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Foreign Investment is supposed to be the next big thing that will play major role in changing the face of the Indian economy. A lot has been debated about it in the recent years with major emphasis being paid on how to attract foreign investment in our country. Introduction of few strong measures in this year’s budget would have attracted foreign investments that would have helped in getting rid of current account deficit problem to some extent but it seems that finance ministry has some other plans.

One of the most worth mentioning point in the budget related to foreign investment and income tax, was the simplification of the process of getting registration and hence forth making investment in bonds and securities of corporate and government available to the foreign investors. The move was much welcomed in the corporate arena but it will not have a big impact on the foreign flows as measured by leading corporate honchos. The benchmark decision would have been a cut in the rate of withholding tax which would have directly attracted foreign investment and helped in correcting the current account deficit.

The only declaration that was related to the foreign investment was the easing of the process of registration, also known as “Know Your Customers” policy. Earlier this month Finance Minister P. Chidambaram met various foreign investors and promised that he would strengthen the current structure of different procedures for registration for different categories of investors. The corporate arena expected a cut in withholding tax that would have significantly helped in the growth of on shore markets but no such move was adopted by the government.

On the other hand, there was lot confusion about a scheme which stated that “tax residency certificate is necessary but not sufficient condition” through which one could gain advantage of the DTA (Double Taxation Agreement). Earlier tax authorities were content with tax residency certificate presented by foreign investors who had signed DTA with India, and hence granted them to avoid paying tax in India. But this proposal has created a lot of confusion in the minds of various investors and even authorities. The move sparked a fear in the minds of the investors that they would be chased after by tax authorities at their own discretion demanding from other necessary documents as necessary.

The move came about a year when General Anti-Avoidance Agreement Rules (GAAR) was adopted but the rules were revoked after they found to be inappropriate and there was general outcry from the foreign investors regarding the rules due to which it was also delayed for its implementation.

But later, P. Chidambaram in a press conference gave clarification of the related uncertain proposal adopted by the government and said that the tax authorities will not only have to look at the tax residency certificate but also to the enforcement rules which seeks to mandate foreign investors as beneficiaries under DTA for any type of investments. But still some tax experts and senior advocates have doubts as to how this beneficial ownership would be tax. Problems may arise for Foreign Institutional Investors (FII) in terms of capital gain which they may make.

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