IMPACT OF

TAXATION ON

CROSS

BORDER

INVESTMENTPresented by:

Isha Joshi

MBA(IB) – III sem

CONTENTS

Introduction

FII Taxation

FDI Taxation

Double Taxation Avoidance

Agreement

Conclusion

INTRODUCTIONConsequent to the implemented economic liberalisation

in India during the 1990s, substantial international

investment activity began within the Indian capital markets

and through corporate vehicles with an increasingly

vibrant energy.

In fact, today, Foreign Institutional Investors (FIIs) play a

crucial role in the liquidity, growth and vitality seen in

Indian capital markets.

Simultaneously, along with increasing FII activity, as a

result of the favourable economic and political climate,

India also witnessed an increasing quantum of Foreign

Direct Investment (FDI).

Foreign investment in India is regulated by the Reserve Bank of

India (RBI), through SEBI as a nodal agency, as is envisaged under

Sections 6 and 47 of the Foreign Exchange Management Act,

1999 and under the Foreign Exchange Management (Transfer or

Issue of Security by a Person Resident outside India) Regulations,

2000.

FIIs under Indian law are defined as institutions established or

incorporated outside India which propose to make investments

in securities in India.

These FIIs, governed by the SEBI (Foreign Institutional

Investors) Regulations, 1995, must make an application for

certification for the purpose of purchasing and selling Indian

securities as FIIs from the Indian market regulator.

According to the stipulations of International

Monetary Fund (IMF) and Organization for

Economic Co-operation and Development (OECD),

the acquisitions of at least ten per cent of the

equity capital or voting power in public or

private corporations by non-resident investors

qualifies such investment to be designated as

FDI.

FII TAXATION

FIIs are subjected to a special scheme of taxation in the

Income – tax Act, 1961. Section 115 AD of the Act is a self-

contained code which provides for their taxation.

Section 115 AD of the Act is however subject to Section

90 of the Act read with the provisions of the Double Tax

Avoidance Agreement (DTAA) of the home country of the

FII which if more beneficial will override the provisions of

section 115 AD.

RULE 115 AD1) Where the total income of a Foreign Institutional Investor includes—

(a) income [other than income by way of dividends referred to in section 115-O]

received in respect of securities (other than units referred to in section 115AB); or]

(b) income by way of short-term or long-term capital gains arising from the transfer of

such securities, the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on the income in respect of securities

referred to in clause (a), if any, included in the total income, at the rate of

twenty per cent :

(ii) the amount of income-tax calculated on the income by way of short-term

capital gains referred to in clause (b), if any, included in the total income, at the

rate of thirty per cent :

(iii) the amount of income-tax calculated on the income by way of long-term

capital gains referred to in clause (b), if any, included in the total income, at the

rate of ten per cent; and

(iv) the amount of income-tax with which the Foreign Institutional Investor

would have been chargeable had its total income been reduced by the amount

of income referred to in clause (a) and clause (b).

RULE 115 AD2) Where the gross total income of the Foreign Institutional

Investor—

(a) consists only of income in respect of securities referred to

in clause (a) of sub-section (1), no deduction shall be allowed

to it under sections 28 to 44C or clause (i) or clause (iii) of

section 57 or under Chapter VI-A;

(b) includes any income referred to in clause (a) or clause (b)

of sub-section (1), the gross total income shall be reduced

by the amount of such income and the deduction under

Chapter VI-A shall be allowed as if the gross total income as

so reduced, were the gross total income of the Foreign

Institutional Investor.

FDI TAXATIONFDI must be made subject to the provisions of the FDI

policy and the extant regulations in respect of procedural

compliance with the exchange control regulations.

FDI must be made in a business vehicle such as a

company, a partnership concern, a joint venture, or a sole

proprietorship and so on. The tax payable for the business

activities of the FDI will depend on the business vehicle so

employed.

ASPECTS OF TAXATIONDirect Taxes:

The investor is required to pay tax on net income earned in India. The rates

of taxes differ among structures.

Company:The company incorporated in India is required to pay 30%

tax+surcharge+education cess on net income earned. It is also required to

deduct tax on profits distributed @15.5%+surcharge+education cess.

Limited Liability Partnerships (LLPs):LLPs are required to pay tax @30%+surcharge+education cess. There is no

tax on profits distributed.

Minimum Alternate Tax (MAT):18.5%+SC+EC- Indian tax law requires MAT to be paid by corporations in

cases where the tax payable according to the regular tax provisions is less

than 18.5% of their book profits. However MAT credit (MAT-actual tax) can

be carried forward in next 10 years for set-off against regular tax payable

during the subsequent years subject to certain conditions.

DOUBLE

TAXATION

AVOIDANCE

AGREEMENT

(DTAA)

×The DTAA, or Double Taxation Avoidance Agreement is a tax treaty

signed between India and other countries so that taxpayers can avoid

paying double taxes on their income earned from the source country as

well as the residence country.

×At present, India has double tax avoidance treaties with more than 80

countries around the world.

×The need for DTAA arises out of the imbalance in tax collection on

global income of individuals.

×If a person aims to do business in a foreign country, he/she may end

up paying income taxes in both cases, i.e. the country where the

income is earned and the country where the individual holds his/her

citizenship or residence.

For instance, if you are moving to a different country

from India while leaving income sources such as interest

from deposits in here, you will be charged interest by

both India and the country of your current residence as

per your consolidated global earnings.

Such a scenario can have you pay twice the tax over

the same income.

This is where the DTAA becomes useful for taxpayers.

CONCLUSIONWhether your business in a corporation or a sole proprietorship,

you are going to pay taxes on the profit you make..

Different decisions, such as how long you hold an investment or

where you open a store, have different tax consequences.

Federal taxes are the same everywhere, but state income tax

rates vary across the country. Given their choice, companies prefer

to locate their operations in states that have favourable, low rates

on corporate income.

It's one of the things that explains why retail stores sometimes

cluster along the border of a low-tax state, where they can

compete for high-tax state customers without being subject to the

tax bills.

CONCLUSIONTime can make a big difference to your capital gains when you

sell stocks, bonds or other investments and assets.

Taxes reduce your investable income, that is, the amount of

income you can invest. When you pay taxes before you invest, you

have less money to invest into the stock market and other

investments.

Some investments are more tax-efficient than others. Interest

from municipal bonds are not usually taxed at the federal level.

There are other investments (like dividend paying stocks) that

sometimes come with preferred tax rates.

However, tax laws can change at anytime.

Thank You!