A proposal in the Union Budget that could result in inflows through Mauritius coming under the scrutiny of tax department has spooked foreign institutional investors (FIIs).
As per the Budget, if an FII or a non-resident wants to avail of tax treaty benefits, then a tax residency certificate (TRC) alone would not be sufficient. FIIs are seeking clarity on another proposal regarding foreign investors with less than 10 per cent in a company as FIIs and the remainder would come under the foreign direct Investment (FDI) category.
FIIs could also be facing tax demands for transactions entered into even during FY13, since a change on requirement of more than a tax residency certificate for avoiding tax is being brought in with retrospective effect. Earlier, for FIIs situated in Mauritius, the tax residency certificate would have sufficed to avail of treaty benefits. Since this is no longer the case, it may expose FIIs to potential tax demands even if they are based out of jurisdictions like Mauritius.
The finance minister however suggested that the implications of asking for more than a tax residency certificate may not be so dire. This merely means that for certain jurisdictions you may require an additional condition to be met such as providing a document on beneficial ownership, if the DTAA that India has with the jurisdiction requires one. The Budget also provided some relief with regard to the General Anti-Avoidance Rules (GAAR) with more independent representationon a panel to determine if tax avoidance arrangements are permissible. The new GAAR provisions would come into force from April 1, 2016.