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CBDT Temporarily Suspends Foreign Funds Taxation By Investors

A notification stating that a controversial taxation circular issued last month is being reconsidered and will be put on suspension has reassured Foreign Portfolio Investors (FPI) having considerable exposure to Indian stocks. The circular contained new provisions to tax India-dedicated funds which had alarmed markets and investors.

Experts have pointed out that the finance ministry must immediately clarify the situation since the circular has reawakened fears of retroactive taxation. The circular indicated that India-focused funds would have to be taxed if they sold shares overseas.  Investors feared that it would result in triple taxation as the foreign individual investor would be taxed in India and not get any tax credit in his home country as well.

The direct taxation avoidance agreement (DTAA) would also not offer protection to such investors.

According to the circular, the tax would become applicable when Indian assets make up 50 percent of any global fund or are valued at Rs. 10 crore. Those owning less than five percent of shares of the fund would be exempted. The amendment would put 181 publicly-traded funds having around $39 billion under management vulnerable to such taxation. Sources have said that the decision to put off the circular was a move to assuage investor fears.

In a statement Suresh Swamy, partner, PwC a Big 4 accounting & consulting firm said,

This will bring a lot of cheer to FPIs. They were concerned about the fallout of the circular in terms of tax provisioning as well as past liability. All those concerns have at least temporarily been put to rest. Specific amendment to the tax law, exempting foreign investors investing directly or indirectly in FPIs will put this issue to rest forever.

Stakeholders including FPIs, venture funds, and other investor bodies made several representations to the finance ministry and to the Central Board of Direct Taxes (CBDT) in order to express concern that the circular omitted considering the implication of taxing the same income multiple times.

The representations resulted in the finance ministry’s capital markets division seeking clarification from the revenue department and in putting the circular on hold. CBDT has said that the representations are being examined by it. According to U R Bhat, managing director, Dalton Capital Advisors the move reflected the central government’s concern about foreign investments which is now vital given that emerging markets are not the only attractive markets for investors any more.

Sources have suggested that the circular would be made applicable to just private equity firms and mergers and acquisitions deals, excluding offshore derivatives and stocks.

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