The new development mainly affects foreign investors. However, it has been dominating news reports the past few days. After all, anything that affects foreign investors has an effect on the Indian stock markets.While reading through these news reports, you may come across hard-sounding jargons.
Here are 7 such terms explained:
This is when foreign investors are taxed in two countries for any profits they make – the country of their residence and the country where they invested. This eats into returns and discourages investors. To avoid this, many countries have signed a treaty to avoid double taxation. This is the treaty with Mauritius that India tweaked.
Foreign investors have to register to invest in the Indian stock market. However, registered foreign institutional investors (FIIs) can invest on behalf of foreign investors who have not registered. To do so, they Participatory Notes or P-Notes to the unregistered investor. The simplicity of the process makes it one of the popular means of investing by foreign investors.
Not all rules are made at the same point in time. Governments regularly update and announce new regulations, some of which ban or allow previous actions – investments, in this case. However, these new rules may not apply to past investments. So, any old investments would be subject to the earlier rule. This is called ‘grandfathering’. As per the new rules, all investments prior to April 2017 will be ‘grandfathered’ – subject to the earlier laws.
Offshore derivatives instruments:
P-notes are a type of ODI – they help foreign investors reap benefits from stocks. ODIs help invest in different kinds of assets too like Equity derivatives. Equity-linked notes, Capped-return notes, and Participating-return notes are some other ODIs.
Let’s understand with an example. Suppose you invest in a Mauritius Fund, which in turn invests in Indian equities. Now, based on the Double Taxation Treaty, you have to pay tax in Mauritius, which is much lower than the taxation in India. If you had invested in an Indian company or its stocks directly, you would have been eligible for taxation in India. The latest change in the tax rules now makes round tripping difficult.
Foreign investors would be taxed for capital gains from April 2017 as per the new announcement. However, the two-year period between April 2017 and 2019 will be considered a ‘transition’ period. So, the removal of tax concessions would not be abrupt. Instead, investors would only pay 50% of the capital gains tax during the two-year period.
Alienation of shares:
This is when a majority investor sells his or her shares in a company to a third party. Earlier, this was applicable to family members who sold their majority stock to an outsider. As per the new Treaty with Mauritius, anyone who earns capital gains from selling such stock of a company in India would attract tax in India.
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