FPIs get no relief from FM Nirmala Sitharaman on 'super-rich' tax

Finance Minister Nirmala Sitharaman | PTI photo
The controversial super-rich tax on foreign portfolio investors (FPIs) that are organised as trusts will stay undiluted as Parliament passed the Finance Bill, 2019, on Thursday.

Replying to a debate on the Bill in the house, Finance Minister Nirmala Sitharaman dismissed the argument of the Opposition that the tax would lead to a flight of FPIs.

“It will have an impact on FPIs registered as trusts. There is an option for FPIs to register as companies. If they are registered as companies, they don't have a problem with this new tax,” Sitharaman said.

She said a trust was treated as an individual entity and came under the tax.

She recalled finance ministry officials had been saying that FPIs registered as trusts might consider the option of dressing up as companies. An increase in the effective tax rate will affect only high net-worth individuals, and, according to government policy, they should contribute more to nation building, the finance minister said. 

Finance ministry officials said the tax on FPI trusts would pull in a mere Rs 400 crore, as against the revenue gain of Rs 12,000 crore from this levy. 

Sitharaman, in her first Budget, proposed a hike in surcharge for the super-rich to 25 per cent for incomes between Rs 2 crore and Rs 5 crore, and to 37 per cent for incomes above Rs 5 crore in a year.

The move will hit 40 per cent of the FPIs. According to reports, about 2,000 FPIs operate as trusts owing to flexibility and tax-efficient repatriation.

The effective long-term capital gains tax rate for FPIs operating as trusts earning between Rs 2 crore and Rs 5 crore has gone up from 11.96 per cent to 13 per cent, while it has increased to 14.25 per cent for those earning over Rs 5 crore. 

As for short-term capital gains, the effective tax rate has gone up from 17.94 per cent to 19.5 per cent for those earning between Rs 2 crore and Rs 5 crore, and to 21.3 per cent for the ones earning over Rs 5 crore.

The effective tax rate on short-term gains from unlisted securities and derivatives will now be 39 per cent for the Rs 2-5 crore group, and 42.74 per cent for the Rs 5 crore group. 

The Income Tax Act has two streams of taxation — individual and companies. Earnings of all non-companies, including Hindu Undivided Families, Associations of Persons, and Trusts are taxed as individuals.

Sunil Gidwani, partner, financial sector, Nangia Advisors (Andersen Global), said: “Restructuring global funds only for Indian tax reasons is not a joke. No one in government seems to appreciate that just as our mutual funds are formed as trusts because regulations require them to be so, in various countries funds are set up as trusts because of home country regulations, industry practice, and commercial reasons and not because they see an advantage in India earlier.”

Gidwani said non-corporate FPIs faced a higher surcharge and hence effective tax. "Surcharge or no surcharge, there should be a uniform rate for foreign portfolio investors because corporate or non-corporate status is a home country creation,” he said.

Amit Singhania, partner, Shardul Amarchand Mangaldas, said, “Now it has become clear that increase in surcharge for FPIs is here to stay. To the extent feasible, they will explore opportunities to shift to a corporate structure.”

Amit Maheshwari, managing partner, Ashok Maheshwary & Co, said considering the fear of GAAR and operational flexibility that the trusts allow, FPIs might become averse to India.

Referring to the imposition of 2 per cent tax deduction at source on cash withdrawal of more than Rs 1 crore, she said the tax could be adjusted against the liability of the assessees and hence there would be no additional burden on them.

The minister, however, did not say anything on the proposal to increase customs duty on newsprint to 10 per cent.