Will tax on the rich hit foreign investment inflows?
Seems foreign to FPIs
The realisation that the new tax likely applies to the trusts through which many foreign investors put money into financial markets sent stocks plunging last week. Now, their advisors say the investors are threatening to pull funds from India unless rules are amended so that they won’t take a tax hit.
Here are some facts about the new tax rules.
What are the new rules?
The additional taxes apply to individuals, and groups of individuals who are an Association of Persons (AoP) or a body of individuals. It takes the tax rate of someone earning Rs 2 crore up to 39 per cent, and for those earning more than Rs 5 crore the rate climbs to at least 42.7 per cent.
The surcharge increases the effective tax rate for most FPIs, set up as Trusts or AOPs, by almost 7 per cent, said Rajesh Gandhi, partner, Deloitte India. “This is a steep increase in the tax rate and is perceived negatively by FPIs.”
Finance ministry officials said the government was unlikely to withdraw the new rules for foreign investors as it would send the wrong signal to domestic investors, who would still be paying the higher rates.
There is still a possibility of some relief to the FPIs, when the parliament gives final approval to the tax proposals later this month.
Who will be affected?
Tax experts say 30-40 per cent of them, registered as trusts, could be affected by the new rules.
Why FPIs register as trusts?
What is the likely increase in tax burden?
For corporate funds, there is no change in the tax burden on long-term or short-term capital gains.
Amit Maheshwari, partner at Ashok Maheshwari & Associates, said many countries don’t tax foreign investors on capital gains from listed securities and there is no discrimination against trusts.
“From an investment perspective India could become uncompetitive and expensive,” he said.
Will FPIs withdraw funds or change structure?
Future investments could depend not only on tax rates but on corporate earnings and the fundamentals of the economy compared with other countries.
Large number of FPIs may continue to use trusts and pay higher tax, tax experts said, as their promoters find the structure convenient and always have the option to shift to other markets.
Could it impact sovereign bonds, foreign investment flows?
If the government doesn’t announce tax exemptions to proposed overseas sovereign bonds then there will be a negative impact, said Rishabh Shroff, Partner & Co-Head, Private Client Practice, Cyril Amarchand Mangaldas.
Government officials have suggested that they could tax interest payments on sovereign bonds under current rules. However, the details are still not public.