Policy

FPIs not to pay enhanced surcharge on gains from F&O transfer, too

Shishir Sinha New Delhi | Updated on August 25, 2019 Published on August 24, 2019

FPIs invested a net Rs 2,096.38 crore in the debt securities.   -  istock

Foreign Portfolio Investors (FPI) will not have to pay enhanced surcharge on gains from the transfer of derivatives, better known as Future & Options (F&O). However, domestic investors will not get this benefit.

FinMin clarification

This clarification was required due to the treatment of gains from  derivatives. Such gains  were not treated as capital asset, and the income  from the transfer of  derivatives was treated as business income, making it liable for normal rate of tax.

However, as the Finance Ministry clarified, in the case of FPI,  derivatives are treated as capital assets, and  gains  from the transfer of the same are treated as capital gains – they  are liable  to a special rate of tax, as per the provisions of section 115AD.

Hence,  “it is also decided that the tax payable on gains arising from the transfer of derivatives (F&O) by FPIs, which are liable to special rate of tax under section 115AD, shall also be exempted from the levy of the enhanced surcharge,” the ministry said.

Finance Minister Nirmala Sitharaman, on Friday, announced the decision to withdraw the enhanced surcharge levied by Finance (No 2) Act, 2019, on tax payable at special rate on income from the transfer of equity share/unit referred to in section 111A and section 112A of the Income-Tax Act from the current fiscal.

Capital assets under these two sections include equity shares in a company, unit of an equity-oriented fund, and unit of a business trust. Since there was no mention of section 115AD in the announcement, there was confusion, prompting the ministry to issue a clarification.

Now, the enhanced surcharge will be withdrawn on tax payable at special rate by both domestic and foreign investors on long-term and  short-term capital gains from the transfer of equity share in a company or unit of an equity-oriented fund/business trust that are liable for securities transaction tax, and also on tax payable at special rate under section 115AD by the FPI on  capital gains from the transfer of derivatives.

However, “the tax payable at normal rate on the business income arising from the transfer of derivatives to a person other than FPI shall be liable for the enhanced surcharge”, the ministry mentioned. It means such gains will be business income for the domestic investor, and will be taxed at normal rate of Income-Tax, plus enhanced rate of surcharge (if it is more than ₹2 crore).

Bringing non-corporate FPIs under the provision of the enhanced surcharge impacted  stock market sentiments.

It resulted in a massive outflow by FPI from the equity market. They withdrew nearly ₹25,000 crore during July and August (up to August 23).

Vikas Vasal, Partner & National Leader – Tax with Grant Thornton India, said  the recent surcharge on FPIs has hurt investor sentiment.

‘Markets hit’

“The government has taken a right step by removing the surcharge, especially when this surcharge would not have yielded much revenue in relative terms, but this had a huge negative sentimental impact on the financial markets,” he said.

Published on August 24, 2019
This article is closed for comments.
Please Email the Editor