Cloud over tax sops for eligible foreign investors trading at GIFT City

EFIs are not registered as FPIs and there is a concern that income earned by these entities from transactions done on the IFSC exchanges might be classified as business income

Eligible foreign investors (EFIs) are unsure if they will escape the tax net, despite the incentives doled out to lure investors to transact at the GIFT City in Gujarat.
 
EFIs are not registered as foreign portfolio investors (FPIs). So there are concerns over the income earned by EFIs from trading on the International Financial Services Centre (IFSC) exchanges being classified as business income. This could mean a hefty tax outgo of 40 per cent plus a surcharge and cess.
 
Any income earned by FPIs from trading on the IFSC will be regarded as capital gains and will be exempt from tax from April 1. For example, the tax on short-term gains on derivatives trades will be nil. Until now, FPIs that invested directly in India or through an IFSC exchange had to pay 30 per cent tax on short-term gains made from derivatives trades. “As things stand, EFIs might not have certainty on the capital gains classification of their derivative trading income. However, investors coming from countries such as the US or the UK could still claim treaty benefits on the business income,” said Rajesh Gandhi, partner, Deloitte India.
 
According to the norms, non-resident Indians (NRIs) can avail of a tax exemption for derivative transactions on IFSC exchanges only if the income is deemed to be capital gains. The Budget 2018 has allowed transactions in derivatives, bonds, global depository receipts and rupee bonds by NRIs on an IFSC exchange to be exempt from the capital gains tax.
 
Income earned by FPIs through Indian securities, including trading on IFSC exchanges, is treated as capital gains. However, the Income Tax Act does not provide a similar treatment to the income earned by EFIs.
 
“The tax treatment of instruments traded on IFSC exchanges is evolving. The government in the past had promptly addressed issues investors were concerned about. It is expected that appropriate clarity will be provided with respect to characterisation of income of EFIs as well,” said Suresh Swamy, partner, financial services, PwC India.
 
Another concern is that EFIs, which are funds and invest over 50 per cent of their assets in India, might be subject to indirect share transfer tax as well. This would be levied when there is redemption by foreign investors. Last year, the government had exempted Category-I and –II FPIs, along with alternative investment funds, from indirect transfer provisions.
 
The Finance Bill 2018 stated that an NRI with significant economic presence can constitute a business connection. Experts said while the provision seemed to be aimed at taxing digital services, transactions on the IFSC could come under its ambit as well.
 
The government has already doled out several sops for IFSC investors, including exemption from paying the securities transaction tax, commodities transaction tax and stamp duty.
 
The Budget also announced a unified regulator for IFSCs, which is expected to further the cause of GIFT City. In a January 4 circular last year, the Securities and Exchange Board of India said that a trading member of the recognised stock exchange in IFSCs might rely on due diligence carried out by a bank permitted by the Reserve Bank of India to operate in IFSCs during the account opening process of EFI.

BATTLING UNCERTAINTY

• If the income for EFIs is classified as business income, it could lead to a tax outgo of 40 per cent plus a surcharge and cess 

• EFIs are not registered as foreign portfolio investors 

• EFIs, which are funds and invest over 50 per cent of their assets in India, might be subject to indirect share transfer tax as well 

• Income earned by FPIs on IFSC exchanges to be exempt from tax from April 1

• Currently, non-residents can avail of a tax exemption for derivative transactions on IFSC exchanges only if the income is deemed to be capital gains

• Budget 2018 has allowed transactions in derivatives, bonds, global depository receipts and rupee bonds by on an IFSC exchange to be exempt from the capital gains tax 

• Income earned by FPIs through Indian securities, including trading on IFSC exchanges, is treated as capital gains