The devil that is not in the details

The Securities and Exchange Board of India (Sebi) has put the detailed report by K M Chandrasekar committee on foreign investment on its website. At the outset, it seems difficult to attempt a comment on what is in the report that runs into over 60 pages, at one go. Let us then do the easier task of finding what is not in the report. One of the tricky issues for all foreign investors, whether in India or anywhere in the world, is the taxation framework. Everyone wants to be clear what they will take home.

The Foreign Institutional Investors (FIIs) route had developed over the past two decades and the taxation principles for this class of investors were pretty much established. The Income Tax Act has specific clauses referring to FIIs at several places.

On the other hand, the Qualified Foreign Investor (QFI) route, opened a couple of years ago, did not have any specific provision in the law. The taxation was to be decided on a case-to-case basis. Now, the Chandrasekar panel has recommended that both these classes be merged into the new category of Foreign Portfolio Investors (FPI).

What will be the applicable taxation framework for FPIs? Will this be the same as that for the FIIs or different? If different, what happens to those which had come in under the FII framework. Will these investors be asked to follow the rules applicable to the new class that is proposed to be created?

Chapter 6.2 of the panel report consisted of just two lines, which said, "The Committee discussed the present taxation framework for various portfolio investors. It is recommended that GoI consider bringing more clarity and certainty while prescribing the taxation provisions for FPIs."

People involved in the committee proceedings said there was an elaborate list of recommendations prepared by the committee. This list pointed out every single amendment required to be made in the tax laws. The chapter relating to taxation was very elaborate and much longer in the original draft submitted to Sebi. However, later, it was decided that it was not up to a Sebi-appointed committee or even Sebi to comment on or recommend changes to the tax laws. The revenue department, which is a separate department with a mind of its own under the ministry of finance, had in the past objected to some suggestions made by Sebi.

Hence, the final report had just a passing mention, as above, instead of section-wise recommendations originally drafted. It simply says, "Necessary amendments should be made to Income Tax Act, 1961". While Sebi might have played it safe, the detailed report is now like a handset without a SIM card.

Consultants say no investor worth his dollar would be ready to move to a new framework unless there is clarity and certainty in the tax provisions.

The tricky details in the tax laws such as the PAN requirement, role of depositary participants in collecting tax, etc, were the devils that killed the QFI route even before it came to life. Such uncertainty should not be allowed to play on the minds of investors for long. Both the ministry and the regulator should move as soon as possible to slay the devil before it slays FPI.