news keep repeating FPIs are worried that their taxes are going up. what exactly is the LTCG for FPIs? They are making heck of a noise for paying 12% or 13% LTCG ? mindblogging!
To know who are FPIs and their broad categorization, one can check this article.
Budget proposed to increase the surcharge, charged on top of the applicable income tax rate,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.
This 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.
Budget changes for an individual earning more than Rs.5 crore, the effective rate of LTCG and STCG will be 14.25% and 21.37%, respectively. Currently, such peak rates are 11.96% and 17.94%, respectively.
The tax structure for individual, HUF, and AoPs is same. Also one should know FPI is an investment by foreign entities for quick gains in stocks, bonds, and other such instruments and can be sold off quickly to make money with short-term attempts and do not create not the long-term investment in the economy.
These changes will majorly impact overseas investment as about 40 percent of the FPIs will fall under the higher tax bracket as they invest in Indian markets as a non-corporate entity such as trust or association of persons (AOPs), which under the Income Tax law are classified as an individual for the purpose of taxation.
So, now for these FPIs to convert their structure to corporate is only way to reduce this tax burden but
the larger issues to deal with are - whether such conversion itself will be tax-neutral, and will this not be seen as a tax avoidance step taken only to save taxes which enables the tax officer to invoke the General Anti Avoidance Rules (GAAR) to ignore the ‘form’ and levy tax based on ‘substance’. So, they are caught up in middle and we need to wait and see how this will play out. I personally believe this move is in right direction in long run, as by doing so we will earn more income from these FPIs if not at-least they will change their structure from trusts to corporate so we can know who the real beneficiary is.
To conclude, yes, it is a big change for FPIs to worry about.
** I have collated the material from different sources and given links above for couple.
@siva Hi thanks for the detailed answer…I have a few questions , how much is the tax structure of corporate’s…And if FPIs convert into corporate’s what will be the pros and cons …can you please share
It is flat 30% and for companies under gross turnover of less than 400 cr per year it is 25%.
It is not easy for FPI to change it’s structure to corporate. They have to amend changes in their registration charter which involves approvals from their registered jurisdictions and it’s investors. Also few entities register themselves as trusts in tax havens to get tax benefits so, that will change if they move to corporate.
Also corporates are entitled for more disclosures and doing so will reveal true beneficiaries of entities.
If they change suddenly then our regulators can invoke the General Anti Avoidance Rules (GAAR) after them as this change is only intended to get tax benefits and not based on any other real substance. So, they are caught in between now. More clarity should come in coming days.