Foreign institutional investors (FIIs) may have to fork out income tax on profits made from buying and selling shares, if a Parliamentary Panel's recommendation gets enacted into law.
The Standing Committee on Finance, headed by senior BJP leader Mr Yashwant Sinha sees no merit in the Direct Taxes Code Bill proposal to treat all FII income as capital gains.
In its report, tabled in Lok Sabha on Tuesday, it recommended that securities (shares, debentures, bonds) held by FIIs should not be included in the definition of ‘investment asset'. The concept of investment asset does not exist in the existing income tax law. It has been introduced in the DTC Bill, which has been introduced in Parliament.
Deeming all FII income from sale of securities as capital gains “artificially re-characterises their income”, said the report, adding that classification of an item of income to be taxed under the code should be based on the nature of income.
However, the proposed classification — as capital gains — ignores key factors like volumes, frequency and size of sale and purchase transactions, pattern of trading activity, which have been followed by the Courts in determining the nature of income from sale of securities, the report added.
The panel's stance that all FII profits should not be treated as capital gains may give a push to the current thinking in official circles that FII profits be brought into the tax net in the interest of the economy.
Since 2006, the Government has been considering ways to bring FII profits into the tax net. Time and again, it gave in to pressure from various vested interests who waved the market card to retain the friendly tax regime for FIIs.
The key question that always propped up was whether FII profits were to be taxed as capital gains or business income. In fact, the original DTC draft in August 2009 had taken a hard line on taxing FII profits by proposing a flat tax on capital gains, while replacing securities transaction tax. It was also proposed that changes to tax laws or litigation should override tax treaties.
But, these proposals were watered down in the revised DTC, put out in August 2010, which said that FII profits would be taxed as capital gains. The primacy of tax treaties over later tax laws was also restored in the revised code.
FIIs have been investing heavily in Indian stock markets till date this year with net investments estimated at about Rs 39,569.40 crore.