Capital gains tax blow for Fidelity

The Authority on Advance Rulings (AAR) on income tax today ruled that the income of two foreign institutional investors "" Fidelity Advisory and Mathew International "" will be taxed as capital gains and not as business income.

The FIIs, which have the option to appeal to the Supreme Court, had contended that their business income could not be taxed since they did not have a permanent establishment in India.

Official sources maintained that being a statutory order, it had "persuasive value." Tax experts said the order, besides being binding on the department and the appellants, could be implemented for all other FIIs filing their income as "business income."

The AAR's decision will be binding irrespective of whether India has a double taxation treaty with an FII's country of origin. The FIIs had appealed to the AAR five months back.

Interestingly, the order has overruled AAR's earlier order in case of Fidelity Advisory Series 8, where it had held that income would be taxed as business income.

The income tax department had pointed out that "within the entire scheme evolved by the government for the purpose of investment by FIIs in the Indian stock market, the income will be taxed as capital gains irrespective of the frequency and volume of transaction."

The Authority on Advance Rulings (AAR) has been constituted by the government to help tax-payers plan their income-tax matters well in advance and to avoid long-drawn and expensive litigation.

A non-resident or certain categories of residents could obtain a binding ruling from the authority on a question of law or fact arising out of any transaction/proposed transaction relevant for the determination of tax liability, said an official.