Budget impact: Most FPIs stare at 14.25% peak LTCG

The fine print of Finance Minister Nirmala Sitharaman’s Budget reveals more pain for stock market investors. The tax outgo for a large number of them, including foreign portfolio investors (FPIs), domestic and foreign individuals and companies, will increase by up to 19 per cent in terms of the long- term capital gains tax (LTCG) and the short-term capital gains tax (STCG).

The effective rate of peak LTCG and STCG will be 14.25 per cent and 21.37 per cent, respectively. Currently, this peak rate is 11.96 per cent and 17.94 per cent for LTCG and STCG, respectively.

This rise in the tax outgo is on the back of increased surcharge on LTCG and STCG for those who fall in the income bracket of ₹2-5 crore and higher annually. It will mainly hurt FPIs, other domestic and foreign institutions and high net worth individuals (HNIs), many of whom earn over ₹2 crore and ₹5 crore annually. The increased rate will apply to all the non-corporate FPIs and funds, experts told BusinessLine .

Nearly 70 per cent of FPIs in India are registered as non-corporates. A lot of them have submitted their Permanent Account Number as identification for Association of Persons (AOP) to gain FPI registration. SEBI-registered category-III funds, which are mainly hedge funds and index funds that move in and out of markets for short-term gains, will be severely affected, experts say.

Part-II of the Finance Bill that was tabled along with the budged speech document talks about ‘rates for deduction of tax at source in certain cases,’ where it specifies the entities that would be liable to pay the increased rate of surcharge. It is here that individuals, persons, association of persons and companies, both foreign and domestic, have been included. Effectively, it means all the share market investors making more than ₹2 crore and ₹5 crore as LTCG and STCG will be liable for increased surcharge, experts say.

‘A colossal burden’

Sitharaman has hiked the ‘surcharge’ on income of ₹2 crore and more and ₹5 crore and above to 25 per cent and 37.5 per cent from 15 per cent. When the LTCG was re-introduced in 2018, the tax rate was 10 per cent and STCG remained at 15 per cent. Since then, there has been a 40 per cent and 42.46 per cent rise, respectively, in the effective rate of tax (including Friday’s proposed hike) due to addition of surcharge.

“Such a sharp jump in taxes is a colossal burden for large number of stock market investors,” said Deven Choksey, founder, KR Choksey Investment Managers. “Stock market investors are already saddled with a huge tax burden. Taxing them multiple times for income derived from the same source is not rational.”

The tax regime as far as the stock markets are concerned was skewed in favour of FPIs for many years as they came from jurisdictions such as Singapore and Mauritius. They also claimed treaty benefits to avoid any levies in India.

However, the new tax regime wherein the LTCG and securities transaction tax (STT) are imposed together coupled with the rising compliance cost will restrict FPI trading to Singapore and Dubai, where Indian equity and commodity market products are traded, experts say.

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