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Foreign institutional investors (FIIs) may have to pay tax on the profits they make when they sell their investments in debt securities too.
This could happen once Parliament passes the Finance Bill, giving effect to the anti-tax avoidance rules.
Tax experts feel the new rules will not only cover the profits that FIIs make when they sell shares but also debt instruments such as corporate bonds.
Many FIIs now show the profits they make when they sell debt instruments as capital gains and claim treaty benefits on them, to avoid paying any tax.
Will override DTAA
Once the General Anti-Tax Avoidance Rules come into force, they will override benefits that any double taxation avoidance agreements may offer.
Taxmen can negate the treaty benefits and tax the gains. FIIs are understood to have raised this issue too during the meeting with Finance Ministry officials on Wednesday.
“To the extent the fear of GAAR is there for taxation of shares sold by FIIs, to the same extent fear of GAAR is there for the debt securities too”, said Mr Nitin Karve, Executive Director, PwC India.
Mr Amit Singhania, Principal Associate, Amarchand & Mangaldas, said the ambit of GAAR is wide enough for revenue to re-characterise the capital gains (on debt securities) as interest to levy tax on the transaction.
However, one can get tax treaty benefit post re-characterisation, if available, he said.
The Government had in November 2011 raised the FII investment cap in government securities by $5 billion to $15 billion. It had also raised the cap on FII investment in corporate bond to $20 billion. FII investment limit in long-term infrastructure corporate bonds was kept unchanged at $25 billion.
While the investment cap has been reached for the government securities side, the FIIs have pumped in close to $19 billion on the corporate bond side. The response has been quite lukewarm for the infrastructure bonds.
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