No clarification over FPI surcharge needed at present, says FM Sitharaman

Confusion continued on Monday over the government’s stand on the applicability of increased surcharge on foreign portfolio investors (FPIs), a move in the Budget that is likely to impact long-term money coming through mutual funds and pension funds. 

While Finance Minister Nirmala Sitharaman said after the RBI board meeting in the capital that there was no need for any clarification on the additional tax burden, CBDT Chairman P C Mody said on the sidelines of an Assocham event in Delhi that the matter was being examined and a clarification could be issued soon. Several industry bodies, which represent portfolio investors such as Asset Managers Roundtable of India, are lobbying with the finance ministry and other sections of the government for an exemption on surcharge. 

In case the government wants to exempt FPIs from the surcharge, it will have to insert a carve-out in the Finance Bill and make changes to Part-II of the First Schedule before it is passed into law, said legal experts. The tax on funds that earn an income of more than Rs 5 crore in a year and structured as association of persons (AOPs) or trusts will increase to 42.7 per cent, from the current 35.8 per cent. For funds earning an income between Rs 2 crore and Rs 5 crore, the tax rate will go up to 39 per cent, from 35.8 per cent. 

The higher rates will apply to non-corporate FPIs and funds; about 50 per cent of FPIs are registered as non-corporates. A large number of FPIs are impacted by the increase in surcharge, as they are structured as trusts or AOPs. Such structures have been adopted to avoid minimum alternate tax. 

The Budget has proposed to raise the surcharge to 25 per cent, from 15 per cent, on taxable income between Rs 2 crore and Rs 5 crore, and to 37 per cent, from 15 per cent, for income above Rs 5 crore.

There will be an increase in tax to be paid by FPIs on long-term capital gains and short–term capital gains as well. For the former, effective rates will increase to 14.25 per cent, from 11.96 per cent, and for the latter, to 21.37 per cent, from 17.94 per cent.

“Admittedly, there is a difference in surcharge between corporate and non-corporate FPIs even today. However, because the percentages of surcharge were not too high, this was not a cause for concern. With surcharge rates as high as 25 per cent and 37 per cent, this is now beginning to hurt,” said Tejas Desai, partner, tax & regulatory services, EY.  

According to Desai, there is no apparent basis to tax FPIs organised in different legal forms in their home country on a differential basis.  

“In fact, a lot of the foreign MFs and pension funds, which ultimately represent the interests of small investors and invest long-term capital in the country, are organised as non-corporate vehicles and will be impacted by the higher surcharge. If that is not the intention, as it seems, the government should clarify this by proposing changes to Part-II of the First Schedule to the Finance Bill before it is passed into law,” added Desai.

Besides paying tax on capital gains, FPIs currently have to pay other taxes, including securities transaction tax and stamp duty.