With no more ‘business income’, FIIs may be hit
The rate of capital gains tax would be decided on later, and on the basis of capital gains, the rate for securities transaction tax too would be decided.
Foreign institutional investors may no longer be able to claim the fruits of their investments in Indian equities under business income, if the recommendations of the discussion paper which is a prelude to the direct tax code is adopted. They would instead be treated uniformly under capital gains tax.The rate of capital gains tax would be decided on later, and on the basis of capital gains, the rate for securities transaction tax too would be decided. The move to eliminate ‘business income’ is expected to cut down the amount of litigation associated with taxation of foreign institutions in Indian markets, many of whom club their profits as business income in a bid to save on taxes.It could have a negative impact on fund flows into India from institutions which are used to lesser taxes, suggested experts.Business income is primarily income that arises out of the conduct of everyday affairs of a company. Capital gains are those that arise out of the sale of assets such as land, gold or in the case of FIIs-equity holdings.“FIIs may be significantly impacted as whatever gains they make will be capital gains. In terms of long-term capital gains, instead of paying nil they will now the tax auto have to pay some tax. And as opposed to the 15% short term capital gains they will have to pay more,” said N C Hegde, tax partner, M&A tax leader at Deloitte.“Such a move is contrary to the position as determined by the Authority of Advance Rulings (AAR) which has been characterising such income as business income,” said Pranay Bhatia, Associate Partner at Economic Laws Practice (ELP).The Authority of Advance Rulings provides a decision on the manner in which an FII’s income would be taxed under Indian laws.Mauritius-based institutions may be safer on account of the fact that they would continue to be taxed under the Mauritius laws, which exempts them from capital gains tax. India has a taxation treaty with Mauritius which is used to save tax by foreign institutions.Nevertheless, the General Anti Avoidance Rule(GAAR) is also a part of the discussion paper on the direct tax code.It gives the tax authorities sweeping powers to study any arrangement and examine whether they can authentically be said to validate tax exemption.The discussion paper suggests that FIIs need not pay TDS but instead pay advance tax which would need them to anticipate possible incomes during the year.This, too, could pose difficulties as estimation of income from the capital markets is not an exact science, suggested one expert.The new capital gains regime is also likely to prove a dampener for private equity funds, promoters and other market players as they would need to shell out a higher tax bill on the disposal of their investments.