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Indian
Government to re-examine tax impact on FII's investment income
in India
The
Indian government is set to take a fresh look into the existing
tax treatment of the income of foreign institutional investors
("FIIs") operating through sub-accounts. The review will
be conducted by an internal sub-group set up by the Central Board
of Direct Taxes ("CBDT").
This
review has been proposed in light of a number of FIIs having approached
the Authority for Advance Ruling ("AAR"), following the
ruling in the case of a US based fund, namely, Fidelity Advisor
Series VIII, wherein the AAR held that the trading income of Fidelity
Advisor Series VIII from Indian securities would be classified
as "business income" and not as "capital gains" thereby not being
subject to tax in India in the absence of a permanent establishment
("PE") in India. The new advance ruling applications are
filed by several FIIs to determine the tax treatment of their
income from investments in securities, in the hope to get exemption
from short-term capital gains tax. Currently, short-term capital
gains from sale of listed securities are taxed at 10%.
Fidelity
Advisor Series VIII had approached the AAR to specifically determine
whether gains accruing from trading in Indian securities would
be treated as "business income or capital gains". The AAR, took
into consideration various factors including the frequency and
magnitude of purchase and sale of securities, and held that the
gains on sale of securities were in the nature of "business income"
which would not be subject to tax in India in the absence of a
PE in India.
The
internal sub-group set up by the CBDT will examine if there is
a case for treating income accruing to FIIs operating through
sub-accounts as "business income". The business income of an FII
can be taxed in India only if it has a PE in India. It is interesting
to note that the Comptroller and Auditor General of India had
earlier this year recommended to the Indian government that the
income of FIIs from trading in Indian securities should be treated
as business income. It has also asked the CBDT to clarify whether
sub account arrangements would constitute PE in India.
However,
a policy change, if at all, to the existing tax treatment will
have to wait till the above proposal has been approved by the
Parliament and if it does undergo a change, then capital flows
could surge from destinations other than Mauritius or Singapore.
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You
can direct your queries or comments to the authors
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Source:
The
Economic Times dated October 5, 2005
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