Income from PNs to be taxed

Indian Tax authorities have indicated that income generated from trading in participatory notes, better known as PNs, should be taxed in India. PNs are offshore derivative instruments issued by foreign institutional investors (FIIs) registered in India to overseas investors who have no direct access to the Indian stock market.

Even though issuance and trading of PNs take place outside the country by entities which are not based in India, the income tax department has raised a query on its taxability. Tax experts say this is similar to the stance the department had taken in the Vodafone case.

The income tax department had issued a show-cause notice to Vodafone, Netherlands, which acquired Hutch-Essar from Hutchison, Hong Kong. Though the deal was cut abroad between two overseas parties, the I-T department felt that tax is payable in India since the underlying asset is in India. Similarly, PNs are offshore derivatives sold outside the country, but the underlying assets are stocks of companies in India, traded in Indian stock exchanges.

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