Qualified foreign investors to get FII-like tax treatment

Written by Sunny Verma | New Delhi | Updated: Jun 7 2012, 08:30am hrs
The gains made by qualified foreign investors's (QFIs) would be treated at par with the tax treatment available to the foreign institutional investors (FIIs), a senior official said. The Central Board of Direct Taxes (CBDT) is expected to clarify this shortly in order to eliminate a key grey area in the regulation of this new class of investors.

The CBDT will come out with a circular shortly. But the rules are very clear that for long-term capital gains, the QFI does not pay any tax in India, while for short-term capital gains they need to pay 15% tax, the official said. Qualified depository participants will be required to deduct tax at source on the gains made by their QFI clients.

Separately, the Securities and Exchange Board of India (Sebi) will soon come out with norms granting some flexibilities to QFIs in choosing custodians and brokers to route their investments.

The government last week permitted QFIs from member nations of the Gulf Cooperation Council and the European Commission as well to invest in Indian equities, debt mutual funds and corporate bonds.

The finance ministry allowed QFIs to invest up to a separate ceiling of $1 billion in corporate bonds and mutual fund debt schemes, on top of the $20-billion cap for investments in general corporate bonds. QFIs comprise foreign individuals, foreign pension funds and foreign trusts, and can invest directly in stocks and equity mutual funds. These do not include non-resident Indians.

With foreign investment into equities on the decline, the government is betting on the new class of investors to inject some stability into the market. Officials said the scheme, which has also been opened up now for corporate bonds, will pick up in 12-18 months. Sebi has so far given permission to 27 QDPs to start selling products to QFIs.

A QFI can hold a maximum of 5% of the paid-up equity capital in a single security.