MUMBAI: The tax department's clarification on General Anti Avoidance Rule (GAAR) has come as a relief for overseas portfolio investors who use off-shore derivative instruments known as participatory notes (P-notes) to bet on Indian stocks, said consultants. “Most P-note issuing FPIs have a strong commercial reason and establishment in Singapore and Mauritius,” he said.Singapore and Mauritius are the two countries from where 80% of foreign investment flows into Indian equities. As of November, the latest available data, close to Rs 1.80 lakh crore worth of investment in equities and debt market in India was through P-notes. Derivatives were kept out of the tax net during India's tax-treaty negotiations with Mauritius and Singapore. But, the use of P-notes to bet on shares could wane as CBDT’s stance on FIFO (first in, first out) principle for arriving at capital gains tax coupled with revision of the Mauritius and Singapore tax avoidance treaties make it infeasible for cash equity linked P-notes.

Source: Economic Times January 27, 2017 15:02 UTC