Looking forward

  • Author : Pranav Khanna
  • Date : December 2012
ABOUT THE AUTHOR: Pranav Khanna is Managing Director of Nerine Advisory Services, India pVT ltd

Since April 2012 there has been a slowdown in offshore structuring. The biggest reason for this was the implementation of a general anti-avoidance rule (GAAR) by the Indian government.

The Indian GAAR was introduced on 1 April as a consequence of a ruling in a court case involving Vodafone. In January, the Indian Supreme Court ruled against India’s tax authority and prevented it from pursuing the UK-listed telecoms group for capital gains tax that is supposedly due on its USD10.9 billion acquisition of Indian mobile operator Hutchison Essar.

With the GAAR, the Indian government was trying to give powers to income tax authorities to deny tax benefit to an entity if a transaction had been carried out with the sole intention of tax mitigation. Under the GAAR, foreign institutional investment (FII) and foreign direct investment (FDI) coming to India through Mauritius and other routes such as Singapore became taxable.

The implications of the GAAR were immediately apparent, with almost all FII and FDI drying up as investors became wary of the tax implications. The Indian government quickly reacted and the GAAR was postponed for three years.

A government working party recommended that tax on gains arising from the transfer of listed securities, whether in the nature of capital gains or business income, to both residents and non-residents, be excluded from the GAAR. The working party recommended that tax mitigation be distinguished from tax avoidance before invoking the GAAR and a list of transactions in which the GAAR cannot be invoked was drawn up, including share buybacks, tax savings due to business reorganisations pursuant to a court-approved scheme, lease versus sale transactions and debt versus equity forms of financing. GAAR will not be invoked in intra-group transactions (i.e. transactions between associated persons or enterprises where the overall tax revenue is not affected by actual revenue loss or deferral of revenue). The GAAR will only be applicable in cases of abusive, contrived and artificial arrangements, and all investments (though not arrangements) whether made by a resident or non-resident that exist before the GAAR start date in 2017 should be grandfathered so that when sold after the GAAR’s introduction, they will not be examined or denied tax benefits. The group also recommended that an advanced ruling on the GAAR should be obtained within six months. A monetary threshold of USD725,000 of tax gain (including tax only, not interest, etc) has been set to apply to GAAR provisions for each taxpayer in a year and, in the case of tax deferral, the tax benefit will be worked out based on the present value of the money.

Since the GAAR has been put on the backburner, the economy has seen an upturn, with new FDI being allowed in the retail, banking, insurance and aviation sectors. The markets have been on the up, and it is a matter of time before the Reserve Bank of India (RBI) allows the liberalised remittance scheme (which allows an Indian family to take out USD200,000 per person, per family, per year) to increase its annual amount to USD400,000.

The government and the RBI have also geared up to finalise the norms on new banking licenses. In a meeting with the banking regulator, Finance Minister Palaniappan Chidambaram gave assurances that necessary amendments would be made to the Banking Act in order to make it easier to gain licences.

Property investment revived

Historically, Indian families have often invested in London property. Two years ago, the rupee had appreciated against the pound and even more Indian families set up structures to purchase property in London. A drop of 25 per cent in the rupee this year, coupled with the UK government’s introduction of new stamp duty rules, meant there was a slowdown in Indian property investment in London. The rupee is now faring better and there has been renewed interest in structuring to invest in London property. Another boost was the appointment of Palaniappan Chidambaram as India’s new Finance Minister. The market has reacted favourably to his appointment and Indian funds have since increased by 22 per cent.

The postponement of the GAAR may well be the first rumblings of its demise. Certainly the market’s reaction to its initial introduction has given the Indian government food for thought. It remains to be seen whether the GAAR will be postponed again from its 2017 introduction and, certainly, I believe its imposition will not be anywhere near as punitive as was initially mooted.


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