The government’s rollback of enhanced surcharge for foreign portfolio investors (FPIs) announced last week has not created a differential regime between FPIs and domestic investors, Central Board of Direct Taxes (CBDT) said in a statement on Wednesday. The CBDT clarified that differential regime between domestic investors (including AIF category III) and FPIs existed even prior to the 2019 budget and was “therefore not the creation of the Finance ( No 2) Act, 2019 or the announcement made by the Finance Minister on last Friday”.
CBDT said, following the announcement, the perception that the withdrawal of enhanced surcharge has created the differential regime in certain sections of the media is completely misplaced. “income arising from derivatives for the domestic investors including Alternative Investment Funds (AIFs) category-III as well as for foreign investors who are not FPIs, has always been treated as business income and not as capital gains, and taxed at applicable normal income tax rates. The differential regime therefore already existed for FPIs through Section 115 AD. Therefore to say, that this year’s budget or FM’s announcement of last Friday created a differential regime between FPIs and domestic investors is incorrect,” it said.
In case of FPIs, Income Tax Act, 1961 (the Act) contains special provisions [section 115AD read with section 2(14) of the Act] for taxation of income from derivatives, it explained. Under this regime, income of FPIs arising from derivatives was treated as capital gains and liable for special rate of tax as per section 115AD of the Act, it said. 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. Later, Finance Ministry clarified 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 for FPIs.
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 (AOPs) or trusts and companies, even as those registered as companies were spared of this surcharge.