Parity in tax treatment of all three categories of Foreign Portfolio Investors AMFI BUDGET PROPOSALS 2018-19

AMFI-  Association of Mutual Funds in India

BUDGET PROPOSALS FOR FY 2018-19

Parity in tax treatment of all three categories of Foreign Portfolio Investors

Background

•                    Section 9 of the Act deals with cases of income which are deemed to accrue or arise in India. Sub-section (1) of the said section creates a legal fiction that certain incomes shall be deemed to accrue or arise in India. Clause (i) of said sub-section (1) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. The said clause provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India.

•                    • Finance Act, 2012 inserted certain clarificatory amendment in provisions of section 9 and included explanation 5 in section 9(1)(i) w.e.f. 1st April 1962 clarifying that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

•                    • Further, in order to address various concerns raised by stakeholders, clarificatory amendment to Explanation 5 made by Finance Act 2017, states that Explanation 5 shall not apply to any asset or capital asset mentioned therein being investment held by non-resident, directly or indirectly, in a Foreign Institutional Investor, as referred to in clause (a) of the Explanation to section 115AD, and registered as Category-I or Category II Foreign Portfolio Investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992, as these entities are regulated and broad based. The said clarificatory amendment is applicable w.e.f. AY 2012-13.

Proposal

It is proposed to bring Category III FPIs under the clarificatory amendment to Explanation 5 by which indirect transfer provisions are relaxed for Category I and II fund vide clarification to Explanation 5 to section 9(1)(i) of the Income Tax Act vide amendment in Finance bill 2017

Justification

This proposal would eliminate risk of possible double taxation on account of indirect transfer in certain jurisdictions.

It will result in uniformity by alignment of tax treatment of all the three categories of FPIs.

It will also result in reduction of compliance burden on taxpayer which requires him to ensure withholding tax provisions on indirect transfer of Category III foreign portfolio investment. This will be helpful for the taxpayer in the light of compliance requirements under various statues and reforms

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