The Central Board of Direct Taxes' released recently circular proposes to bring foreign portfolio investors under the purview of a withholding tax. The circular ever since it was released late last year has been sending jitters down the spines of FPIs.
FPIs fear such a move could lead to double – and even triple -- taxation.
Transfers among India-dedicated, according to the circular, will be levied on indirect taxes.
The onus will fall on the fund manager to withhold tax for clients at the time of redemption.
It will also impact feeder funds holding more than 5 percent stake in any Indian company.
Investors feel that it could spell the end of FII investments in India, if no further clarifications come forth before or in the Budget announcement.
In the ten-point agenda that FPIs presented to the government, the investors have called attention to the fact that taxation provisions aimed at FPIs only hits India-dedicated funds.
The differential taxation will likely create an unequal playing field among FPIs.
Threshold of 5 percent shareholding in FPIs disregards substantially lower economic interests, say FPIs.
There is no direct long-term capital gain tax at source on the FPI and treaty amendments do not render the need for indirect taxation on FPIs, they add.
A 5 percent shareholder owns underlying assets and indirectly pays 5 percent of taxes paid by the FPI.
Treating FPIs as strategic investors seems misplaced, they say.