Finance minister NIrmala Sitharaman proposed higher tax on foreign portfolio investors (FPIs) in the Union Budget 2019 presented on Friday.
Akhilesh Ranjan member of the Central Board of Direct Taxes (CBDT), Vaibhav Sanghavi co-CEO at Avendus Cap Alt Strategies, Girish Vanvari founder of Transaction Square, Saumil Shah partner at Dhruva Advisors, Nandita Parker managing partner at Karma Capital Management and Himanshu Parekh of KPMG India shared their views on the impact of increase in the FPI tax in an interview with CNBC-TV18.
Ranjan said: "The rate structure for individuals, Hindu Undivided Family (HUFs) and association of persons (AOPs) is the same. The new surcharge applies to all three categories. Our understanding of FPI investment is that it is normally a collective investment vehicle which is in the form of funds — mutual funds, alternate investment funds or through limited liability partnerships or corporate structures. Now it seems that there are FPIs who are coming in through a trust structure which would make them an AOP and hence coming under this new surcharge. We are trying to get the facts and see what is the extent of the problem, how are the FPIs operating through a trust structure and once we will get all the facts, we will devise a way to deal with this situation.
"So we need to find out what makes FPIs go into the trust route, trusts are normally associated with a degree of opacity in functioning. So we are trying to see where does the problem lie and we will address it as soon as we get the facts."
Shah said: "The trust is not something that is new. Trusts have been in existence for long. The government is aware about the existence of trusts. There have been more than 10,000 registrations of FPIs as per the Securites and Exchange Board of India (Sebi) data and a lot of them have been registered and incorporated as trusts. So it is not something new.
"However, largely speaking FPIs have been incorporated and registered as foreign companies but there would be an element of around by may be 15 percent who may be registered as trusts. So the unintended consequences have gone to those 15 percent of FPIs which have been registered as trust."
Parekh said: "The long term capital gains tax rate which was applicable prior to the amendment proposed in the budget was about 11.96 percent but now it goes up to 13 percent in the case of FPIs whose taxable income falls between Rs 2 crore to Rs 5 crore and it further goes up to 14.20 percent for FPIs having income exceeding Rs 5 crore. So there is a substantial rise in the long term capital gains from almost 12 percent to 14 percent and even higher rise when it comes to short term capital gains tax."
Parekh added: "On short term capital gains depending on whether securities transaction tax (STT) has been paid on it or not, in cases where STT has not been paid, the effective rate earlier was 35.88 percent, now for taxable income between Rs 2 crore to Rs 5 crore, it goes up to 39 percent and in the category of income exceeding Rs 5 crore, it goes up to 42.74 percent. So straight from almost 36 percent to 43 percent is a steep increase. In case STT is paid, the short term capital gains earlier used to be 17.9 percent, it goes up to 19.5 percent and then to 21 percent odd which is a steep rise."
Parker said: "Let me just say that 40-50 percent of the FPIs would be impacted, these would include the large mutual funds, some of the large US pension funds, so this is a very big deal for the FPI community. We have been marketing India for years now but this kind of tax changes is making it very difficult to market India at this point.
"The global investor perception towards India is certainly getting impacted. The perception is now that India is too complicated to do business because there are so many tax changes and people cannot keep up with them. So this is a very substantial tax increase that has come about in this kind of way where people are just grappling with it. It is not discussed previously in any forum, there was no consultation on this. So it is quite a surprise and a negative one."
Vanvari said: "It is not all trusts which are taxed at a maximum marginal rate. The trusts are categorized into two parts — determinate and indeterminate. Determinate are the ones where you have fixed percentages, who will get what. Indeterminate are the ones where you do not have fixed percentages. So actually indeterminate trusts are where this impact will be. So before concluding that all trusts will get impacted, you need to understand whether the trust is a determinate one or a indeterminate one.
"Determinate ones are not in problem because in that case it is anyway taxed as the beneficiaries are taxed. Indeterminate ones are the ones where this maximum marginal rate will apply. This is not only for FII [foreign institutional investors], FPI, this is also for domestic trusts, for any trust formed in India or formed outside India fetching interest from India. So determinate and indeterminate is what is the law."
Sanghavi said: "This is a short term dampener in terms of the sentiment. As an AIF [Alternative Investment Funds] category we have been large contributor to the disinvestment programme of government of India wherein we are approximately about 10 percent size of all the CPSE [central public sector enterprises] and Bharat 22 subscription. We hope that as we grow our AUM [assets under management], we will be able to contribute even more to that programme but if this is the case probably that might be curtailed or probably we would add some amount of risk as well on that.
"So to solve this whole issue, what we would want to see is basically that the investment vehicle registered under Sebi should be taken out from the increased surcharge and at a later date try and sort out the tax arbitrage between the different investment vehicles with the same underlying assets because different investment vehicles and different investment rates are not very good for an efficient market system."