CBDT denies that last week's announcements create a differential regime for FPIs, domestic investors

The Central Board of Direct Taxes (CBDT) on Wednesday dispelled doubts that last Friday announcements made by Finance Minister Nirmala Sitharaman which brought in several structural measures to boost up the economy have created a differential regime between foreign portfolio investors (FPIs) and domestic investors.

Differential regime between domestic investors including Alternative Investment Funds (AIF) category III and FPIs existed even before the Union Budget 2019 and was therefore not the creation of the Finance (No. 2) Act 2019 or the announcement made by the Finance Ministry on last Friday, the CBDT said in a statement.

In case of FPIs, the Income Tax Act 1961 contains special provisions [section 115AD read with section 2(14) of the Act] for taxation of income from derivatives. Under this regime, the income of FPIs arising from derivatives was always treated as capital gains and liable for a special rate of tax as per section 115AD of the Act.

However, income arising from derivatives for the domestic investors including AIFs category III as well as for foreign investors who are not FPIs has always been treated as business income and not as capital gains, and taxed at applicable normal income tax rates.

"The differential regime therefore always existed for FPIs through Section 115 AD. Therefore to say that this year's budget or Finance Minister's announcement on the last Friday created a differential regime between FPIs and domestic investors is incorrect," said the CBDT.

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