“The decision to go for a non-corporate structure is driven more by legal considerations in the FPI’s home jurisdiction rather than based on Indian tax considerations and investments” said Abhay Sharma. partner at law firm Shardul Amarchand Mangaldas & Co.
A partner at one of the Big Four tax consultants also said that the funds typically invest in multiple countries, so the structuring is based on the norms in their home country, rather than based on any one individual country in which the vehicle may invest.
The higher rates will apply to non-corporate FPIs and funds; about 50 per cent of FPIs are registered as non-corporates. A large number of FPIs are impacted by the increase in surcharge, as they are structured as trusts or association of persons (AoPs). Such structures had been adopted to avoid minimum alternate tax in some cases, according to one expert.
The Budget increased the surcharge on such non-corporate entities, including FPIs structured as AoPs. The surcharge for FPIs earning more than Rs 2 crore but less than Rs 5 crore has risen from 15 per cent to 25 per cent.
The surcharge on income above Rs 5 crore has increased from 15 per cent to 37 per cent.
This means that the effective taxation on long-term capital gains for FPIs has risen to a maximum of 14.25 per cent. Short-term capital gains tax at the highest level has risen to a maximum of 42.74 per cent.
On Monday, on the sidelines of an Associated Chambers of Commerce and Industry of India (Assocham) event in New Delhi, Central Board of Direct Taxes Chairman P C Mody had said that the matter was being examined and a clarification could be issued soon.
After the Reserve Bank of India board meeting in the Capital on Monday, Finance Minister Nirmala Sitharaman, however, said that there was no need for any clarification on the additional tax burden. When pressed for a clarification, Sitharaman said she would talk about the issue in Parliament.
In case the government wants to exempt FPIs from the surcharge, it will have to insert a carve-out in the Finance Bill and make changes to Part-II of the First Schedule before it is passed into law, said legal experts.