Foreign portfolio investors to get tax benefits similar to FIIs

Introduction

Foreign Portfolio Investors (FPIs) will get all the tax benefits available to foreign institutional investors (FIIs). They will also not have to fulfil the Know Your Customer norms separately for opening bank accounts, the Finance Ministry said.

On October 5, the Securities and Exchange Board of India had announced a new category of investors, called the FPI, by merging the existing FIIs, sub-accounts and qualified foreign investors. The decision was taken on the basis of recommendations by the K.M. Chandrasekhar Committee, which suggested that the Government could consider bringing more clarity and certainty while prescribing tax provisions for FPIs.

“Taxation benefits available to FIIs would be transferred to FPIs,” a senior Finance Ministry official told Business Line, outlining the Ministry’s effort to bring clarity in the new tax regime.

Withholding tax

Earlier on May 21, the Finance Ministry had said that foreign investors would have to pay only 5 per cent withholding tax (against 20 per cent earlier) on interest earned through investment made in rupee-denominated long-term infrastructure bonds issued by Indian companies and Government securities.

Withholding tax is similar to tax deducted at source, but is meant for non-resident investors.

Foreign investors are also not required to have permanent account numbers to claim lower withholding tax.

Similarly, foreigners investing in the equity market get tax benefits on long-term (investments of more than a year) profit earned, as prescribed by the Double Taxation Avoidance Agreements with various countries.

For example, like India, Mauritius, too, prescribes zero duty on profit earned on selling equities after one year. FIIs using the Mauritius route will not have to pay any tax on long-term profits here.

Vasudha Sundararaman, MD and CEO of SBISG Custodial Services, feel that the Revenue Department needs to give a go-ahead to legislative changes proposed by the Chandrasekhar Committee to give FPIs at par treatment with FIIs. She said, for the successful execution of the regime, it would be vital that KYC requirements of SEBI and the RBI to be on the same page.

According to the Finance Ministry official, RBI’s KYC norms were for opening bank accounts and were, therefore, simpler. “If the two are aligned, it would cause inconvenience to millions of new bank account holders, but not vice versa. In other words, KYC done by SEBI should be adequate for opening bank accounts,” he added.

On the overall structure of FPIs, Sundararaman said, the guidelines by SEBI were clear and had covered all the aspects of FII entry into India. “Approval in flat 10 days is a remarkable step for the success of the FPI regime,” she said. The SBI SG was a member of the committee.

Source

India Brand Equity Foundation , October 08, 2013