Tax rules yet to catch up to FPI regime

Rules still under old FII framework, notification required to bring them in line with FPI framework

The tax department is yet to issue a circular acknowledging the change in the regulations governing foreign investments into India.

While the Securities and Exchange Board of India has revamped its Foreign Institutional framework and notified the new framework under the Foreign Portfolio Investment route, the tax regulations are yet to be amended accordingly.

The Income Tax Act still refers to foreign institutions as FIIs, a category made redundant by the new FPI regime. The term FII is used in sections including 115 AD 194 LD and 196D. These section deal with issues such as tax deduction at source and capital gains tax.

“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,” says section 194LD.

Section 115 AD deals with capital gains tax.

Suresh V Swamy, Executive Director, Tax & Regulatory Services, at PricewaterhouseCoopers pointed out that the government has announced its intention to revamp the tax regime in accordance with the FPI framework. However, a notification is required to make it law.

“There is still need for some clarity from the point of view of taxation. The tax department will have to come out with a circular on migration from the FII to the FPI regime. That should, however, only be an operational issue since the intention seems to be to extend the FII benefits to FPI as well,” he said.