Foreign Funds Cry Foul Over Rising Costs, Want Tax Clarity

New Delhi: Fearing a rise in their business costs, some foreign portfolio investors have knocked on the doors of markets regulator Sebi and Finance Ministry for greater clarity on taxation rules for indirect transfer of securities, especially after revision to treaties with key jurisdictions like Mauritius, Cyprus and Singapore.

The foreign funds, who have pumped in billions of dollars into Indian capital markets over years, have been on a heavy selling spree in recent months, including in bonds segment, amid an overall weakness in the domestic markets and adverse global cues.

The investors are, however, hopeful that a consultative process, as was adopted by Sebi in case of revision to the rules governing participatory notes, can resolve the matter and lead to greater clarity by the markets regulator and the Finance Ministry to check any exodus of funds from India.

Top executives of several foreign fund houses, on condition of anonymity, said a clarity is needed at the earliest and they are hopeful that the regulator would soon take up the matter with the government.

A senior official said the matter could be discussed at the upcoming board meeting of Sebi, after which the regulator can communicate to the government the taxation related concerns raised by the foreign portfolio investors.

The board is scheduled to meet on January 14, days before the presentation of Union Budget on February 1, and would also discuss various other measures to deepen the equity and debt markets, as also for improving ease of doing business in India.

Overseas players seem to be caught in a bind with prospects of higher tax liabilities, especially with recent clarification making it clear that indirect transfer rules would be applicable on FPIs.

Besides, reports suggesting that more taxes might be on the way for capital market players have also raised concerns among FPIs, which of late has been pulling out substantial investments from their Indian portfolios.

In the run up to the Union Budget for 2017-18, foreign funds as well as their representative associations have been voicing their concerns to the Indian authorities, primarily those related to taxation issues.

Sources said foreign funds are awaiting clarity on their tax liabilities with respect to transactions in India against the backdrop of recent clarifications issued by the government on indirect transfer provisions.

Recently, they had discussions with Sebi officials and the regulator is now expected to raise the issues with the Finance Ministry, sources added.

A key concern being flagged by FPIs is about indirect transfer provisions as the latest communication from CBDT makes it clear that FPIs are not exempt from them.

According to experts, CBDT's (Central Board of Direct Taxes) interpretation would result in double taxation for FPIs. Now, offshore investors in the Indian market have to pay taxes apart from capital gains tax which they are already coughing up.

In recent months, India has revised its tax treaties with Mauritius, Cyprus and Singapore -- jurisdictions which are generally favoured by FPIs to channel their investments into Indian markets -- as part of larger effort to curb black money menace.

With treaty revisions, FPIs would now be subject to capital gains tax while investing through these jurisdictions.

Earlier, the taxation pacts had provisions whereby they were not liable to pay capital gains tax.

2016 saw foreign investors pulling out more than $3 billion from the Indian capital market -- making it the worst period in last eight years in terms of overseas investments.

About the CBDT clarifications, leading consultancy Deloitte recently said this would result in double taxation for FPIs.

"Also, there are significant practical changes in collection of taxes and transaction reporting especially in case of listed FPIs," it noted.

Generally, indirect transfer provisions were not applied to FPIs.

In the wake of latest clarifications, Deloitte said it is possible that tax officers may seek information from FPIs about their global asset allocation and investor profile to examine applicability of the indirect transfer provisions.

"The impact would largely be felt by India-focused funds who invest mainly into India though other funds could be asked to provide details to prove otherwise.

"Further, it is not clear how would listed Indian companies (especially with large investor base) comply with the filing obligations to report details of nonresident investors which derive substantial value from such companies," Deloitte said.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)