Financial Daily from THE HINDU group of publications
Friday, Nov 05, 2004
Industry & Economy
Foreign Direct Investment
FICCI calls for review of controlled financial deals
New Delhi , Nov. 4
THE increasing levels of inbound-outbound investment and growing sophistication of tax-avoidance tools have prompted the need to review the controlled financial transactions regime in India.
This would not only check any potential erosion of domestic tax base but also control any adverse impact on balance of payments position, the Federation of Indian Chambers of Commerce and Industry (FICCI) pointed out.
There have been many recent tax and legal changes that impact both the inbound and outbound investments, and planning for international operations. "If we are looking at attracting FDI into the country then we have to create a conducive environment and do away with legal bottlenecks," FICCI said.
In India, the Income-Tax Act provides how taxable income for non-resident Indian (NRI) is to be determined. The Act provides that an NRI is liable to tax in respect of income that is received or deemed to be received in India by him or on his behalf. Further, it also stipulates that the NRI income that is liable to be taxed is accrued or arises or is deemed to accrue or arise in India during the previous year.
According to a FICCI background paper for International Conference on `Emerging tax policy: Challenges and perspectives', the broad objectives of any outbound investment planning is maximising the source country tax incidence, that is the host country minimising the home country corporate tax incidence and maximising the future capital gains. Indian outbound investment regulations, to a large extent, ensure that such investments are made for genuine business reasons.
For instance, investment as an activity (other than core activity of investing company) is prohibited under the automatic route (except where investment is made out of EEFC funds). Likewise, investments through investment companies or special purpose vehicles (SPVs) are prohibited under the automatic route and warrants special regulatory approvals. In such cases, the Reserve Bank of India evaluates the investing company's business plans, projected cash flows, and projected Indian dividend flows among other things.
"These serve as in-built checks and balances to avoid treaty shopping or use of tax havens in outbound investment," the paper stated.
In nutshell, restrictive outbound investment regulations have traditionally served as a deterrent towards retention of monies in tax havens outside India by Indian companies going global, the chamber said.
"There are a number of jurisdictions in the world that have established themselves as favourable holding company locations. This is mainly because of certain tax perquisites," it stated.
The issue, which needs detailed discussion is why to go for holding company structure and what is the practice of holding company structure in other countries, the FICCI paper emphasised. It also said "it is equally important to analyse the tax aspects in treaty agreements and tax laws of other countries."
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2004, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line