An analysis by the finance ministry has found that the increased surcharge on the super-rich in the budget will affect only 40% of foreign portfolio investors (FPIs) and nobody else. They do business through the FPI trust structure. The ministry said that 60% of FPIs use corporate structure and will not have any impact on them.
A government source said that the Finance Ministry is finding out why these FPIs at the tax havens are using the trust structure and what they are benefiting from. In this case, any decision will be taken keeping in mind that giving separate exemption to FPI will not affect the tax structure of the country.
Finance Minister Nirmala Sitharaman has proposed to increase the income tax rate from 15 to 25% on taxable income from 2 to 5 crores and 37% to more than 5 crores of income in the budget. This will increase the actual tax rate on these two groups to 39% and 42.74% respectively. Nirmala said in a press conference on Monday, “I don’t think any clarification is needed in this matter yet. Do you think it is needed?” He said further, “I am not talking about the ban of the rule, but in this case I would like to give an answer in the parliament.”
This surcharge is levied on salaries, savings, interest, mutual funds and stock markets. The scope will include individuals, trusts, Hindu undivided families, companies and associations of persons (AOP). With the decision taken in the budget, the long-term capital gains tax on an annual income of more than Rs 5 crore will increase from 12% to 14.25%, while the short-term capital gains rate will increase from 17.9% to 21.4%.
There is no change in the surcharge rate for companies. Non-corporate entities are taxed like an individual in the country. The source mentioned above said, “FPIs can do business through the company route and opt for a lower tax, as 60% of FPIs are doing.”
Tax authorities say that many FPIs have chosen the trust route to save tax. His business structure has become opaque with his arrival in India from a tax haven such as the Cayman Islands or Luxembourg and doing business through the trust route. Adopting a trust route helps FPIs save tax in their country. The official said, “If we levy less surcharge on FPIs from Indian investors, it will be unfair to them. This will also adversely affect our tax structure. It cannot be allowed to them.”