INSUBCONTINENT EXCLUSIVE:
budget proposal earlier this month to increase taxes on those with annual incomes of more than Rs 2 crore has rattled many foreign portfolio
investors (FPIs).The realisation that the new tax likely applies to the trusts through which many foreign investors put money into financial
markets sent stocks plunging last week
Now, their advisors say the investors are threatening to pull funds from India unless rules are amended so that they won't take a tax
hit.Here are some facts about the new tax rules.What are the new rules?In her budget, Finance Minister Nirmala Sitharaman proposed a tax
increase of 3 per cent for individuals with an annual income of between Rs 2 crore and Rs 5 crore, and 7 per cent for those earning more
than Rs 5 crore.The additional taxes apply to individuals, and groups of individuals who are an Association of Persons (AoP) or a body of
It takes the tax rate of someone earning Rs 2 crore up to 39 per cent, and for those earning more than Rs 5 crore the rate climbs to at
least 42.7 per cent.The surcharge increases the effective tax rate for most FPIs, set up as Trusts or AOPs, by almost 7 per cent, said
Rajesh Gandhi, partner, Deloitte India
"This is a steep increase in the tax rate and is perceived negatively by FPIs."Finance ministry officials said the government was unlikely
to withdraw the new rules for foreign investors as it would send the wrong signal to domestic investors, who would still be paying the
higher rates.There is still a possibility of some relief to the FPIs, when the Parliament gives final approval to the tax proposals later
this month.Who will be affected?There are about 9,400 foreign portfolio investors registered in India, largely from tax domiciles in the
United States, Mauritius, Ireland, Luxembourg, Singapore and the United Kingdom, who have invested nearly $50 billion in domestic equity,
debt and hybrid instrument markets.Tax experts say 30-40 per cent of them, registered as trusts, could be affected by the new rules.Why FPIs
register as trusts?FPIs register as private trusts mainly to navigate cumbersome disclosure rules and other compliance questions
If structured as a corporate fund, they may have to pay a minimum alternate tax of 18.5 per cent
In a trust structure, it is easy for investors to move capital in and out of trusts without paying high taxes, said an auditor at an
international tax consultancy.What is the likely increase in tax burden?The FPIs registered as trusts will be taxed as AoPs at the new rates
Though they will continue to be charged at the basic tax rate of 15 per cent and 10 per cent on short term and long term capital gains in
financial markets, the increase in the overall income tax rates mean their tax bills will go up substantially.For corporate funds, there is
no change in the tax burden on long term or short term capital gains.Amit Maheshwari, partner at Ashok Maheshwari - Associates, said many
countries don't tax foreign investors on capital gains from listed securities and there is no discrimination against trusts."From an
investment perspective India could become uncompetitive and expensive," he said.Will FPIs withdraw funds or change structure?Tax consultants
with overseas investors said the majority of investors are unlikely to withdraw their current investments particularly in the debt market
though they would continue to lobby for withdrawal of tax rules.Future investments in India could depend not only on tax rates but on
corporate earnings and the fundamentals of the Indian economy compared with other countries.Large number of FPIs may continue to use trusts
and pay higher tax, tax experts said, as their promoters find the structure convenient and always have the option to shift to other
markets.Could it impact sovereign bonds, foreign investment flows?The proposed rules could hit India's plans to raise $10-$15 billion
through overseas sovereign bonds and its attempts to attract more foreign investment in equities and debt, as many investors may feel
reluctant to invest due to uncertainty over tax rates in India.If the government doesn't announce tax exemptions to proposed overseas
sovereign bonds then there will be a negative impact, said Rishabh Shroff, partner - co-head, private client practice, Cyril Amarchand
Mangaldas.Government officials have suggested that they could tax interest payments on sovereign bonds under current rules
However, the details are still not public.Get Breaking news, live coverage, and Latest News from India and around the world on
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