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 AOPs. Such structures have been adopted to avoid minimum alternate tax.
The Budget has proposed to raise the surcharge to 25 per cent, from 15 per cent, on taxable income between Rs 2 crore and Rs 5 crore, and to 37 per cent, from 15 per cent, for income above Rs 5 crore.
There will be an increase in tax to be paid by FPIs on long-term capital gains and short–term capital gains as well. For the former, effective rates will increase to 14.25 per cent, from 11.96 per cent, and for the latter, to 21.37 per cent, from 17.94 per cent.
“Admittedly, there is a difference in surcharge between corporate and non-corporate FPIs even today. However, because the percentages of surcharge were not too high, this was not a cause for concern. With surcharge rates as high as 25 per cent and 37 per cent, this is now beginning to hurt,” said Tejas Desai, partner, tax & regulatory services, EY.
According to Desai, there is no apparent basis to tax FPIs organised in different legal forms in their home country on a differential basis.
“In fact, a lot of the foreign MFs and pension funds, which ultimately represent the interests of small investors and invest long-term capital in the country, are organised as non-corporate vehicles and will be impacted by the higher surcharge. If that is not the intention, as it seems, the government should clarify this by proposing changes to Part-II of the First Schedule to the Finance Bill before it is passed into law,” added Desai.
Besides paying tax on capital gains, FPIs currently have to pay other taxes, including securities transaction tax and stamp duty.