A proposed tax rise has been dropped following a hostile reaction from Foreign Portfolio Investors (FPIs).
Faced with an urgent need to reinvigorate a slowing economy, the re-elected Modi government had proposed a ‘super rich tax’ in the form of an increase on the country’s existing 15% surcharge in its budget in July.
The move was designed to support the government’s ‘Make in India’ policy with the aim of powering an economy worth USD5trn within the next few years.
Under the proposal the surcharge – based on all taxable income, including capital gains – would rise from 15% to 25% for those with taxable incomes of INR20 million (USD275,000) to INR50m (USD700,000), and to 37% for those with taxable incomes of more than INR50m (USD700,000). This would take the maximum effective tax rate from 35.88% to 39% and 42.74%, respectively. Global Insight October 2019 | 20 Given that inward investment usual comes through offshore funds established and operated as Association of Persons (AOP), or trusts taxed at the same rate as individual Indian citizens and deriving the majority of their income from capital gain, the surcharge rise would have increased the tax rate for most FPIs set up as trusts or AOPs by almost 7%.
Rattled investors, pulled out more than USD3 billion from Indian stock markets in July and August, the highest outflow seen in 2019. There are about 9,400 FPIs registered in India, largely from tax domiciles in the US, Mauritius, Ireland, Luxembourg, Singapore and the United Kingdom, who have invested nearly USD50b in Indian equity, debt and hybrid instrument markets.
They would have been hit by this proposal whether investing directly in the Indian market or through offshore funds. FPIs normally register them as private trusts, mainly to navigate cumbersome disclosure rules and other compliance questions.
To avoid the surcharge they would have needed to structure as a corporate fund to pay a minimum alternate tax of 18.5%.
The proposed rules would also have hit plans to raise USD10-USD15bn through overseas sovereign bonds and its attempts to attract more foreign investment in equities and debt, with many were reluctant to invest due to tax rate uncertainties.
On August 23, in a bid to allay growing concerns of investors and corporate houses, Finance Minister Nirmala Sitharaman announced a string of measures to revive a flagging economy and withdraw the surcharge both on long and short-term capital gains tax.
The move has been a big relief for FPI investors and will help allay their fears around a less investmentfriendly environment.
For more information, contact:
Date: October 2019