Income of FPIs from derivatives was treated as capital gains and liable for special rate of tax
Announcement has led to belief that withdrawal of enhanced surcharge has created difference between FPIs and DIIs
New Delhi: The Central Board of Direct Taxes (CBDT) on Wednesday clarified that relief for FPIs on super rich tax announced by finance minister Nirmala Sitharaman last week does not favour Foreign Portfolio Investors (FPIs) over domestic investors.
As a part of the government’s course correction measure and to boost investor sentiment, the finance ministry, on Friday, announced the rollback of the additional surcharge it had imposed on FPIs and domestic investors in its Budget.
“In order to encourage investment in the capital market, it has been decided to withdraw the enhanced surcharge levied by Finance (No. 2) Act, 2019 on long/ short term capital gains arising from transfer of equity shares/units," Sitharaman said on Friday.
But the announcement has led to belief in certain section of media that the withdrawal of enhanced surcharge has created a “differential regime between FPIs and domestic investors", which the CBDT said was completely misplaced.
“Dispelling this false impression being created in certain sections of media including social media, CBDT said that differential regime between domestic investors (including Alternative Investment Fund category III) and FPIs existed even prior to the 2019 Budget and was therefore not the creation of the Finance (No 2) Act , 2019 (higher super rich surcharge) or the announcement made by the finance ministry on last Friday," the finance ministry said in a statement.
CBDT also said in case of FPIs, the income tax law contains special provisions, under section 115AD, for taxation of income from derivatives. Under this, income of FPIs from derivatives was treated as capital gains and liable for special rate of tax. “However, income arising from derivatives for the domestic investors, including, AIFs category-III as well as for foreign investors who are not FPIs, has always been treated as business income and not as capital gains, and taxed at applicable normal income tax rates," the apex direct tax policy making body under the finance ministry said.
While announcing the rollback on Friday, the ministry had said the relief applied to capital gains from sale of equity shares, as well as earnings from sale of derivatives.
“The differential regime therefore already existed for FPIs through Section 115 AD. Therefore, to say that this year’s budget or FM‘s announcement on the last Friday created a differential regime between FPI and domestic investor is incorrect," it clarified.