A slew of measures with regard to foreign portfolio investors (FPIs) were announced in the Budget, the key being that most FPIs will be able to save tax on dividend. Also, the limit for FPIs in corporate bonds was increased to 15 per cent from 9 per cent and sovereign wealth funds will be getting 100 per cent tax exemption on infrastructure and other notified investments for a period of three years. The date of withholding tax has been extended to 2023 for FPIs.
The Finance Minister said that dividend distribution tax (DDT) will be taxed in the hands of the recipients. Earlier, it was companies that deducted 20 per cent tax and passed on the dividend to shareholders. Now a lot many FPIs will be able to claim complete exemption on this as they can claim full rebate on the home country where they are registered.
According to Lokesh Shah, Partner, L&L Partners, “By removing DDT, the government gave an impetus to non-resident investors who were not able to claim credit of such DDT in their home jurisdictions.”
FPIs have to pay flat rate of tax in many countries and are exempt from incremental components as most of them come through tax havens, experts say.
“Foreign investors may cheer incentives being provided of elimination of DDT, higher FPI limit to corporate bonds, incentives to invest in infra sector until 2023 as positive steps to encourage foreign investments in India,” said Shashank Khade, Co-Founder & Director, Entrust Family Office.
Jaspal Bindra, Executive Chairman, Centrum Group, said, “A 100 per cent tax reduction in infrastructure investments from sovereign wealth funds will be a big boost for infra financing. An increase in FPI limits in corporate bonds and enabling NRIs to increase investments in government bonds and securities will add to bringing in long-term foreign capital.”
Additionally, initiatives towards boosting tourism, improving bond markets and setting up international financial centres at IFSC, GIFT City are likely to boost foreign inflows. The removal of DDT by substituting it with the introduction of tax on dividends in the hands of all shareholders is a positive step. This will definitely be very appealing to foreign investors.”