End of tax benefits worries French FPIs
NEW DELHI : A meeting between Indian and French tax authorities on the sidelines of a recent G20 summit has set off alarm bells among foreign portfolio investors (FPIs) based in France, three people with direct knowledge of the matter said.
The meeting, around potential tweaks to the double taxation avoidance agreement (DTAA) between India and France, has led to apprehension among foreign funds that India may soon renegotiate the treaty to eliminate the capital gains tax exemption. Currently, France and the Netherlands are the only major jurisdictions benefiting from a tax treaty with India that grants exemption from capital gains tax on share sales.
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This comes ahead of Prime Minister Narendra Modi’s visit to Paris next week, where several new bilateral agreements will be discussed.
Following the G20 meeting, Indian FPI representatives, including custodians, consultants, and lawyers, have received calls from their French clients to check if capital gains tax was on the discussion table, the people cited above said on condition of anonymity. A spokesperson for the finance ministry declined to comment, saying DTAA negotiations are confidential.
There were discussions around ‘corresponding adjustments’ under the DTAA along with tweaks to the information sharing policy,” said one of the people. “However, it could not be ascertained if the capital gains tax renegotiation was part of the talks. We will get better clarity post the Prime Minister’s visit to France, where many bilateral issues will be discussed.”
In 2017, India renegotiated similar tax treaties with Singapore and Mauritius, ending capital gains tax exemptions. India also removed such exemptions from its pact with Cyprus. Consequently, many foreign banks and large funds shifted their India equity trades away from Mauritius and Singapore to France.
DTAAs are bilateral agreements between two countries to prevent businesses from getting double-taxed for the same product or service. For instance, if a French company invests in India and makes a profit and repatriates it to France, its profit would be taxed in India since it earned the income from India. Additionally, such companies may also be taxed in France since the proceeds are received there. The DTAA lets the company choose if it wants to pay tax in India or France and avoids getting taxed in both countries.
A leading custodian, on condition of anonymity, said it has been asking clients to be prepared for the eventuality for the last two years.
“We received several queries from FPIs asking about the capital gains tax status. We reiterated that the capital gains tax exemption with France will eventually be renegotiated,” the person said.
The custodian said he expects a renegotiation of DTAAs at some time in the future, considering the Indian government’s focus on plugging loopholes in such agreements. “With the advent of anti-avoidance laws, we are advising FPIs to keep their structures simple and clean and avoid complex layering for the sake of tax benefits,” the person said.
France ranks as the 10th-largest source of FPI inflows to India, with funds based in the country holding securities worth ₹1.2 trillion in Indian markets as of 31 May, depository data showed.
Market participants said a sizeable portion of the participatory notes (P-notes) with Indian shares as underlying are currently issued from France due to the capital gains tax benefit.
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Updated: 06 Jul 2023, 11:51 PM IST
