The Hindu Business Line : Cutting the Gordian knot

If the Government for some reason is Sensex fixated and does not want to subdue FII interest in Indian bourses, it may introduce a concomitant deeming provision

The Central Board of Direct Taxes (CBDT) has at last bestirred, but just. Foreign institutional investors (FIIs) have all along been getting away with the status of investors, whereas everything points to they being in the business of buying and selling shares.

By getting onto the investor bandwagon the FIIs have been getting away lightly — no tax at all if they are incorporated in Mauritius, or else a 10 per cent tax on their short-term capital gains earned from the Indian bourses which forms a substantial part of their operations and absolutely no tax on the long-term variety.

Should they be asked to dismount this bandwagon and stop this pretence, they would have to shell out as much as 41 per cent tax on their business income so earned.

The CBDT has come out with a draft set of supplementary (the main instructions having been issued way back on August 31, 1989, vide instruction number 1827) instructions — 15, to be precise — to the assessing officers (AO) to help them decide whether a transaction or series of transactions is in the nature of trade or investment, and the public have been requested to come up with their views on these instructions.

However, a cursory look at the draft instructions shows that the distinction between investment and trade is going to be as nebulous as it was.

That the AO would at the end of the day still have to exercise his own judgment, which admittedly would be subjective, is apparent from the last sentence of the draft instructions, which reads: "The assessing officers are also advised that no single criterion listed above is decisive and total effect of all these criteria should be considered to determine the nature of activity."

This sure is an anti-climactic end to the entire newfound enthusiasm because normally one expects supplementary instructions to clear the air. This one, on the other hand, would only serve to reinforce the existing ambivalence on the issue. The FIIs are in the business of buying and selling shares, period.

Therefore, Parliament should deem the income of the FIIs from buying and selling of shares as business income. And this would not be the first time Parliament would have used this strategy to get over the roadblocks and to cut the Gordian knots.

Movers and shakers

Courts would in all likelihood be tolerant of such a steamrollering tactic given the nature of transactions carried on by the FIIs in this country and the loss of revenue to the government all along as a result of they wearing the robes of investors despite being in the business of buying and selling shares.

The FIIs, one must remember, are the movers and shakers of Indian bourses and the tax avoided by them, thanks to the ambivalence on the distinction between a dealer and investor thus far, would be sizeable.

The CBDT instructions, including the supplementary ones, may therefore be used in cases other than the ones involving FIIs. The FIIs constitute a unique category because of their avowed intentions — to make money from Indian bourses here and now.

Theirs is an open-and-shut case requiring no elaborate subjective enquiry. Deeming their income as emanating from business would also, incidentally, put paid to their stratagem of routing their investments from Mauritius so as to take advantage of the Indo-Mauritius treaty which confers on them a wholly unmerited tax exemption on capital gains what with the Mauritius Government following a dog-in-the-manger policy in this regard. The reason why the Government may be reluctant to take this extreme but perfectly justified step is the fear of the FIIs losing interest in the Indian bourses faced with the prospect of paying a hefty tax.

If the Government for some reason is Sensex fixated and does not want to subdue FII interest in Indian bourses, it may introduce a concomitant deeming provision — fixing the tax rate at, say, 20 per cent for FIIs in respect of their income from buying and selling of shares.

(The author is a Chennai-based chartered accountant.)

More Stories on : Taxation | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
`Drafted' damage

Is the FM keen on joining the Sensex party?

Bringing about parity

Cutting the Gordian knot

The fifteen commandments

Is China's supply chain sustainable?

Gradualism, key to FDI in retail

Reservation through the lens of future