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Super-rich tax: Why foreign funds organised as trusts have not been singled out to garner revenue

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A slew of media reports suggests that around 40 percent of the FPIs are organised as trusts and will be affected by the proposed changes.

Super-rich tax: Why foreign funds organised as trusts have not been singled out to garner revenue
In her first Budget presented on July 5th 2019, the finance minister has proposed an increase in surcharge from 15 percent to 25 percent on the income tax payable by a category of taxpayers comprising individuals, Hindu Undivided Family, Association of Persons or Body of Individuals (whether incorporated or not) or every artificial juridical person not otherwise specified, with income in the Rs 2-5 crore range. Similarly, surcharge is proposed to be increased from 15 percent to 37 percent in the case of such category of taxpayers earning more than Rs 5 crore during Financial Year 2019-20. This is being touted as ‘super rich’ tax.
A reading of Schedule III to Finance Bill (No 2) 2019 that contains the rate of tax prescribed for the purposes of payment of advance tax for Financial Year 2019-20 reflects that the proposed increase in surcharge is also applicable to short term capital gains or long-term capital gains derived on sale of shares on stock exchanges and are subject to tax at concessional rate of 15 percent and 10 percent under Section 111A and 112A of the Income tax Act 1961 (IT Act) respectively. Surcharge has been increased for such taxpayers regardless of whether they are domestic investors or foreign.
The manner in which Sensex and Nifty have taken a beating since pronouncement of Budget provisions last week, it is apparent that investor community has been hit hard owing to magnitude of the proposed change. It may be worth noting that there is no difference in the manner in which such category of taxpayers has been historically taxed. Even before recent revision of surcharge, gains derived by foreign trusts falling in above category were subject to surcharge upto 15 percent while maximum surcharge on foreign companies was restricted to 5 percent. Thus, it would be incorrect to say that foreign funds organised as trusts have been singled out to garner tax revenue. In fact, it is only in case of companies that distinction is made with respect to rate of tax as tax rates applicable to  applicable to a domestic company or a company other than a domestic company have been historically different. Depending on jurisdictions, profits of most corporates suffer dual taxes first at the corporate level and second at the time of distribution of profits as dividends. On the other hand, individuals, trusts, association of person do not have to pay tax on distribution of profits if such profits have been taxed at first.
A slew of media reports suggests that around 40 percent of the FPIs are organised as trusts and will be affected by the proposed changes. An argument put forward by some is that if foreign trusts do not want to be taxed along with the individuals, they should form a company and any investments through that shall not suffer high rate of surcharge. Sebi's FPI Regulations 2014 enlists various categories of investors  such as endowments,  charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices who could register as FPIs. Some of the investors such as public pension funds and university bodies are governed by stringent local laws.
Other foreign trusts too are governed by the provisions of the trust deed and may not be able to make any amends to the investment structure to seek lower tax rate at par with foreign investors organised as companies. Ironically, some of these foreign trusts are usually the investors that commit to markets for long term, invest in low volatility stocks in infrastructure sectors that provide regular yields and are thus hold significance for Indian economy when we seek to grow the investments in infrastructure. If we intend to attract long term stable funds from foreign sources that are well regulated in their countries of origin an exception may be made for such large well governed foreign trusts that commit to investment for longer term.
This has been successfully attempted in past vide special provisions for taxation of  Foreign Institutional Investors (FIIs). These have however lost relevance owing to introduction of Securities Transaction Tax that consequently lowered tax rates on gains derived upon sale of shares on stock exchanges. FM may take a cue from the past to recreate the preferential base for such investors.
Kumarmanglam Vijay is partner, J Sagar Associates. Views expressed are personal. 

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