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Domestic investors can now seek advance tax ruling

Friday, 11 July 2014 - 7:45am IST | Agency: DNA
(Tax anomaly between FIIs and DIs remains)

Even though the finance minister recognised the need to bring about uniformity in taxation through the centralised goods and services taxes (GST) and acknowledges the issue of black money, he fell short of announcing a roadmap. However, the notable fact is that the budget presented on Thursday did make an attempt to lay the roadmap to bring about some uniformity in taxation as far as foreign institutional investors (FIIs) and retail investors of equities were concerned, but left issues unaddressed for domestic institutions doing the same business of share trading.

FIIs, registered with the markets regulator Securities and Exchange Board of India, can now classify their incomes from trading under the capital gains tax and not business income and can apply the advance ruling should there be a dispute with tax sleuths later. The Authority for Advance Rulings would interpret the laws that would be binding and leave no room for tax authorities claiming higher taxes subsequently.

In a way, the FM has clipped the wings of tax sleuths. However, domestic institutional investors would continue to be dogged by existing tax laws and risks the chances of being taxed on income as business income where the tax rate is 33% and not under capital gains, as is the case for FIIs, where the tax rate is 15%.

FIIs ended up being a happy lot as their income from equity trading would be treated as short term capital gain and taxed 15% if there is no Cayman Islands or Mauritius treaty protection and nil if protected by the agreement.

However, the tax sleuths interpret existing laws and grope even retail investors trading in shares under the ambit of the 33% taxation subjected to any business income. Interpretation of tax laws hitherto were totally left to tax sleuths and hence binding on the assessee.

"Making the advance ruling open to domestic investors is good because there is certainty on taxation across all investors," said UR Bhat, managing director at Dalton Capital Advisors (India).

The move has been timely and had clipped the wings of tax sleuths who interpret laws for targeting high tax collections that have led to long drawn litigations and delayed revenues (taxes) for the government.

One estimate says the tax litigations amount is close to Rs 4 lakh crore.

"This budget clarifies what tax authorities have been disputing and FIIs were apprehensive about entering India. Now there is certainty on the tax position but there may still be disparity between Indian institutional investors and FIIs," said Rohit Jain, partner at Economic Laws Practices.

The move is therefore seen positive and many more foreign investors were likely to enter India and capitalise on the growth story.

However, the anomaly continues when it comes to domestic institutions doing the same business, he added.

"There has been a breach of trust between the government and domestic businesses. While FIIs can do the same business with lesser taxes or nil taxation, we continue to be taxed, the government's focus is more on attracting foreign investors," said a senior executive at a domestic brokerage.




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