The wait for foreign fund managers' with permanent establishment in India to get tax relief on their global income may get longer as the Income Tax department will make the necessary amendments only in the next Budget. The proposal to treat their business income as capital gains was part of capital market reforms announced by Finance Minister Arun Jaitley in Budget 2014-15.
"Changes in the Income Tax Act, which will treat the fund managers' income as capital gains instead of business income, is now likely to be a part of the next budget," said a finance ministry official who did not wish to be identified.
So far, any such income has been treated as business income, which can attract tax of up to 30%. Short term capital gains, for equity and mutual fund assets held for less than one year attracts a 20% tax, while long term capital gains for the same attracts no tax.
"The aim in July was to notify the changes in the Income Tax Act after the budget. However, despite repeated requests by the capital markets division, the revenue department has not taken any action on this. Now it has been decided that the changes will be part of the next finance bill, and the amendment will be notified after that," said a finance ministry official.
In his maiden budget speech, Jaitley said that there was a need to, "Clarify the tax treatment on income of foreign fund whose fund managers are located in India toresolve a long-standing problem."
The Finance Minister had said that one of their concerns facing foreign portfolio investors (FPI) in India was uncertainty in taxation on account of characterisation of their income. "Moreover, the fund managers of these foreign investors remain outside India under the apprehension that their presence in India may have adverse tax consequences."
"With a view to put an end to this uncertainty and to encourage these fund managers to shift to India, I propose to provide that income arising to foreign portfolio investors from transaction in securities will be treated as capital gains,"Jaitley had said.
With this change in tax treatment of a foreign equity fund's income the policymakers want to make it easier for foreign equity funds set up a permanent establishment inIndia.