New Delhi, July 10Finance Minister Arun Jaitley’s maiden Budget has brought further clarity to the tax treatment of Foreign Portfolio Investor’s (FPI) incomes. To end the uncertainty around characterisation of their income, Jaitley announced that income arising to FPIs (foreign portfolio investors) from transactions in securities would be treated as “capital gains”. This is intended to encourage fund managers of such foreign investors to shift focus to India.

Long-term gain

Till date, such fund managers preferred to remain outside India under the apprehension that their presence in India might have adverse tax consequences. Currently in India, there is no long-term capital gains tax. For shares, the holding period of more than one year is treated as long-term.

Simply put, if an FPI holds shares for more than one year, then the gains from sale of such shares will be tax exempt in India. “Now that it is proposed that income would be treated as capital gains only, the aspect of the presence of fund managers managing these funds in India ought not to be a material factor,” Aseem Chawla, Partner, MPC Legal, a law firm, told Business Line.

Tax treaty aspect

However, the impact of the proposed amendment would need to be viewed from the aspect of application of tax treaty benefit, he added. For instance, under the present Indo-Mauritian treaty, capital gains are not subject to tax in India.

Former CA Institute President G Ramaswamy said this amendment was a good move to bring FPIs to locate their businesses in India. It will encourage them to open offices with greater tax certainty and more funds will flow into India, he said.

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