P- Notes, Tax Avoidance & DTAA

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Switzerland MF Company has 5% TSC Share. A person from Switzerland want TCS share but stock not available in the stock exchange. Buy MF company has Stock of TCS, So the person buy stock from the MF company. Company give us P-Notes (5% of TCS Share) to the investor. (For Foreign Retail Investor).

According to SEBI, 5% of TSC share is having by Switzerland MF Company. But the real owner is someone who having P-Notes (5% of TCS Share).
(Misused the black money to buy P-Notes or Illegal money is used to buy the P-Notes)
What are Participatory Notes?
  • Participatory Notes or P-Notes (PNs) are financial instruments issued by a registered foreign institutional investor (FII) to an overseas investor who wishes to invest in Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).
Key points:
  • P-Notes are Offshore Derivative Investments (ODIs) with equity shares or debt securities as underlying assets.
  • They provide liquidity to the investors as they can transfer the ownership by endorsement and delivery.
  • While the FIIs have to report all such investments each quarter to SEBI, they need not disclose the identity of the actual investors.
What are govt & regulator’s concerns?
  • The primary reason why P-Notes are worrying is because of the anonymous nature of the instrument as these investors could be beyond the reach of Indian regulators.
  • Further, there is a view that it is being used in money laundering with wealthy Indians, like the promoters of companies, using it to bring back unaccounted funds and to manipulate their stock prices.
Balance of Payments
  • The total balance, i.e., the balance on current account plus the balance on capital account is called the balance of payment which may show an overall deficit or surplus.
  • A country may have a deficit in the current account but a surplus in the capital account and an overall deficit in the balance of payment
  • A balance of payment deficit simply means that certain payments are due to the foreigners and a surplus means that the foreigners are indebted to us in respect of certain payments.
  • A BOP deficit may be adjusted by the Reserve Bank of India through sale of foreign currencies released from the foreign exchange reserves, or by borrowing from the International Monetary fund or by foreign aid.
  •  A surplus may be adjusted by increasing the foreign exchange reserves.
Tax Avoidance
Use legal ways to reduce the amount of pay tax. The process is Tax Planning and concept is Tax Avoidance.
Tax evasion – not pay properly tax. Keep black money).
  • Tax Avoidance means an attempt to reduce tax liability through legal means, i.e. to regulate one’s financial affairs in such a way that one pays the minimum tax imposed by the law.
  • Tax Evasion and Tax avoidance are two different things. While Avoidance is legal management to avoid tax, tax evasion is illegal means to reduce tax liabilities, i.e. falsification of books, suppression of income, overstatement of deductions, etc. Similarly, Tax planning is an accepted practice, whereby the taxpayer uses provisions of law to minimize his tax liability.
Double Taxation Avoidance Agreements (DTAA)
(South Korea company start company in India. Pay tax on income to India as well as South Korea. To avoid double taxation brought DTAA.
Company pay tax on any one nation South Korea (Tax 8%) or India (Tax 15%) which they want).
Company pay tax in South Korea. India Tax Base Erode & Profit Loss.
Misuse, The Black money sent to cheap tax country (Tax 3%) & start company and invest in India. Pay only 3% tax, India has profit loss.
  • It is a treaty signed between two or more countries and is applicable in cases where a taxpayer residing in one country has to earn his/her income from another country. India has signed Double Taxation Avoidance Agreements or DTAAs with 88 countries,
  • Double Taxation Avoidance Agreements is a treaty signed between two countries, which, through the elimination of international double taxation, promotes the exchange of goods, services and investment of capital between the two countries. Double taxation is an issue related to the taxation of income that crosses boundaries. 

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