Government’s decision of imposing a surcharge on those having taxable income of over Rs 2 crore has come at a cost of FPI withdrawal of more than Rs 14,000 crore from the equity so far in July.
Government’s decision of imposing a surcharge on those having taxable income of over Rs 2 crore has come at a cost of FPI withdrawal of more than Rs 14,000 crore from the equity so far in July. In an interview to ‘The Indian Express’, Finance Minister Nirmala Sitharaman underlined that foreign portfolio investors, who were registered as trusts, had an impact of the new surcharge introduced in the budget. To moderate the impact, Nirmala Sitharaman had suggested the FPI trusts to convert into companies, but it faced a strong denial from those trusts. According to the interview, the trusts doubt the conversion to be tax-neutral and call it tedious, demanding a lot of effort.
Nirmala Sitharaman further clarified that the government did not intend to hit foreign investors or the investments coming via foreign portfolio investments. However, despite the denial of the trusts on their conversion into companies, the FM said that the conversion is still possible.
In the new budget, surcharges were drastically raised for those having taxable income between Rs 2 crore and 5 crore, and those with taxable income over Rs 5 crore. The surcharge of 25 per cent has been imposed on those having taxable income between Rs 2 crore and 5 crore. Surcharge in this segment was 15 per cent previously. Similarly, the surcharge of 39 per cent has been levied on those with taxable income over Rs 5 crore, which was 35.88 per cent previously.
Foreign portfolio investors have pulled out Rs 14,383 crore from the Indian equity market so far in July, according to NSDL. The impact of the raised surcharge is significant because more than a fifth of the foreign portfolio investors investing in Indian equity, debt and hybrid instruments use the trust route for investments.
Foreign portfolio investors invest in different countries where the tax structures are different too. Hence, conversion of the entity to make it suitable and profitable to invest in India, also bring new challenges for them to invest in other economies.