Sebi likely to examine surcharge impact on foreign portfolio investors

The Securities and Exchange Board of India (Sebi) may examine the overall impact of the increase in surcharge on foreign portfolio investors (FPIs).

The market regulator may do an analysis to find out the number of non-corporate FPIs, the quantum of investments by such investors, and the possible adverse impact on the markets if such investors offload shares on a sustained basis, said sources in the know. 

FPIs are on tenterhooks ever since the implication of the surcharge came to light. Several industry bodies that represent portfolio investors such as Asia Securities Industry & Financial Markets Association (Asifma) and Asset Managers Roundtable of India are lobbying the Ministry of Finance and other sections of the government for an exemption on the surcharge. 

According to experts, there is no basis to tax FPIs organised in different legal forms in their home country on a differential basis. This is especially so, considering several foreign mutual funds and pension funds are organised as non-corporate vehicles overseas as well. 

“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.

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