New tax evasion rule not retroactive - sources

NEW DELHI Thu May 3, 2012 9:40pm IST

A broker looks at a computer screen at a stock brokerage firm in Mumbai July 6, 2009. REUTERS/Arko Datta/Files

A broker looks at a computer screen at a stock brokerage firm in Mumbai July 6, 2009.

Credit: Reuters/Arko Datta/Files

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NEW DELHI (Reuters) - India will not retroactively tax portfolio investments and will shift the burden of proving evasion on tax to authorities, two government sources said on Thursday, providing a measure of comfort to foreign investors worried about proposed new rules.

Overseas investors have been critical about a set of proposals India unveiled as part of its budget for the fiscal year that began in April, including a rule that would crack down on the use of tax havens, saying vague wording left it too open for subjective interpretation.

However, foreign investors may have to wait a month or two for full clarity. While the finance bill that includes the new tax provisions will be presented to parliament next week, final details will not be released until June or July, the sources said.

The wait could constrain Indian markets, which have seen foreign outflows since the proposals were unveiled in mid-March, sending the rupee on Thursday to its lowest in more than four months, while stocks have lagged their Asian emerging peers.

"The uncertainty on what the guidelines will be on GAAR is really the issue now," said Agam Gupta, head of foreign exchange, rates and credit trading at Standard Chartered Bank in Mumbai.

"The government needs to come out with something which is unambiguous," he said.

The vague wording of the proposed General Anti-Avoidance Rule (GAAR) had prompted worry among investors that it might be applied retroactively, but one of the government sources said India "has no intention" to apply the rule retrospectively.

Another point of contention over GAAR is that it might put the burden on investors registered in countries with special tax exemptions with India, such as Mauritius, to prove they do not intend to explicitly avoid taxes.

However, the sources clarified tax authorities will bear the burden of proof.

"The onus of proof will be on the Income Tax Department to show an impermissible arrangement before GAAR can be revoked, not on the taxpayers," the source said.

Still, New Delhi has not clarified what criteria will be used to determine what qualifies as an impermissible arrangement after previously mentioning a few criteria such as "substantial" commercial purpose. Investors have complained that is too vague.

Tax authorities could thus still impose a short-term capital gains tax of 15 percent on foreign institutional investors (FIIs) if they are proven to have registered in countries with tax exemptions just to avoid paying Indian taxes.

Foreign investors have been net sellers of about 35 billion rupees in India's broader debt markets in April, according to provisional regulatory data, reversing earlier stronger purchases. They have also sold a more modest 6.3 billion rupees in Indian stocks.

Not all of the selling has been related to worry over new tax rules. India's worsening economic fundamentals, slowing policy reforms and the steep fiscal challenges have also been key reasons. Last week rating agency Standard & Poor's cut in the country's outlook to negative.

"There will be some momentary impact of GAAR passing, but perceived lack of policy reforms, twin deficits are the more tangible reasons why we don't have portfolio inflows," said Hitendra Dave, head of global markets for HSBC India.

(Reporting by Manoj Kumar; Additional reporting by Suvashree Choudhury and Abhishek Vishnoi; Editing by Tony Munroe and Rafael Nam)

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