No question of rolling back surcharge on FPI trusts, says Finance Ministry

The government has ruled out a rollback of the ‘super-rich’ tax on foreign portfolio investors (FPIs) organised as trusts or association of persons. The tax on such FPIs will yield an estimated Rs 400 crore, as against the overall revenue gain of Rs 12,000 crore from the surcharge.

Finance Minister Nirmala Sitharaman in her maiden Budget last week proposed a hike in surcharge for the super-rich (non-corporate) from 15 per cent to 25 per cent for incomes between Rs 2 crore and Rs 5 crore, and from 15 per cent to 37 per cent for incomes above Rs 5 crore a year. The move will hit 40 per cent of the FPIs. According to reports, about 2,000 FPIs operate as trusts and not companies due to several advantages related to flexibility and tax-efficient repatriation. Central Board of Direct Taxes (CBDT) Chairman P C Mody on Wednesday said at an event organised by the Confederation of Indian Industry (CII), that FPIs could opt for corporate structure if they did not want the higher surcharge introduced in the Budget. “They can’t have their cake and eat it too,” he said.  

Another senior government official said: “There is no question of a rollback. We are not targeting any one section. If you are a non-company, you will be taxed as an individual, the same way you also enjoy the tax or other advantages of being operating as one. We can’t treat them separately.”

The effective long-term capital gains tax incidence for FPIs operating as trusts earning between Rs 2 crore and Rs 5 crore has gone up from 11.96 per cent to 13 per cent, while it has increased to 14.25 per cent for those earning over Rs 5 crore.

The Income Tax Act has two streams of taxation — individual and companies. Earnings of all non-companies, including Hindu Undivided Family, association of persons, and trusts are taxed as individuals.

“The government needed more revenue. We cannot increase tax burden on companies as their taxation is already on a glide path,” said the official quoted above. Sitharaman extended the lower corporation tax rate of 25 per cent for companies with a turnover of up to Rs 400 crore from Rs 250 crore earlier, forgoing a revenue of Rs 3,000 crore. “One of the reasons for discontentment is, this additional tax has come as a bolt from the blue. This tax was never built in their business models and hence dampened sentiment,” said Rakesh Nangia, managing partner, Nangia Advisers LLP.

With inputs from Samie Modak