FIIs Avoiding Tax in India *

Abstract:

The caselet discusses the inflow of Foreign Institutional Investments to India. The decision of the Authority of Advanced Ruling (AAR) with regard to the taxation of Fidelity, a US-based FII is focused on. The caselet also looks into the applicability of the Indo-US Double Taxation Avoidance Agreement to investors.

Issues: » Taxation of Foreign Institutional Investors in India. » How the Authority for Advanced Rulings is influencing the tax-payers. » How FIIs are avoiding tax by not having a Permanent Establishment (PE) in India. » The liability of FIIs in India in case of capital gains. Introduction India is the third largest recipient of Foreign Institutional Investment inflows in the emerging market category, after South Korea and Taiwan. There are 609 Foreign Institutional Investors (FIIs) registered with SEBI. In 2004, the total inflows have crossed the $6-billion mark. Most of these FIIs operate through domestic custodians to avoid being taxed through a Permanent Establishment (PE). According to the Income-Tax law, "A non-resident entity may outsource certain services to a resident Indian entity...

Questions for Discussion:

1. The ARR recently gave its ruling that the profits made by Fidelity are not liable to taxation in India. Comment on the ruling. On the basis of the definition of PE in the Income Tax Law, do you think this was the right decision?
2. Many analysts feel that the Government of India should take a re-look at India's double taxation avoidance agreements with various countries. In the light of the situation mentioned in the case, do you support this view?

Key words:
Foreign Institutional Investors (FIIs), SEBI, Authority for Advanced Rulings (AAR), Fidelity, Indo-US Double Taxation Avoidance Agreement (DTAA), Permanent Establishment, Standard Chartered Bank.

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