Good news for India-focused funds: Govt looking to resolve triple tax issue

Finance ministry has raised the matter with the revenue dept, seeking a quick clarification

The revenue department is likely to settle the issue of “triple taxation” that is spooking foreign portfolio investors (FPIs) after a recent circular brought India-dedicated funds under the purview of the withholding tax.

After a representation by FPIs, the capital markets division in the finance ministry’s department of economic affairs raised the matter with the revenue department, seeking a quick clarification.

“We are examining the issue. We will issue a clarification if need be,” Revenue Secretary Hasmukh Adhia told Business Standard.

The recent circular on indirect transfer of assets implied that India-dedicated funds would be taxed if they sold shares. Besides, overseas individual investors in the funds will also be taxed in India as well as in their home country.

Amit Maheshwari, partner in Ashok Maheshwary & Associates, said the home country of investors would, in most cases, not provide for a credit as this kind of tax on indirect transfers was not in accordance with double taxation avoidance agreements.

The tax arises when Indian assets of a fund constitute 50 per cent of the total asset value of the fund globally, or Rs 10 crore. However, investors with less than 5 per cent of fund shares are exempt.

FPIs had earlier requested the finance ministry to exempt individual investors from the levy, but that was turned down when the Central Board of Direct Taxes (CBDT) issued the circular.

An official said the capital markets division had referred the matter to the revenue department and had provided its inputs.

“The present set of clarifications need to be reviewed and appropriate guidance issued. In the present form, these could lead to unintended consequences and add to confusion, the administrative burden and hardship for foreign investors,” said Vikas Vasal, national leader, tax, Grant Thornton.

He added India needed to encourage FPIs, especially sovereign and pension funds, as they generally had a long-term investment horizon and the capacity to make large investments.

“If no relaxation is offered, FPIs shall also be liable to withhold tax from the capital gains arising to investors on redeeming their units,” said Rakesh Bhargava, director, Taxmann.