Funds headed to GIFT City ask for GAAR exemption

Mumbai: India’s anti-tax avoidance laws are turning into a concern for foreign funds looking to set up base in Gujarat International Finance Tec or GIFT City, the country’s International Financial Services Centre.The government has announced several tax sops to lure offshore funds to shift their bases from locations such as Singapore and Mauritius to Gandhinagar. But overseas investors are worried that the General Anti-Avoidance Rules (GAAR) provisions can be used by the tax department.According to the tax avoidance laws, tax cannot be the only reason for a fund to move its base from one jurisdiction to another. Lawyers said the prime reason for FPIs to shift base to GIFT City would be tax sops which include exemptions from capital gains tax, STT and stamp duty for their Indian investments.Two leading FPI lobby groups Asia Securities Industry and Financial Markets Association (ASIFMA) and Capital Markets Tax Committee of Asia (CMTC) have written to the IFSC regulator seeking an explicit exemption for funds shifting to GIFT City to be shielded from GAAR.In a joint letter to the IFSC Authority dated July 16, the lobby groups said GAAR provisions “confers wide discretionary powers” to Indian tax authorities and hence “there is an exposure that the GAAR provisions can be invoked against taxpayers who have set up a unit in GIFT IFSC”.“An exposure to applicability of GAAR brings in uncertainty to the eligibility to tax incentives which are provided by the Government to promote GIFT IFSC,” said the letter addressed to IFSC Authority chairman Injeti Srinivas. “To bring certainty on taxability of income of a GIFT IFSC unit, exemption should be granted from applicability of GAAR provisions.”GAAR was introduced in 2017 by the government to curb tax evasion by foreign entities investing in India. Back then, the entities would choose jurisdictions like Mauritius and Singapore to route their India investments. Both the countries enjoyed capital gains tax exemption under the double tax avoidance agreements (DTAA). However, the treaties have been subsequently revised and a large part of tax benefits don’t apply to the countries anymore.“The relocation exercise may be futile if it’s later clouded by tax uncertainties of any kind, particularly GAAR,” said Tejesh Chitlangi, partner, IC Universal Legal.84955998GAAR isn’t the only anti-avoidance law that concerns the global asset management industry. Top economies of the world including India have joined hands under the umbrella of the Organisation for Economic Co-operation and Development (OECD) to arrive at a global tax anti-avoidance law named BEPS.“A fund based in GIFT City will be better protected under GAAR as compared to an offshore fund because there will be no need to consider eligibility under a tax treaty and the Principal Purpose Test under BEPS will not apply,” said Rajesh Gandhi, partner, Deloitte India.GAAR prescribes various tests and thresholds based on which the taxmen assess if a structure was legitimate or created for purposes of tax sops. One of the tests that determine the assessment is commercial substance. If an entity is set up in a jurisdiction say Mauritius, it needs to have an office, permanent staff among others to pass the anti-avoidance test.

from Economic Times https://ift.tt/2Vr8BCo