Higher surcharge to impact 40% FPIs: Finmin math
FinMin is trying to find out why FPIs are using the trust structure and how this benefits them.
The finance ministry is trying to ascertain why these FPIs, mostly coming in through tax havens, are using the trust structure and how this benefits them, a government source said. Any decision on this will need to consider that special dispensation for FPIs will distort the tax structure, the person said.
Finance minister Nirmala Sitharaman has proposed to increase the surcharge levied on top of the applicable income tax rate from 15% to 25% for those with taxable incomes between Rs 2 crore and Rs 5 crore, and to 37% for those earning more than Rs 5 crore. This takes the effective tax rate for those two groups to 39% and 42.74%, respectively. “I don’t think clarification at the moment is all that required.
Let’s see as it goes. You think it is required? Will take it as it comes,” she said at a press conference on Monday. “I don’t want to sound like a stickler for rules, but this is an answer that I’d rather give in Parliament.” The surcharge is proposed to be raised for all incomes, be it from salary, savings, interest, mutual funds and gains made in stock markets.
It will apply to individuals, trusts, Hindu Undivided Families, firms and associations of persons (AoPs). For an individual earning a total income of more than Rs 5 crore, the long-term capital gains tax rate would go up to 14.25% from 12%, while the short-term capital gains rate would increase to 21.4% from 17.9%. For companies, no change is proposed in the surcharge rate. Noncorporate entities get taxed as individuals in India.
“FPIs can choose the company route and pay less tax like the 60% have done,” said the person cited above. One view among tax authorities is that many FPIs have chosen the trust route to lower their tax outgo besides preferring the opacity this offers when they come into India via tax jurisdictions such as the Cayman Islands or Luxembourg. A trust structure, a source said, aids in avoidance or lowering of tax in their home countries.
“Giving them (FPIs) further lower surcharge rate as compared to our domestic investors would be discriminatory to the domestic investors and would not be a level playing field as far as the tax structure is concerned. This would amount to distorting our tax structure and allow them to choose to eat their cake and have it too,” he said.
The proposal to extend the tax surcharge to foreign entities was in line with the increase in income tax for rich Indians whose total income is more than Rs 5 crore a year, officials said. “Therefore, the FPIs’ demand which is being projected through various sources in media is unjustified,” one of them said. Also, domestic investors should not be discriminated against and put at a disadvantage, the person added. Experts said foreign investors prefer to invest in India through a trust structure due to various business and regulatory considerations.
“The proposed changes in the budget to increase surcharge for super-rich has caught such foreign investors off guard, which had not been built up in their business and investment plans, as their total cost of Indian investments goes up due to increase in surcharge,” said Vikas Vasal, national leader at Grant Thornton.
Any sudden change does impact investor sentiment in the short run, Vasal added.