FPIs now have a tax advantage over domestic investors on F&O
As part of the tax rationalization for investors, the Finance Minister clarified on the buyback tax. The tax will not be applicable to companies that had announced buyback offers prior to July 05th. The FM also clarified on the much debated higher surcharge on FPIs and individuals. Finally, there is a lot more clarity on the subject of derivatives tax.
Derivatives tax for FPIs
For the foreign portfolio investors (FPIs) there is a lot more of clarity on the tax front. There were concerns that the higher surcharge imposed in the budget on super rich category, would also hit the FPIs structured as trusts or as AOPs. Previously, the government had clarified that the capital gains earned by all investors would be exempt from the higher surcharge announced in the Union Budget. But, areas of ambiguity still remained. There was lack of clarity on the surcharge applicable on F&O income and capital gains on bonds earned by the FPIs. Now, even that has been clarified by the FM. All capital gains earned by the FPIs from equities, bonds and futures & options will be exempt from the additional surcharge. That is because, in the case of FPIs, all gains on equity, debt and derivatives are treated as capital gains only. Since, under the traditional definition, the FPI would have already paid STT on these securities, these would be exempt from the additional surcharge. However, existing rates of tax will continue.
Disadvantage Indian investors
While exemption from higher surcharge is quite clear in case of FPIs, Indian investors may have a problem on hand. That is because, Indian investors of a reasonable size, are required to show income from trading in securities as Business Income and not as capital gains. It will be capital gains for a small investor or trader but then that person will not be paying super rich taxes. In the case of the super rich investors they will still have to pay additional surcharge since they show these gains as business income. While, there is a choice for local investors in case of equity gains, in the case of futures and options, they have to mandatorily show it as business income only. That would mean; gains on F&O will attract higher surcharge as will gains on bonds as there is no STT paid on these instruments.
Need for level playing field
It is here that the government must intervene and provide a level playing field for domestic investors. In the last few years, billions of dollars of Indian money has travelled abroad and this lack of level playing field would only accentuate the trend. The government has created unnecessary complications by an additional surcharge, which is unlikely to be productive in the final analysis. The easier solution would be to scrap the additional surcharge fully to give relief to all investors!