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Mutual funds will be responsible for deduction of tax at source (TDS) on any profits made by qualified foreign investors (QFIs), a top Finance Ministry official has said.
QFIs are new category of foreign investors who will be allowed to invest in equity schemes of Indian mutual funds. This category essentially comprises foreign individuals, companies and pension funds that are not separately registered as a foreign institutional investor (FII) or a non-resident Indian (NRI) with the Securities and Exchange Board of India (SEBI).
All the existing provisions of taxation will apply to them when this scheme is brought into force, the official said, when asked if QFIs would be eligible for tax exemption if they come into India through the Mauritius route. Indications are that foreign investors, such as the FIIs, will be able to use treaty benefits and thereby avail themselves concessional tax treatment in certain cases.
A QFI could invest in Indian mutual funds through two routes – Unit Confirmation Receipt (UCR) route and the direct depository participant (DP) route. The first route involves the issue of UCRs while the second route involves opening of demat accounts by QFIs with DPs, which would hold mutual fund units on behalf of the foreign investors.
All DPs intending to avail themselves of the opportunity to open demat accounts of the QFIs would have to be registered with SEBI for the purpose. DPs having paid-up capital of Rs 50 crore and above will only be eligible to open demat accounts of QFIs.
The DP route will be operated through separate pooled bank accounts to be maintained by DPs, according to Mr Thomas Mathew, Joint Secretary (capital markets) in the Finance Ministry. One QFI can open only one demat account in any one of the qualified DPs.
Also, DPs will have to report their QFI transactions and holdings in their QFI pooled account to SEBI in the form and according to the periodicity prescribed by SEBI.
To operationalise the Budget announcement of allowing foreign investors to access the equity schemes of mutual funds, the Finance Ministry had on June 23 held a meeting with RBI, SEBI, AMFI besides some experts on the subject.
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