Indirect transfers: Category-II FPIs knock on govt doors for relaxation

At present, all FPIs under category-II are subject to transfer provisions which impacts close to 20 per cent of FPIs

A section of lobby groups has asked the central government to reconsider its stance on indirect transfer provisions on foreign portfolio investors (FPIs).
 
At present, all FPIs under category-II are subject to such transfer provisions, impacting close to 20 per cent of FPIs including a sizeable number of funds from Mauritius and the Cayman Islands.
 
Their request is the exemption of all sub-categories other than ‘corporate’ or ‘family office’ from these provisions.  To facilitate this, the grandfathering provisions should extend to FPIs registered as category-I or category-II under the 2014 regulations, irrespective of whether the investment was made prior to September 23, 2019 or not — the date when the new FPI regulations came into force.
 
FPIs and their tax advisors have highlighted a dichotomy with regard to taxation, pertaining to the withdrawal of DDT. Section 196D of the IT Act provides for withholding tax at 20 per cent without providing for any treaty benefits. Section 195, however, states that any person responsible for making payment to non-residents may withhold taxes at treaty rates.

Tax advisors believe the higher withholding could hamper cash flows for FPIs, besides leading to long waits for tax refunds. For this reason, the government should allow treaty benefits on such withholding and allow for a uniform rate of withholding.
 
The 2019 provision of higher surcharge rates, for those other than corporates and partnership firms for other income, will impact the tax paid on dividend income of FPIs that are not structured as such.
 
The effective tax rate on dividend income for FPIs set up as corporates would come to 21.84 per cent, while that for FPIs set up as partnership firms would come to 23.29 per cent. FPIs set up as trusts will have to shell out tax at the rate of 28.49 per cent on dividend income. Earlier, the impact of DDT was uniformly borne by all types of investors, albeit indirectly.
 
Lobby groups want the surcharge not to be applicable on dividend income accrued to FPIs. If this is not acceptable, a uniform rate of surcharge may be applied to all classes of FPIs at 5 per cent or 15 per cent, irrespective of their structure, they seek.