Mumbai: It’s an old saw of India’s budget documents — the devil lies in details of the fine print.
A higher surcharge on wealthy Indians in the budget has spooked non-resident and overseas funds enough to erase ₹2.3 trillion ($30 billion) in market value from companies in the S&P BSE Sensex over the past three sessions.
The reason: the realization that the new tax rate applies not just to the super rich but also to trusts — a structure of choice for a large number of foreign funds that invest in the nation.
The proposal “seems to have inadvertently" dragged foreign portfolio investors into the tax net and must be clarified by the government, said K.R. Sekar, a partner at Deloitte Touche Tohmatsu India LLP.
Finance Minister Nirmala Sitharaman in her budget speech on Friday proposed to increase the surcharge from 15% to 25% for those with taxable incomes of between ₹2 crore and ₹5 crore, and to 37% for those earning more than ₹5 crore. This takes the effective tax rate for those two groups to 39% and 42.74%, respectively.
Global and non-resident investors participate in India via non-corporate trusts and the so-called association of persons. Problem is, the structures are treated on par with individuals for tax purposes. That has stoked concerns about the levy encompassing foreigners at a time when the nation has emerged as Asia’s biggest destination for equity money in 2019.
“An investment vehicle — such as a category III alternative investment or an FPI — taxed at a fund level is likely to get affected as the income may easily exceed ₹5 crore," said Vaibhav Sanghavi, co-chief executive officer at Avendus Capital PBC Markets Alternate Strategies LLP in Mumbai. Alternative investments, such as hedge funds, which use complex trading strategies, are classified as category III by the markets regulator.
The head of the nation’s direct-tax department on Monday said the government would clarify on the applicability of the higher levy on global investors. But a few hours later, Sitharaman ruled out an immediate clarification.