NEW DELHI :
Those foreign portfolio investors (FPIs) that are registered as trusts or associations of persons (AoP) can consider converting to corporate entities in order to avoid paying the “collateral damage" of additional surcharges proposed in the recent annual budget, Central Board of Direct Taxes (CBDT) chairman PC Mody said on Wednesday.
In the budget, finance minister Nirmala Sitharaman proposed hiking the surcharge on super-rich individuals. The tax outgo for individuals, Hindu Undivided Family (HUF) and AoPs having taxable incomes of between ₹2 and ₹5 crore is proposed to be increased to 25% from 15%, and to 37% from 15% in case of those earning more than ₹5 crore.
While a corporate entity will not fall under the ambit of the surcharge, FPIs will have to pay additional tax. FPIs are generally set up as corporate bodies or partnerships. However, according to reports, 40% of FPIs follow the structure of a trust or AoP and they will be impacted by the higher surcharge proposed in the budget last week. The rest use a corporate structure and will not have to pay higher tax.
“The consideration was that the people who have the higher ability to pay more for the cause of nation building. And those were the people between ₹2-5 crore and ₹5 crore and above, that’s why the difference in surcharge. And again, the base rate was not changed, but the surcharge was changed," Mody said at a Confederation of Indian Industry (CII) event.
“As a collateral damage that you may call it, it affected the FPIs (Foreign Portfolio Investors), AIF III (Alternative Investment Fund). But there again the option is to go to the corporate structure. I do not see any kind of a differential treatment," he said, adding that the increase in surcharge looks at benefitting taxpayers who are in the lower tax slabs.
On Monday Mint reported, citing CBDT member Akhilesh Ranjan, that tax structure for individuals, AoPs and HUFs remained the same (attracting higher tax). However, some FPIs that have the structure of trusts may be assessable as AoPs and that the income tax department is looking at how many of such investors will be impacted.
The announcement of a higher surcharge on super rich individuals and FPIs that follow the structure of trusts led to the biggest single-day decline in Indian stocks in nine months on Monday--the first full trading day after the budget was announced.
A higher surcharge has spooked non-resident and overseas funds enough to erase ₹2.9 trillion in market value from companies in the S&P BSE Sensex in the four sessions since budget on 5 July, Bloomberg reported.