Home / Politics / Policy /  Budget 2017: Relief from indirect transfer provisions for foreign investors

Mumbai: Finance minister Arun Jaitley announced a number of steps in the Union budget to attract funds from foreign portfolio investors (FPIs). The proposals include an exemption from the provisions of indirect transfer tax for category I and category II FPIs.

The indirect tax provisions will still apply to category III foreign portfolio investors such as corporate bodies, trusts and family offices.

Category I foreign portfolio investors include foreign central banks, sovereign wealth funds and government agencies. Pension funds are an example of category II foreign portfolio investors .

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The confusion over the applicability of indirect transfer tax provisions on foreign portfolio investors started on 21 December, when the Central Board of Direct Taxes (CBDT) said that FPIs were subject to indirect transfer tax provisions, which impose taxes on offshore transactions if the value of Indian assets represents 50% or more of the value of all assets owned by the FPI.

Foreign investors had then termed the move as a case of double taxation as they were already paying securities transaction tax (STT) and were worried about the retrospective impact of the circular.

Responding to the criticism, the tax department had put the circular on hold on 18 January.

“Exempting FPIs—category I and II—from provisions of indirect tax was on expected lines. The government’s intent was to prevent tax evasion when securities are sold offshore; to that extent, the category III FPIs have been kept out of the ambit of exemption and may be liable to pay indirect tax on securities sold off-shore," said Rajesh Gandhi, partner, Deloitte Haskins & Sells Llp.

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The government also decided to abolish the Foreign Investment Promotion Board (FIPB) to reduce paperwork for investors.

Over the past two years, 90% of the sectors had been allowed foreign investment through the automatic route.

“There are still some sectors such as telecom, multi-brand retail that are not allowed foreign investment under the automatic route. The government would need to ensure that they have a mechanism for these sectors, the abolishment of FIPB and any further liberalization of the foreign investment policies would need to be done in phases," said Tejesh Chitlangi, Partner, IC Legal.

The budget also proposed measures to ease the business environment for FPIs by reducing paper work.

“A common application form for registration, opening of bank and demat accounts, and issue of PAN will be introduced for foreign portfolio investors," according to the Union budget.

The move is expected to enhance operational flexibility and ease of access to Indian capital markets.

The budget also made it mandatory for investors to pay STT to avail of the benefits of long-term capital gains regime from financial year 2018-19 to prevent abuse of this exemption.

However, the memorandum to the financial bill said that genuine cases where STT could not have been paid like acquisition of share in an initial public offering, bonus or rights issue by a listed company would be exempt from the new rule.

“The move is aimed at reducing revenue leakage when shares are transferred. However, there is a need for an exemption list so that genuine share transfers, such as in the case of merger and acquisition, are not taxed," said Riaz Thingna, director, Grant Thornton Advisory Pvt. Ltd.

Jaitley also proposed to integrate the spot and derivatives commodity market. The government will form an expert panel to draft a bill to integrate the two markets.

“The budget has not given any road map for integration but the idea is to have genuine price discovery in both markets," said Sanjay Kaul, managing director and chief executive, National Collateral Management Services, a commodity services provider.


Jayshree P Upadhyay

Jayshree heads a team of reporters focussing on legal, regulatory, investigative stories. She has worked for over a decade, reporting on financial scams, legal stories and the intersection of corporate and regulatory issues. She is based in Mumbai and has previously worked with Business Standard, Mint, The Morning Context and Bloomberg TV India.
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