Indian Finance Minister P. Chidambaram, struggling to rein in a budget deficit, tightened rules for overseas investors seeking to benefit from treaties with Singapore, Mauritius and Cyprus to avoid double taxation.
The so-called tax residency certificate needed to claim benefits is “necessary but not sufficient,” according to the Finance Bill document released along with the federal budget for the year starting in April. Overseas investors will also have to provide proof that they are the final beneficiaries of any profits, according to Chidambaram.
Both overseas and local companies often route investment into India through firms based in Mauritius, a tropical island off the east coast of Africa, because capital gains on Indian shares held by a Mauritian company aren’t subject to tax in the South Asian nation.
The proposal to change the rule is “disturbing,” said Ketan Dalal, joint tax leader at PricewaterhouseCoopers LLP in Mumbai. “Investors dislike uncertainty and one would like the finance minister to expressly clarify this.”
Indian equities declined yesterday, with the benchmark stock index completing its first monthly drop in four months, on concern the nation’s budget lacks measures to curb expenditure that’s key to containing the fiscal gap.
The S&P BSE Sensex (SENSEX) retreated 1.5 percent and ended the month with a drop of 5.2 percent, the most since May. Chidambaram is targeting a budget shortfall of 4.8 percent of gross domestic product in the 12 months starting April 1, from an estimated 5.2 percent in 2012-2013.
The rule also creates ambiguity regarding the additional documents that will have to be produced to enjoy these benefits, said Shefali Goradia, a partner at BMR Advisors, a Mumbai-based tax and deals advisory.
Bilateral treaties are meant to ensure that capital gains arising from sale of shares are taxed only in the investors’ country of residence and not where the company is based, thus avoiding the payment of taxes twice over.
Tax treaties with Mauritius, Singapore and Cyprus might get affected, said Punit Shah, co-head of tax at KPMG.
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