Tax net widened

The changes in the Union Budget on taxation of the Foreign Portfolio Investors (FPI) will help bring a larger number of these investors into the tax net. By laying down clearly that all securities held by foreign investors registered with the Securities and Exchanges Board of India will be treated as capital assets and hence will be eligible for capital gains, the Finance Minister has laid down that all profits made in the stock market will be taxed as capital gains tax.

Around one-tenth of foreign investors were claiming that their securities transactions were part of their business that was taxable as business income. They were further claiming exemption from paying this tax under the double-tax agreement entered into between their country and India. These investors will now have to pay tax capital gains tax on their profits on securities transaction.

Foreign investors routing their investments through offshore tax havens such as Mauritius or Singapore do not have any reprieve either. These investors were earlier claiming exemption from capital gains tax paid in India under the double taxation avoidance agreement (DTAA) between India and other offshore business centres. These DTAA allowed companies to pay capital gains tax in the country of origin. Since capital gains tax rate in many of these tax havens is zero, these investors did not pay any tax. By leaving the General Anti Avoidance Rule unchanged, the Finance Minister has left open the window for the tax man to take a closer look at the companies established in such countries and investing into India. FPIs investing into India through this route will now seriously need to consider adopting a different channel or be ready to face the tax man’s scrutiny.

Clearly spelling out that there will be no further alteration to the retrospective tax regime will, however, make FPIs happy. Foreign investors need consistency in tax laws so that they can plan their strategy accordingly. Setting up a high level committee for scrutinising fresh cases opened under the retrospective tax rules will ensure that the tax man does not go entirely unchecked.

The disappointment in the Budget was the Finance Minister leaving the securities transaction tax unchanged. Considering that this tax yields just ₹5,000 crore to the exchequer, the Government could have reduced this tax. It would have given a boost to the sentiment in the market.

COMMENT NOW