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Impact Of CBDTs FPI Circular
Published on Mon, Jan 27,2014 | 20:58, Updated at Tue, Jan 28 at
13:51Source : Moneycontrol.com
Heres some great news for all foreign portfolio investors!
The
CBDT has finally provided clarity on how investments by FIIs
and QFIs- categories that constitute Indias new Foreign
Portfolio Investment regime- will be taxed. Just this month,
SEBI notified its FPI regulations; repealed its extant FII
regulations and left it up to the tax department to clarify
the
modalities of taxation. The tax department has now clarified
that the tax procedures for FPIs will be similar to that for
FIIs.
That brings in clarity not just for FIIs who will now have
to
migrate to the FPI regime but also for Qualified Foreign
Investors or QFIs- an investor category that was introduced last
year but did not take off as it
placed onerous requirements of withholding on Qualified
Depository Participants. Heres Tax
consultant Ameet Patel on the impact of CBDTs Circular
Ameet Patel, Partner, Sudit K Parekh & Co.
As you are aware, SEBI had been very proactive in setting up a
committee and verbatim
accepting the committee report and forwarding it to the
government to implement it. While
SEBI was proactive, the problems that were faced were with
reference to taxation because
everyone felt that unless necessary notification was issued or
necessary amendments were
passed in the Income Tax Act, the FPI scheme would not really
kick off & as we saw - based
on the experience of the QFI scheme- the tax related issues
really bogged down that scheme.
So when the FPI regulations were notified by SEBI, everyone was
awaiting the necessary
amendments or clarifications on the income tax side. As you are
aware, the IT Act refers to the
term FII and in the last budget we had a couple of amendments
whereby the concept of QFI
was brought into the IT Act. So the IT Act was nowhere talking
about FPI & therefore it was
obviously the expectation that the Act would be amended so as to
bring clarity on FPIs.
Now with this notification that seems to have been issued by the
CBDT, it appears that the
notification talks about Section 115AD of the IT Act. This
Section refers to the taxation of FIIs &
in that the term FII is defined to be 'any foreign investor as
may be notified by the Government
from time to time' and using those powers vested in the
government, under the particular
Section, the new notification seems to have been issued. And the
notification says that for the
purpose of Section 115AD, the term FII would mean or include
FPIs and therefore all the tax
related Sections or provisions in the IT Act applicable to an
FII would going forward apply to an
FPI. Clearly this notification is aimed at allaying all the
fears that the foreign investors and the
custodian industry had on the taxation front on FPIs and
hopefully we should now see the
foreign investors getting more confidence and all those
investors who had held back their
applications hopefully would now go forward with their plans of
entering India in the context of
investment in Indian securities.
As you are aware, in the context of QFIs, the biggest stumbling
block was the provision
whereby QDPs were required to take care of withholding tax
provisions and they were forced
to ensure that anytime money is going into the bank account of a
QFI, the QDP was to ensure
that tax was deducted and paid to the government. In the context
of FII, that requirement was
not there. Most of the income of the FIIs is either exempt or is
deducted by someone else.
Since the regulations relating to FPI- on taxation- are
identical to the ones relating to FII, I feel
that the QDPs or the DDPs - the custodians basically- they would
certainly heave a sigh of
relief and they would no longer be required to take care of the
withholding tax provisions.
The only thing that is a curious point is that in the
operational guidelines for DDPs, issued by
SEBI, para 6 mentions that the DDP will need to set in place a
mechanism to ensure that tax
is deducted and paid over from any payments made to the FPIs and
of course at that place
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