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Govt clarifies on FPI, experts say benefits limited
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SME Times News Bureau | 24 Aug, 2019
Soon after Finance Minister
Nirmala Sitharaman announced to roll back higher surcharge on foreign
and domestic portfolio investors, the Income Tax (I-T) department on
Saturday clarified that the tax payable at normal rate on the business
income from the transfer of derivatives to a person other than Foreign
Portfolio Investments (FPIs) will be liable for the enhanced surcharge.
"The
derivatives (future & options) are not treated as capital asset and
the income arising from the transfer of the derivatives is treated as
business income and liable for normal rate of tax," an official
statement said.
Tax experts said that the clarification has
watered down the expected benefits of the government announcement and
can make return-filing very complicated. One of them said that the
structure is very "ridiculously worked out" as it makes things very
complex.
"So, what it means that capital gains on listed entities
will be exempted from higher surcharge for everybody. But when it comes
to derivatives, all incomes of the FPIs will be at lower rate of lower
surcharge but all other entities will be subject to higher surcharge.,"
he said.
As a result of the clarification, the expert said, even
Alternative Investment Fund (AIF) would also be paying higher surcharge.
Further, government has protected the market on listed entities and
protected FPIs but everybody else is at ransom.
Riaz Thingna,
director, Grant Thornton Advisory Pvt Ltd, said that the impact of the
press release (clarification) can be summarised to state that long term
capital gains (LTCG) on all listed securities will not be subjected to
higher surcharge for all assesses.
"Business income on derivative
trading would not be subjected to higher surcharge for FPIs only.
Entities like AIFs however will not enjoy the relief. The tax impact
differential between listed and unlisted securities has also widened. In
short, the impact of the press release is likely to provide only
partial relief while creating complications in tax compliance for a
large section of assesses," Thingna said.
The Finance Minister on
Friday announced to withdraw the enhanced surcharge levied by Finance
(No. 2) Act, 2019 on tax payable at special rate on income arising from
the transfer of equity share/unit referred to in section 111A and
section 112A of the Income-tax Act, 1961 from FY20.
In its
official statement on Saturday, the tax department said that the
enhanced surcharge shall be withdrawn on tax payable at special rate by
both domestic as well as foreign investors on long-term and short-term
capital gains from the transfer of equity share in a company or unit of
an equity-oriented fund/business trust which are liable for securities
transaction tax and also on tax payable at special rate under section
115AD by the FPI on the capital gains arising from the transfer of
derivatives.
"However, the tax payable at normal rate on the
business income arising from the transfer of derivatives to a person
other than FPI shall be liable for the enhanced surcharge," the
statement said.
The decision to roll-back surcharge came weeks
after FPIs turned net sellers of stocks after levy of surcharge in the
Union budget.
In her maiden budget Finance Minister Nirmala
Sitharaman, raised surcharges on those having annual taxable income more
than Rs 2 crore. The surcharge of 25 per cent was levied on those
having taxable income between Rs 2 crore and 5 crore, and 39 per cent on
those with taxable income over Rs 5 crore.
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