New Delhi: Amid a backlash from foreign portfolio investors over the new tax, the government on Tuesday said it is not targeting FPIs by raising tax on super-rich individuals, and foreign investors have an option to convert into a corporate entity to avail of lower rates available to such category.
Finance Minister Nirmala Sitharaman in her maiden budget hiked the surcharge on income tax paid by super-rich individuals.
However, some 40 per cent of the FPIs automatically come under the higher tax rate as they have been investing as a non-corporate entity such as trust or association of persons (AOPs), which in the Income Tax law are classified as an individual for the purpose of taxation.
“A picture is being painted that government has targeted FPIs by increasing surcharge over FPIs only. It is totally false. The surcharge has been increased for all super-rich individuals and non-corporate entities regardless of whether they are domestic investors or foreigner, FPI, FII. The surcharge has not been increased for companies – again regardless whether it is domestic or foreign,” a top government source said.
Sitharaman had in the Budget proposed to increase the surcharge, charged on top of the applicable income tax rate, from 15 per cent to 25 per cent for those with taxable incomes of between Rs 2 crore and Rs 5 crore, and to 37 per cent for those earning more than Rs 5 crore. This takes the effective tax rate for those two groups to 39 per cent and 42.74 per cent respectively.
The source said the surcharge has been increased on all income, be it from salary, saving, interest, mutual funds, stock market or trade in the futures and options (F&O) markets, LTCG, STCG, or other means and is applicable to all individuals and those who choose to be counted as an individual be it through funds, Association of Persons (AOPs) or Trusts.
“FPI is not FDI. Any foreign investor has two options – it can come as a non-corporate entity such as trust, Association of Persons, etc or as a corporate company. The non-corporate entities get taxed as individuals in India. Since the FPIs who are making transactions through stock/F&O markets have chosen to come from trust route instead of company route, so they will be taxed automatically as an individual,” the source said.