CBDT says FPIs can convert to corporates, rules out surcharge relaxation

CBDT Chairman P C Mody on Wednesday ruled out giving relaxation to FPIs from the ambit of increased surcharge, saying that foreign investors have an option to convert into a corporate entity to avail lower rates available to such category.

He said the consideration for increasing surcharge on people earning above Rs 2 crore was that people who have the ability to pay should shell out more for nation building.

"The base rate was not changed. It was the surcharge which was changed. As a collateral, it affected the FPIs and AIFs (Alternative Investment Funds). But, there again the option is to go to the corporate structure. I don't see there is any kind of differential treatment," Mody said at a CII event here.

Finance Minister Nirmala Sitharaman in her maiden Budget 2019-20 raised surcharge on income tax paid by super-rich individuals.

However, some 40 per cent of the foreign portfolio investors (FPIs) automatically get covered by the higher tax rate as they have been investing as a non-corporate entity such as trust or association of persons, which in the income tax law are classified as an individual for the purpose of taxation.

Sitharaman in the Budget proposed to increase the surcharge, charged on top of the applicable income tax rate, from 15 per cent to 25 per cent for those with taxable incomes of between Rs 2 crore and Rs 5 crore, and to 37 per cent for those earning more than Rs 5 crore. This takes the effective tax rate for those two groups to 39 per cent and 42.74 per cent, respectively.

Mody said the increase in surcharge was to provide benefit to the taxpayers who are in the lower end of the income tax slab.

"One of the options was to go in for increase (in tax rates) as such but that was not considered to be favourable," he said.

Experts said surcharge on capital gain on companies is lesser and, therefore, these FPIs could choose to come as a company, if they wanted to pay a lesser surcharge. About 60 per cent of FPIs or FIIs have come by adopting the company route and paying a lesser surcharge.

However, they can not opt for both, the benefits as an individual person and benefits as a company.

Even though option to invest as a company is available, many FPIs have chosen trust route to enjoy less tax or zero tax through tax havens such as the Cayman Islands and Luxembourg, where numerous global funds do create corporate entities to set up a separate structure for each class of fund to be invested. Through trust structure, they enjoy tax avoidance in their countries.

Finance ministry sources said giving FPIs lower surcharge rate as compared to our domestic investors would be discriminatory to the domestic investors and would not be a level-playing field as far as the tax structure is concerned.