Tax clarity awaited in new FPI regime

Participants seek uniform treatment in regime covering erstwhile FII and QFI routes

Market participants are looking to the tax authorities for further clarity after the Securities and Exchange Board of India (Sebi) issued new norms for foreign investors last week.

On Saturday, the stock market regulator consolidated the rules for foreign entities investing in India. The new rules aim to bring all foreign investors under a common framework called the Sebi (Foreign Portfolio Investors) Regulations, 2013.

However, the existing tax regulations are still under the foreign institutional investor (or FII) framework and are yet to migrate to the new FPI regime. Participants are still awaiting a notification to bring tax laws in line with the new Sebi framework, say experts.  

TAXING ISSUE

• Sebi moves foreign investment rules from FII to FPI regime
• Tax regulations still under FII framework
• Participants to await notification for clarity
• Currently, FIIs have different tax treatment from QFIs
• Participants hope for uniform treatment under new FPI regime

Suresh V Swamy, executive director, tax & regulatory services, at PricewaterhouseCoopers, said a rewrite of existing tax policy was required.  “Tax regulations will need to be tweaked to reflect the change in regime from FII to FPI. Till that comes up, there might be some confusion in the market on the application of the new rules. While logically it should follow as a function of the change in Sebi regulations, investors might want to wait till this becomes official,” he said.

Tejesh Chitlangi, partner at IC Legal, said the new regime would require some coordination between the different government agencies.

“Smooth implementation of the FPI regime would be the key, which again will be dependent upon the speed with which multiple regulators put their acts together for amendments and repeals of the existing laws,” he said.

The Income Tax Act has a number of references to FIIs, in sections such as 196D, 194LD and 115 AD. “Any person who is responsible for paying to a person being a Foreign Institutional Investor…shall, at the time of credit of such income to the account of the payee…deduct income tax thereon at the rate of five per cent,” according to 194LD.

Similarly section 115 AD deals with capital gains tax.

Interestingly, Sebi has accorded a one-year window for migration of Qualified Foreign Investors to the new FPI regime. The QFI route was begun largely as a window for individuals investors from foreign countries who wished to invest in India.

An overhaul of the tax norms should look to bring entities coming through the QFI and FII route under the same umbrella, according to Naresh Makhijani, a chartered accountant.

“Since under the newly approved FPI regime, QFIs and FIIs would now be combined into a single route, it is recommended that the FII framework for tax…be adopted for all FPIs (including QFIs).  This would imply that any investor who is categorised as an FPI as per Sebi would be accorded a similar tax treatment as currently accorded to an FII,” he said.