Foreign Portfolio Investment

One Time Tax Waiver for FPIs Conversion

The Union Budget 2019 presented by Honorable Finance Minister Mrs Nirmala Sitharaman has introduced various schemes and benefits for individuals such as 80EEA and 80 EEB. In a recent development, the Finance Minister has declined to remove or relax the applicability of new super-rich surcharge on Foreign Portfolio Investors (FPIs). The minister instead advised them to transform their holdings to the corporate structure when Tax Waiver for FPIs was demanded.

Additionally, for the taxpayers having income above INR 5 Crore, the surcharge has increased by 22 per cent. The long term Capital gains tax would increase to 14.25% from 12% on FPIs using a trust structure. Also, the short term capital gain tax would increase from 17.9% to 21.4%. Along with FPIs, many pension and retirements funds, educational endowment funds, etc., come in through these trust routes as these are the most tax-efficient structure. Also, corporate has to pay MAT at the rate of 18.5% and an additional dividend distribution tax at the rate of 20%.

Union Budget 2019 on One-Time Tax Waiver for FPIs

During the Union Budget 2019, Finance Minister Increase the surcharge on Foreign Portfolio Investors (FPIs) registered as trusts and associations. Indian Capital market faced a downward fall due to FPIs pulled about INR 3800 Crore in July 2019.

The Indian Equity market has also faced a vast amount of ups and downs over the last two months. With the Lok Sabha elections, FPIs infuse a heavy amount of approx INR 10000 Crore in Indian Capital Markets with favourable amendments with the return of BJP-led governments.

Union Budget 2019 was expected to make available for SOP based equity investors, but instead, it led down big time by the Finance Minister. Super rich and FPIs registered trust are now would be levied with higher surcharge. Such an increased tax is going to stay for a while, clarified by Nirmala Sitharaman.

Reactions of the FPI Community

With the increase in surcharge, FPIs consider newly elected government to be non-aligned to their welfare. Therefore, they had pulled funds from the Indian Capital Markets. With the relief as the Government has considered offering a one-time tax waiver for converting FPIs. FPIs registered as a trust or associations have been previously asked for conversion to corporate structure. Union Budget 2019 has not modified any taxation on FPI corporate.

Reviews of Tax Experts on FPIs Conversion

As per the Tax Experts, shift by FPIs using the trust structure would be easier if the Government had provided a one-time waiver from the capital gains tax. Many of these “Trust FPIs” had considerable unrealized gains but the tax cost of converting would dissuade them from doing so. Conversion cannot be possible practically in many jurisdictions from where such FPIs operate. More than 50 per cent of FPIs investing in India Equity, Debt, and Hybrid instruments use this trust route.

Effects on FPIs Trust Structure

• Higher rates of tax and slowdown in economic growth are the reasons behind the market going down.
  
• One of the ways to revive the undergoing market is to offer a one-time waiver on the capital gain tax for FPIs converting from trust or associations structure to corporate structure
• FPIs registered as a trust that is willing to convert them into corporate structure would be more feasible for them if the government provides relief and waive off the tax on capital gains.
  
• FPIs would have accumulated unrealized capital gains, and the expenses of conversion are very high.
  
• Around 20 per cent of FPIs work in a trust structure to invest in Indian Capital Market, and for citing generation of revenues in the form of tax collection, the finance minister is persuaded to hike their surcharges.
  
• In spite of the increase in surcharge, FPIs would continue to use trust structure, as they are the least taxed structure.
  
• Also Indian market tends to provide a good return, and trust would remain invested in Indian Capital Markets^[1].

Overview of Foreign Investors

As per FPIs, they consider that the government is segregating them based on structures. The government is now introducing the division within FPIs as a corporate and non-corporate. Earlier, they were categorized based on their risk profiles, i.e., least risky or high risk. Category III FPI owned and controlled by rich overseas investors can easily escape surcharges in case it’s a corporate entity. Mutual Fund or Pension Fund as they are structured as a trust are subject to higher tax rates.

Most of the trust funds continue to invest in India as a developing market like India provides a better return. They will pull back only in the case if deciding factors like corporate earnings or economic growth tend to turn worse in comparison to other nations. The FPI hopes that the government will waive off the tax paid on the conversion of trust-based FPIs to Corporate based FPIs as conversion includes higher tax rates.

Also Read: Revision of KYC norms for FPIs (Foreign Portfolio Investors) by SEBI

FAQs

• What are the impacts of the increase in surcharge?

Increase surcharge affects the FPIs dealing in the cash and derivatives market. Though the impact is higher on funds dealing with derivatives since all the income they earn is from Future and Option (F&O) trades. 

• What is the effective increase in tax rates?

FPIs reporting income over INR 5 Crore, the effective tax rate in derivatives goes up from 35.88% to 42.74%. If the income varies from INR 2 Crore to INR 5 Crore, the tax rate changed from 35.88% to 39%. Also, long term capital gain tax and short term capital gain tax changed with an increase of 2-3 per cent.

• What are the difficulties faced by FPIs to convert from Trust Structure to Corporate structure?

All the trust structured FPIs can’t convert them into corporate structure overnight. Due to certain restrictions, including ambiguity in the laws applicable in an operating nation. A single FPIs operates in multiple markets. However, they can’t restructure themselves as a corporate for merely the Indian market. 

• What are the effects of a tax surcharge on FPIs’ existence in India?

FPIs consider certain other factors too apart from tax while making an investment decision. Since the tax outgo has increased around 7 per cent, FPIs will revise their strategies in Indian Markets.