Bringing in huge relief for foreign portfolio investors, finance minister Arun Jaitley on Thursday said that income arising out of transactions in securities market will be treated as capital gains and not business income for taxation purpose. This essentially puts an end to the discretion that tax officers enjoyed while taxing FII income in India.
The amendments, effective from April 1, 2015, will put an end to the uncertainty in tax treatment of FIIs, who pumped in an aggregate of Rs 79,709 crore in the Indian securities markets in 2013-14. The move will also help the FIIs in taking advantage of the double taxation avoidance agreement India has with low-tax jurisdictions like Mauritius, which exempt capital gains from taxation. “Fund managers may now be able to relocate to India without creating additional tax risk for the funds. This may also lead to increase in economic activity in India and thereby aid revenue collection,” Suresh Swamy, executive director, PwC India said.
Presenting the Budget in Parliament, Jaitley said the government will work towards improving the tax-to-GDP ratio and providing a “stable and predictable taxation regime”, which will be investor-friendly and spur growth. The government has set a direct tax collection target of Rs 7,58,421 crore for 2014-15.
While the retrospective amendments on indirect transfers introduced in 2012 have not been rolled back, the finance minister clarified, “Henceforth, all fresh cases arising out of the retrospective amendments… coming to the notice of the assessing officers will be scrutinised by a High Level Committee to be constituted by the CBDT before any action is initiated in such cases.”
Rahul Garg, leader direct tax, PwC India, said this will strengthen the investor confidence in the economy and would protect interest of both the revenue department and taxpayers. However, reacting to the development, Vodafone said it will continue the process of international arbitration initiated under the India-Netherlands Bilateral Investment Treaty. In a bid to mobilise additional revenue and encourage savings, the government also increased the long-term capital gains tax rate from 10 per cent to 20 per cent, while increasing the tenure of short term capital gains from one year to three years for debt-oriented mutual funds and unlisted security, effective from April 1, 2015.
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The measures taken by the government on the direct tax front will lead to a net revenue loss of Rs 22,200 crore. “This leads to the closure of tax arbitrage. This directs the energies of the mutual fund industry from short to long term; and towards more stable investible inflows,” said Sandesh Kirkire, CEO, Kotak Mutual Fund.
On dividend payment, the government tweaked the computation formula, a step which will increase the tax outgo for dividend-paying companies. Essentially, the finance ministry has tried to apply “tax on tax by grossing up”, according to Sameer Gogia, director, Deloitte Haskins and Sells LLP. “By doing this, the government will get additional revenue, which was hitherto lost due to difference in the base of income distributed,” he said. The FM also announced a series of taxpayer-friendly steps, including allowing resident taxpayers to obtain advance rulings with regard to their income tax liability, which was so far available only for non-residents and PSUs.