The government has proposed to tax the income of FIIs from the sale and purchase of securities as capital gains under the proposed Direct Taxes Code (DTC) that will replace the 50-year-old Income Tax Act.
The DTC draft also proposes to streamline the holding period of capital assets to one year uniformly. It has suggested a deduction for a portion of capital gains on listed securities and equity-oriented funds.
It said so far, the majority of the FIIs are reporting their income from such investments as capital gains, but some of them were showing it as business income and claiming total tax exemption in the absence of a permanent establishment in India, leading to litigation.