Finance minister Nirmala Sitharaman gave a waiver to FPIs and domestic investors in capital markets from the much-decried extra surcharge on the super-rich introduced in the recent Budget, but the move has created inequity among different classes of investors in terms of tax treatment of their income.
The removal of higher surcharge only benefits the FPIs as individuals, and domestic investors in the derivative market would continue to pay the additional impost.
The government on Saturday clarified that the derivatives (futures and options) are not treated as capital asset and the income arising from the transfer of the derivatives is treated as business income and liable for normal rate of tax for domestic investors.
However, in the case of foreign portfolio investors (FPIs), derivatives are treated as capital assets and the gains arising from the transfer of the same are treated as capital gains and subjected to a special rate of tax as per the provisions of the Income Tax Act.
“It has further widened the ‘gap’ between FPIs (lower rate) and individuals (higher rate) on derivative incomes and capital gains,” Ketan Dalal, partner, Katalyst Advisors said.