New tax rule likely to drive away FIIs

Foreign investors may be relieved over the controversial GAAR tax proposals being pushed back by a year but another new taxation framework could make their India investments riskier and expensive.

These proposals are a part of the Finance Bill.
They state that capital gains arising from the transfer of shares or interest in a non-Indian company — in case the share or interest derives directly or indirectly its value substantially from assets located in India — will be taxable in the country. The new rules could force foreign investors to re-examine their structures for investments in India, while impact would be visible also on global mergers and acquisitions involving Indian businesses to take into account the potential tax risks from the indirect transfer rules.

The FIIs are of the view that their gains from India are as such taxed in the country, and any repatriation of gains to its investors by way of redemption of capital should not come under the offshore transfer provisions. A number of foreign funds, may soon approach the Finance Ministry to seek clarifications and certain changes in the rules, sources said.

Foreign Institutional Investors (FIIs) are hoping for certain changes and clarifications in the final form of the rules.