Tax relief on cards? Finance Bill may ring-fence FPIs from 'super-rich tax'

Coming under criticism for the Budget proposal to levy a surcharge on the “super-rich” and its impact on foreign portfolio investors (FPIs), the government will likely ring-fence FPIs from the effects of the tax by tweaking the relevant portion of the Finance Bill.

This means the “super-rich tax” stays, but there will now be provisions in the Bill to ensure FPIs structured as a trust don’t feel the effect of it.

The discussion on the Finance Bill is expected to begin in the Lok Sabha later this week.

According to a rough estimate by accounting firms, about 40 per cent of FPI funds that invest in India are set up in a trust format.

Senior finance ministry officials, including Finance Secretary Subhash Garg, Revenue Secretary Ajay Bhushan Pandey, and Chief Economic Advisor Krishnamurthy Subramanian, have received representations from stakeholders regarding the “super-rich tax” and how it will affect FPIs.

Core policymakers in North Block have spoken to Finance Minister Nirmala Sitharaman on the issues, and there was even a meeting on this on Tuesday, Business Standard has learnt.

This comes even as the Central Board of Direct Taxes (CDT) is looking into the concerns of some big accounting firms such as Ernst & Young and Deloitte, who want the new surcharge to apply to only Indian residents.

The Revenue Department will tweak the Finance Bill because the proposal is related to taxation, officials say.

This will be done before the debate on the Finance Bill begins.

In her Union Budget speech, Sitharaman said: “Those in the highest income brackets, need to contribute more to the nation’s development. I, therefore, propose to enhance surcharge on individuals having taxable income from Rs 2 crore to Rs 5 crore and Rs 5 crore and above so that effective tax rates for these two categories will increase by around 3 per cent and 7 per cent 

In a representation to the CBDT, accounting firms said that the surcharge would lead to an unintended consequence for certain categories of taxpayers and that had the potential to “disrupt and distort” the capital markets. 

“We urge you to seriously consider the impact of increased surcharge on the Indian capital markets and the reputation of India as a stable tax jurisdiction,” said Sudhir Kapadia, partner and National Tax Leader, EY in the presentation to the CBDT.

Further, EY claimed that the proposed surcharge would also impact alternative investment funds, especially Category III AIFs. Citing the lack of clarity on taxation in this segment, EY said that Category III AIFs are stepping stone in India for providing globally renowned innovative investment products for investors. The capital commitments raised by such AIFs as on March 31 was about Rs 43,250 crore. 

Meanwhile, Deloitte recommended that who are already registered with the Securities and Exchange Board of India (Sebi) can be easily exempted and that all FPIs be treated consistently for Indian tax purposes so that they all be subject to corporate rates of surcharge.

“Sebi has a process for Know Your Company (KYC) and approval of such trusts. Consequently, there is a good case to exempt such registered trusts from the new additional surcharge,” said Rohinton Sidhwa, tax partner, Deloitte.

These firms also explained the rationale of having the trust format structure and how it gets impacted by the new surcharge. They said it will result in increase in effective rate of capital gains on the FPIs.

Tax debate

| Audit firms demand all FPIs be treated consistently
| In the US and the UK, funds can choose to set up either as a corporate or trust
| In both cases, they are treated as corporate for taxation, irrespective of their legal status
| Currently, FPIs struggle to choose their classification for tax purposes in India
| Conversion to corporation from trust may involve transfer of assets