Government working on solution for FPIs facing higher surcharge
Government is considering some relief for FPIs from the super-rich surcharge levied in the budget.
One of the options is a carve-out for FPIs that are organised as trusts but pool the savings of investors such as pension funds, retirement pools or those not so well-off. “Issue is being examined,” said a government official.
The idea is that the rich who route their savings via trusts that face this surcharge should not get any relief. Trusts are essentially associations of persons (AoP) that are covered under the levy. The crucial issue while designing such a carve-out will be to clearly identify the beneficiaries of the trusts making investments in India and how they would be structured. “We do not want that this relief should be abused,” said another official familiar with the idea.
Most trusts are pass-through vehicles where the beneficiary bears the tax. “So the tax (surcharge) is passed to the investors and they can claim credit,” said the official, adding there is a discussion on a carve-out.
“Problem here is that some trusts based in the US don’t have pass-through,” he said. For instance, in the US, if less than 50 per cent investors are overseas, then no pass-through is allowed in certain instances.
“If we do it, then how will we do it?” the official said, adding that a well-thought-out decision will have to be taken.
The revenue and economic affairs departments are examining the issue in detail, the second official said.
The government has already sought details of FPIs from the Securities and Exchange Board of India (Sebi). ET reported on July 10 that a finance ministry analysis shows about 40 per cent of FPIs investing in India are structured as trusts and would face the higher surcharge. The majority 60 per cent are structured as corporates and do not face the levy. ET had reported last week that many FPIs are thinking of converting themselves into corporate from trusts, but experts said the process could be costly.
Finance minister Nirmala Sitharaman ruled out an immediate clarification on the proposed increase in the income-tax surcharge on the super-rich as it applies to FPIs. She said she would respond in Parliament, where the debate on the Finance Bill is set to begin next week.
“The trust form of organisation is more attractive for fund sponsors because it offers significant governance and operational flexibility and reduced compliance burden in the home country,” said Rajesh Gandhi of Deloitte, explaining its advantages.