Foreign retail investors? equity portfolios to attract capital gains tax

The domestic law regarding capital gains tax will prevail in case of foreign retail investors putting in their money in Indian equity schemes unless India has a double taxation avoidance agreement with the country the investor belongs to, revenue secretary Sunil Mitra told FE.

The finance minister Pranab Mukherjee in his Budget speech for this year had announced that in order to liberalise the portfolio investment route, it has been decided to permit Sebi-registered mutual funds to accept subscriptions from foreign investors who meet know your costumers (KYC) requirements for equity schemes. This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market.

Till now, only foreign institutional investors (FIIs) and non-resident Indians (NRIs) registered with market regulator Sebi could buy units of India-managed funds.

Under the current taxation rules, capital gains arising on the transfer of units of an ?equity oriented? mutual fund, held for a period of 12 months, is exempt from tax, if the Securities Transaction Tax (STT) is paid on this transaction. In case the unit is held for less than 12 months, the short-term capital gains is levied at a base rate of 15% (increased by surcharge as applicable, education cess of 2% and secondary and higher education cess of 1%).

India has a double tax avoidance agreements with 75 countries.

Hiresh Wadhwani, tax expert from Ernst & Young, said, “the capital gains tax will have a marginal impact on the foreign investors as only short-term capital gain is taxable. Long-term capital gain is exempt from tax. So, this taxation is targeted at a small number of investors”.

Though Indian MFs are eager to open doors to foreign investors, whether they will come in big numbers will depend on factors like KYC norms, investment limits and so on. Top officials from Sebi are discussing the finer details of the proposal with various stakeholders from industry and other regulators. The norms are likely to be finalised by May end.