Markets

Super-rich cess on FPIs will account only for 1% of estimated mop-up

Shishir Sinha New Delhi | Updated on July 31, 2019 Published on July 30, 2019

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But FPI investments turn negative for the second time in July in this calendar year

The Finance Ministry has estimated that collection through the super rich cess on Foreign Portfolio Investors (FPIs) will not be even one per cent of the total estimated mobilisation through this cess.

“We expect to get approximately ₹400 crore from the cess,” a senior Finance Ministry official told BusinessLine. The total estimated collection through this cess is around ₹12,000 crore. This higher surcharge will be applicable in FPI who are individual, association of persons or trust and not on those which have corporate structure.

According to various industry estimates, nearly 40 per cent of FPIs have non-corporate structure and are likely to be affected by the increase in surcharge.

Finance Minister Nirmala Sitharaman in the Budget proposed a higher surcharge on persons earning more than ₹2 crore. Since this higher surcharge covers individuals or Hindu undivided family or association of persons or body of individuals, domestic or foreign, there is a fear that tax on the sale of equity will rise to 21.3 per cent from 18 per cent for short-term capital gains, and to over 14 per cent from 12 per cent for long-term capital gains.

The markets have frowned at this proposal and many experts warned of a funds outflow. However, the official said that these fears were baseless and considering the earning opportunities here, FPIs will not only continue to invest here but also increase their holdings.

When asked about the impact on Double Taxation Avoidance Agreement (DTAA), he said that the matter was being examined and the details will be mentioned in the rules. The Income Tax Department will come out with rules, once the President gives his assent to the Finance Bill, which is expected any time now.

Though, it was expected that the Finance Minister might come out with a compromise formula for FPIs during her reply on the Finance Bill, she however stood by her proposals. She advised FPIs to register themselves as a company to protect themselves from this levy.

The Finance Ministry has maintained that since the Budget did not impose any new taxes or increase the tax burden on the middle classes, the surcharge on the super rich was one way of mobilising revenue to fund the various welfare schemes.

But the move has resulted in a large outflow of funds as seen in the FPI investment figures published on the NSDL website. Between July 1 and July 29, the net FPI investment was positive only at the end of two trading sessions. July has been, so far, only the second month during this calendar year where net FPI/FII investment was negative.

Published on July 30, 2019
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