rs. 5.1 trillion from an initial budget estimate of Rs. 4.17 trillion. The Centre plans to reduce its budget deficit to 5.1% of GDP from an estimated 5.9% in FY12 that ends on March 31, Mukherjee said on March 16.

Govt to front load borrowings...65% of FY13 debt sales in H1

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