India postpones anti-avoidance rules, cuts capital gains tax for PE

The Finance Bill, announced on Monday, has effectively granted offshore investors a one-year grace period to adapt to the General Anti-Avoidance Rule (GAAR). Under the rule, transactions would be presumed to have been structured to obtain tax benefits unless the taxpayer proves this is not the main objective. Clearly further guidelines should be forthcoming over the next 12 months in order to clarify how proof can be established.

The GAAR targets capital entering and leaving India via Mauritius-based entities, which are not subject to capital gains tax under the countries' double tax agreement (DTA). Although the Indian authorities are primarily interested in targeting wealthy Indians bringing money onshore, private equity firms are affected. Some are already relocating to Singapore, which offers similar tax advantages and where it is easier to set up sufficient business operations to convince the authorities that tax is not the key factor.

The tax cut for private equity firms selling unlisted securities is intended to shore up interest in the asset class and facilitate profitable exits - long a concern for investors in the country. This puts private equity on an equal footing with foreign institutional investors who already benefit from the 10% rate. No long-term capital gains tax applies to transactions that take place on stock exchanges.

The Finance Bill also proposes a 0.2% securities transaction tax (STT) on the sale of unlisted securities, instead of a withholding tax. An STT is levied on all stock exchange transactions.

In addition, legislators decided to exempt angel investors from a provision on closely held companies. The Finance Bill decrees that any consideration received by a closely held company in excess of the fair market value of its shares would be taxable. The potentially serious repercussions this would have for investments in start-up companies have now been preempted.

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• Topics
• South Asia
• Regulation
• India
• tax
• Mauritius
• regulation