Government Clarifies On Higher Surcharge For FPIs

The apex direct tax body said foreign portfolio investors and alternative investment funds can get registered as corporates instead of a non-corporate structure or trust to avoid payment of a higher surcharge.

The clarification by the Central Board of Direct Taxes is aimed at addressing the ambiguity around the government's proposal to raise surcharge on individuals earning Rs 2-5 crore and above. It wasn't clear whether this would cover FPIs and alternative investment funds that are registered as non-corporate entities with the market regulator. This spooked the markets and triggered a selloff.

The consideration for imposing a surcharge on the super-rich was that those who can pay more should help in nation-building, PC Mody, chairman at Central Board of Direct Taxes, said on the sidelines of an event organised by the Confederation of Indian Industry.

The incidence of income tax on those earning between Rs 2 crore and Rs 5 crore will be 39 percent, while individuals with annual taxable income of over Rs 5 crore will be taxed 42.7 percent—one of the highest in the world.

According to Mody, income tax rates in India are competitive as compared globally, however, there is a case for reducing tax rates.

Not An Easy Transition

Certain pension funds are mandated by their operating law to function as investment trusts, according to Richie Sancheti, head (investment funds) at Nishith Desai Associates. So, it would be difficult for them to reset their structures, Sancheti told BloombergQuint.

Also, Indian regulations require mutual funds to operate as schemes of trusts, and it may be unfair to expect category-III AIFs—largely hedge funds—that follow similar investment strategies, to adopt other structure models, Sancheti said.