Clarifying further on Friday’s announcement regarding rollback of the enhanced surcharge for foreign portfolio investors (FPIs), the Finance Ministry said on Saturday that the relief would be applicable not only on capital gains from transfer of equity shares, but also for income from the sale of derivatives.
The Finance Ministry said usually derivatives in the form of futures and options are not treated as a capital asset, but investment from FPIs gets different treatment. The income from the transfer of the derivatives is treated as business income and is liable for normal rate of tax.
However, in the case of FPIs, the derivatives are treated as capital assets and the gains arising from their transfer is treated as capital gains and subjected to a special rate of tax as per Section 115AD of the Income-tax Act.
“Therefore, it is also decided that the tax payable on gains arising from the transfer of derivatives (future & options) by FPI which are liable to special rate of tax under section 115AD of the Act shall also be exempted from the levy of the enhanced surcharge,” a statement from the Finance Ministry said on Saturday.
The enhanced surcharge shall be withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term and short-term capital gains arising from the transfer of equity shares in a company or unit of an equity oriented fund/business trust which are liable for securities transaction tax and also on tax payable at special rate under section 115AD by the FPI on capital gains arising from the transfer of derivatives, the Ministry’s statement further said.
The enhanced surcharge, however, will continue to be levied on the business income arising from the transfer of derivatives to a person other than FPIs.
Finance Minister Nirmala Sitharaman — as part of measures to support the faltering economic growth — had on Friday announced the rollback of enhanced surcharge on long-term and short-term capital gains arising from transfer of equity shares for both domestic and foreign investors.
“The pre-Budget position is restored,” she had said at a press conference Friday. The surcharge was increased by 3 per cent and 7 per cent on those earning between Rs 2 crore and Rs 5 crore and over Rs 5 crore, respectively, as part of the Budget proposals announced by the Finance Minister on July 5.
This had resulted in different taxation outcomes for FPIs registered as Association of Persons or trusts and companies, even as those registered as companies were spared of this surcharge.
Ever since the Budget announcement, markets have been seeing a selloff on most trading days, largely in light of the FPI impact. Friday’s decision reverses the levy that had been announced to be imposed in the Budget 2019-20. The higher surcharge will continue to be applicable for higher net worth Individuals (HNIs), but it will be reviewed after the 75th Independence Day, the government said.