Taxation norms hold key for FPI success: Experts

Written by Ashish Rukhaiyar | Mumbai | Updated: Jun 27 2013, 06:08am hrs
The Securities and Exchange Board of India (Sebi) may have given the go ahead to club different categories of overseas investors into a single category, but the real aim of simplifying investment norms will be achieved only after tax procedures are rationalised, say industry and market players.

Experts in taxation say that the ideal approach for the government would be to extend the tax norms currently applicable for foreign institutional investors (FIIs) and sub-accounts to the proposed new category foreign portfolio investors (FPIs). FPIs would primarily comprise of FIIs and sub-accounts as there are only a handful of registered qualified financial investors (QFIs) in the country, so continuing with the current norms would be advisable, they say.

Section 115AD of the Income Tax Act deals with taxation of both FIIs and sub-accounts. To make the proposed FPI regime investor friendly, the policy makers should look at extending the FII tax regime to FPIs, as the regime is simple to understand and has stood the test of time, says Suresh Swamy, executive director - financial services, PwC.

According to Section 115 AD of the Income Tax Act, FIIs and sub-accounts do not have to pay any long-term capital gains tax if the shares are held for more than a year. The short-term capital gains are taxed at 15% while interest earned on bonds are taxed at 20%. The interest on government bonds and certain prescribed corporate debt, however, attract tax of only 5% instead of 20%.

The policy-makers should understand that there are two main aspects of the FPI structure. One is procedural and the other is taxation and the latter holds the key to the acceptance of the proposed framework, says a partner of a law firm that deals with FII entities. It does not matter whether I am told to register with Sebi or some other entity but the tax norms make a lot of difference. QFIs included individuals, groups and associations and the ambiguity on tax made it a non-starter, he said wishing not to be named.

Incidentally, the QFI structure proposed last year is said to have failed due to ambiguity related to taxation. Experts say the government should avoid a similar debacle with the newly created investor category by providing clarity on tax treatment as quickly as possible.

The concept of a qualified foreign investor (QFI) has failed to generate enough traction, as there are lots of grey areas related to their taxation in addition to the local custodians being treated as representative assessees for the QFIs tax liability. It is therefore important that the tax issues are clearly addressed so that the proposed framework for FPI can take off, explains Swamy.

The Securities and Exchange Board of India (Sebi), on Tuesday, accepted the recommendations of the KM Chandrasekhar committee on rationalisation of investment routes for overseas investors by merging FIIs, sub-accounts and QFIs into a new investor class to be termed as FPIs.