GAAR: No clarity on grandfathering for bonus shares

Mumbai: The tax department's clarifications on General Anti-Avoidance Rule (GAAR) last week may not have cleared all the uncertainties of foreign investors about this rule. On Friday, the Central Board of Direct Taxes (CBDT) clarified that GAAR will not be invoked against bonus or compulsory convertible shares issued on the underlying equity held prior to April 2017. Tax experts said, however, foreign investors remain worried that the tax department might send tax notices on bonus shares and convertible shares issued on the underlying security held before April 2017.

“Clarifications on GAAR also need to be followed up with clarifications to the India-Mauritius and India-Singapore protocol with regard to bonus or convertible shares,“ said Suresh Swamy, partner, tax and regulatory services, PwC. “GAAR is invoked only when FPIs claim tax exemption but here the amended treaty does not state if `grandfathering' is extended to bonus or convertible shares, which means they will be taxed.“

The government last year amended treaty with countries like Mauritius and Singapore to subject FPIs to domestic tax laws.However, the amended treaty says that FPI investments in India held before April 2017 can still avail treaty benefits, which they call `grandfathering'. Tejesh Chitlangi, partner, IC Legal said: “The tax authorities are still leaving a lot of room for multiple interpretations, and ambiguous provisions can later be invoked to tax the otherwise legitimate structures. For instance, the need is to clarify as to whether bonus and convertible shares will get `grandfathering' or not. Till then, clarification pertaining to non-invocation of GAAR is not helpful.“