This follows the intervention of the Prime Minister’s Office. One of the options is ringfencing entities registered with the Securities and Exchange Board of India (Sebi) from the increased surcharge, said the people cited above.
The finance ministry was looking at measures to allow FPIs to convert themselves into companies from a trust structure to escape the surcharge. But policymakers are of the view that this would take time and something needed to be done immediately. Conversion would require several changes to the income tax law, something that would have to possibly wait for the next budget, and wouldn’t provide quick relief.
A circular could be issued under Section 119 of the Income Tax Act empowering the Central Board of Direct Taxes (CBDT) to direct assessing officers to provide relief to a class or category of taxpayers.
Entities regulated by Sebi including FPIs and Alternate Investment Funds (AIFs) can be protected through this, said the persons cited above. The Supreme Court has held that a circular issued under Section 119 by CBDT to mitigate the effects of a tax provision on a class of taxpayers is valid in law and binding on assessing officers.
Finance minister Nirmala Sitharaman had in the July 5 budget raised the surcharge levied on top of the applicable income tax rate to 25% from 15% for those with taxable incomes between Rs 2 crore and up to Rs 5 crore, and to 37% for those earning Rs 5 crore and more, taking the effective tax rate for them to 39% and 42.74%, respectively. This increased surcharge impacts individuals, Hindu Undivided Families (HUFs), trusts and associations of persons (AoPs).
Foreign portfolio investors, sovereign wealth funds and alternate investment funds that are structured as trusts or AoP are covered by this. This measure has contributed to stock market volatility since the budget was announced. As many as 40% of FPIs registered with the regulator are said to be affected by the budget move.
Sitharaman had subsequently told ET that the surcharge was not aimed at FPIs.
“No, to be honest, I don’t think it was an intent; we didn’t aim to touch the FPIs,” she said in an interview published on July 29.
“The intent was more to look at putting in a surcharge from the point of view of incomes above Rs 2 crore and Rs 5 crore and within them, make sure we calibrated. But of course, it has touched those FPIs that are registered as trusts. Although I don’t want to be tempted to repeat the dialogue, it is possible, and we are, as a government, willing to even help out if FPIs registered as trusts want to come over to being companies.”
While temporary relief can be provided by way of a circular, the government needs to look at a more lasting solution, tax experts said.
“Ideally, this (circular) should be followed by a proper amendment in the statute in due course,” said Sudhir Kapadia, national tax leader, EY India.
“This was done effectively on a previous occasion on the issue of MAT (minimum alternate tax) on FIIs (foreign institutional investors) when initially assessing officers sought to impose this levy on FIIs in a few cases.”