"Indian tax authority would not go beyond financial investor (FIIs) to check the details about the P-Note holders.Accordingly, a question of liability for tax in India of the P-Note holder would not arise. Necessary clarification will be issued", he said.
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P-Note holders not liable to pay tax in India: FM
Participatory Notes (P-Notes) are instruments that allow foreign institutional investors (FIIs), which are notregistered with market regulator SEBI, to invest in the Indian equity market.
Referring to the provisions in the Finance Bill 2012 on overseas investments, Mukherjee said, "I would like tocategorically clarify that the intention of the government is is not to cause any harassment to genuine investors.
"Pointing out that P-Note holders invest in stock market through FIIs, the Minister said, "the income tax departmentwould examine the tax liability of the FIIs."
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P-Note holders not liable to pay tax in India: FM
The proposals in the Finance Bill 2012 relating to taxation of indirect transfers of assets and General Anti-Avoidance Rules (GAAR) have created concerns among the foreign investors leading to uncertainty in the stock markets.
The Asia Securities Industry & Financial Markets Association (ASIFMA) along with Securities Industry and Financial Markets Association (SIFMA) had written to the Finance Minister contending that "such onerous taxation or even the risk of such taxation could threaten this important source of capital for India's businesses".
Noting that FIIs are carefully evaluating these new tax risks, the letter had said the proposals were too broadly worded.
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P-Note holders not liable to pay tax in India: FM
Photographs: Kham/Reuters.
FIIs have assets under custody of more than Rs 10 lakh crore or 17 per cent of the capitalisation of India's equity markets. Further, these entities also invest in Indian government and corporate debt, as per the letter.
It appears that market participants have already begun to reduce their positions in India, it said.
In the Budget for 2012-13, Mukherjee has proposed GAAR in order to "counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel".
P-Note holders not liable to pay tax in India: FM
Photographs: Reuters.
The fear of GAAR had spooked stock markets had pulled them down on concerns that all short-term capital gains made by FIIs and P-Note investments would be taxed.
As per the Finance Bill, GAAR would be applicable from April 1. The markets thus settled and moved up on assurance by Mukherjee that P-Note holders will not be taxed and a clarification will be issued by the Finance Ministry.
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