The Modi 2.0 government is planning to provide relief for FPIs or foreign portfolio investors from the surcharge levied on the super-rich in the Union Budget 2019. This proposal has increased the marginal tax rate for those earning more than Rs 5 crore to around 43%.
The Finance Ministry analysed that around 40% of FPIs follow the trust structure and will be impacted by the surcharge. The rest 60% of FPIs use the corporate structure will not be affected.
One of the solutions is a carve-out for foreign investors that are organised as trusts but pool the savings of investors such as retirement pools, pension funds, or those not so wealthy.
The objective is that the rich who save tax via trusts that face this higher surcharge shouldn’t get any relief. Trusts are primarily associations of persons (AOP) covered under the levy. The crucial issue while designing such a carve-out will be to identify the beneficiaries of the trusts making investments in India and how they would be structured.
A government official said that trusts are pass-through instruments where the beneficiary is taxed. Hence, the surcharge is passed on to the investors, and they are allowed to claim credit. He continued to say that the economic and revenue departments are scrutinising the issue.
Tax expert, Rahul S. said, “This move may have a leap on the revenue graphs, but the high rates of surcharge may let think the FPIs from now on. There were more withdrawals in the past financial year and may have more numbers added to it in the current year.”
FPIs prefer the tax route as it helps lower their tax outgo besides the opacity this route offers when they enter India through the tax jurisdictions such as Luxembourg and the Cayman Islands.
The government has asked SEBI to submit details of FPIs using the trust structure. Several FPIs are planning to convert themselves into corporates from trusts.
Another government official said in an interview that offering lower surcharge to foreign entities as compared to the domestic investors would be discriminatory towards India’s investors. This would also lead to distorting the tax structure.
The Finance Minister, Nirmala Sitharaman has ruled out any clarifications on the increase in income tax surcharge proposal on the super-rich. She mentioned she would respond in Parliament when the Finance Bill is taken up for debate next week.