Though the higher surcharge is applicable to individuals, many foreign funds too will have to pay more tax as they are structured as trusts and association of persons and not as companies
Foreign portfolio investors have net sold Rs 2000 crore of shares so far in July, with the Budget proposal to hike surcharge on income tax for wealthy individuals said to be one of the major reasons.
Though the higher surcharge is applicable to individuals, many foreign funds too will have to pay more tax as they are structured as trusts and association of persons (AOP) and not as companies. According to a media report, there are around 2,000 such FPIs.
The effective tax rate for these FPIs earning more than Rs 5 crore of income in a financial year, will increase from 5.98 percent to 7.12 percent (on interest income from specified bonds), 23.92 percent to 28.5 per cent (on interest income), 11.96 percent to 14.25 percent (on long term capital gains), 17.94 percent to 21.37 percent (on STT paid short term capital gains), 35.88 percent to 42.74 percent (on non-STT paid short term capital gains).
However, the increased rates are not effective on FPIs constituted as a company, a firm or a limited liability partnership, Punit Shah, Partner, Dhruva Advisors told Moneycontrol.
Market players say the move could result in foreign funds buying more of debt as compared to equity.
FIIs have net poured in more than Rs 6,000 crore in the debt segment so far in July. In the whole of June, they had net bought Rs 7000 crore of debt.
“Higher tax surcharge will make India a less attractive destination and may also lead FIIs to re-visit their positive outlook on India. There will be most certainly a re-think on the vehicle for investing into India which may require more paperwork and additional regulation,” Dipan Mehta, Director at Elixir Equities Pvt. Ltd told Moneycontrol.
“But, FIIs come to India despite higher taxes and increased regulation and scrutiny because of the demographic opportunity that India offers and presence of world-class companies with excellent corporate governance standards and secular high growth businesses that provide compounding returns,” he said.
Amar Ambani. President & Research Head, YES Securities in a note said that hike in surcharge in the Budget will have an adverse impact on high-end consumption, as well as reduce the investible surplus of high-income individuals, whose money was the mainstay of mutual funds, portfolio management services and the midcap segment.
“The increased surcharge also has a bearing on FPIs coming in through the Trust route and Cat-3 AIFs. This potentially reduces the post-tax attractiveness of India, vis-à-vis other markets, where such a high rate doesn’t exist,” he said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.