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E&Y Makes Tax Recommendations For India

by Mary Swire,, Hong Kong

11 June 2013

The Indian Government "needs to work on eliminating multiple levels of taxation, simplifying tax payment and ensuring certainty in tax laws to attract foreign investors to India," accountants from Ernst and Young have said.

A new report, "Private Equity: breaking borders," stresses that "it is imperative for the Government to formulate a conducive foreign investment policy that gives foreign investors a sense of comfort while choosing India as a location for pooling such funds." To achieve this, Ernst and Young makes a number of recommendations.

These include a reduction in the tax compliance burden. The report calls on the Government to exempt from Indian tax compliances income received from a Private Equity (PE) fund, in cases where taxes have been discharged or deducted by the trustees of an Alternative Investment Fund (AIF) on the distribution of income.

In addition, the Government should consider extending the scope of tax exemptions for any long-term capital gains earned on the transfer of listed securities on which securities transaction tax has been paid. Capital gains earned by AIFs on the transfer of shares of unlisted companies, which are held over the long-term, should be made eligible.

For India-domiciled SEBI-registered AIFs, a pass-through system of taxation is envisaged. The report claims that this would enable the authorities to ensure that the tax collected on the fund’s income is no more than the tax that would have been payable had the investor injected funds directly in the investee company or asset.

Finally, India ought to consider the ramifications of its double tax avoidance agreements (DTAAs). The report points to the deals with Mauritius and Singapore, which have a favourable clause that provides for capital gains tax exemptions. Ernst and Young contends that where the capital gains earned by the foreign investors in AIF are exempt from tax, it would act as a strong deterrent for fund managers to raise India-dedicated funds from overseas jurisdictions.

TAGS: compliance | tax | tax compliance | India | Mauritius | tax avoidance | law | Singapore | agreements

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