Tax rules yet to catch up with new FPI regime

Still operate under old FII framework; notification needed to bring these 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.

This creates a situation where foreign investors as defined by the stock market regulator have no mention in the nation’s tax laws. While the Securities and Exchange Board of India (Sebi) has revamped its Foreign Institutional Investor (FII) framework and notified the new framework under the Foreign Portfolio Investment (FPI) route, the tax regulations are yet to be amended accordingly.

“Ideally, it should have been issued in a synchronised manner. As we speak, there is no such thing as an FII. But sometimes, the left hand does not know what the right hand is doing,” said one person with a law firm, which advises foreign investors.

TAXING TIME FOR NEW REGULATION

• Sebi changes foreign investor regulations, introduces FPI framework to replace FII rules
• Has already brought new rules into effect with a notification
• Tax rules still follow FII framework
• Government has written to CBDT, saying same tax rules to apply
• But a formal notification required for regulations to be in line with each other

“There is a need for a notification from the tax authorities on the issue so that all regulations are in line,” said a senior official with a custodian, which holds securities for foreign investors.

Sebi had said it had received a letter saying similar tax treatment would be meted to FPIs. “As regards FPI regulations, the communication from the Department of Economic Affairs to the CBDT (Central Board of Direct Taxes) and to Sebi, conveying the decision that all three categories of FPIs would be given similar tax treatment as available to FIIs presently, was noted,” it said in a statement after its board meeting on December 24, 2013.

However, experts say this requires a formal notification from the tax department as well. 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 sections 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.

Suresh V Swamy, executive director (tax and regulatory services), at PricewaterhouseCoopers pointed out the government has announced its intention to revamp the tax regime in accordance with the FPI framework.

However, a notification is required to give this the effect of law.

“There is still a 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.

Yogesh Chande, consultant at Economic Laws Practice, said a notification is required for the tax laws to be in line with the changes brought about by the Sebi decision.

“A notification should happen soon. In the interim period, it is expected that foreign investors will be guided by what Sebi has said,” he said.