FPI conversion expected to get one-time tax waiver

The Union Budget 2019-20 saw Nirmala Sitharaman, the Finance Minister of India, increase the surcharge on Foreign Portfolio Investors (FPIs) registered as trusts and associations. The Indian capital market saw backlash in the form of FPIs pulling out nearly Rs 3,800 crore in July 2019. 

The Indian equity market has seen tremendous ups and downs over the last two months. The verdict of 2019 Lok Sabha elections led to FPIs infusing as much as Rs 10,384.54 crore into the Indian capital market, citing favourable amendments with the return of the BJP-led government. 

The Union Budget 2019-20 was expected to roll out sops for the equity investors but, were led down big time by the Finance Minister. The super-rich and FPIs registered as trusts are levied with a higher surcharge. The Finance Minister later clarified that the increased surcharge is here to stay for some time. 

The clarification on the increased surcharge has possibly made the FPIs consider the newly elected government aligned towards the left, and hence, have pulled out of the Indian markets. All is not lost yet for the FPIs as the government is considering to offer a one-time tax waiver for FPI conversions. 

Nirmala Sitharaman had previously asked FPIs registered as trusts and staring at a higher tax outflow, to convert to the corporate structure. The Union Budget 2019-20 did not modify the taxation of the FPI corporates. However, the cost of conversion is high and would negate the benefit of conversion from trusts or associations.

Also Read: Government and policymakers left with concerns as FPIs continue selling

Higher taxation and slowdown in economic growth are few of the significant reasons behind markets going down of late. One way in which the government can revive the ailing markets is by offering a one-time waiver on the capital gains tax for FPIs willing to convert to the corporate structure from trust or association structure. 

FPIs registered as trusts willing to convert to the corporate structure will find it more comfortable if the government offers them tax relief in some way and it could be waiving tax on the capital gains. FPI trusts and associations would have accumulated considerable unrealised capital gains, and the expense of conversion is pretty high. 

Also, FPI conversion may not be structurally possible in some jurisdictions from where FPIs invest. Nearly 20% of the FPIs use the trust structure to invest in the Indian capital market, and this may be one of the reasons that have possibly persuaded the Finance Minister to hike their surcharge, citing a higher generation of revenues in the form of tax collection. 

FPIs might continue to use the trust structure in spite of the increase in surcharge as trusts are the least taxed structure. Also, the Indian economy is an emerging one and tends to offer good returns, and hence, trusts would remain invested in the Indian capital market.