View: From reduction in LTCG tax to uniform surcharge rates — Key expectations of FPIs from Budget 2023
The extant provisions provide a beneficial tax rate of 5 percent on interest income earned by FPIs on rupee denominated bonds of an Indian company, Government securities or municipal debt securities subject to fulfilment of prescribed conditions upto 1 July 2023.
India is the silver lining on the looming dark clouds of global slowdown. Despite the geopolitical issues across the globe, scare of COVID relapse and recession warnings sounded by many experts, the India outlook seems rather positive. Amongst many other factors, the resistance demonstrated by our economy to the pandemic coupled with a promising and stable market environment have helmed India through this rough phase.
FPIs have contributed exponentially to the India growth story over the years. They are a major force that influence market sentiments. However, the past year has seen significant outflows in portfolio investments. Whilst this was extensively rooted to external global factors, bolstering their exposure through introspective reforms shall go a long way in reassuring their confidence in the Indian capital market and economy.
Some of the key expectations/ issues faced by FPIs that should be considered in the Union Budget 2023 are discussed hereunder:
Extension of date for eligibility of the beneficial tax rate of 5 percent on government securities and bonds
The extant provisions provide a beneficial tax rate of 5 percent on interest income earned by FPIs on rupee denominated bonds of an Indian company, Government securities or municipal debt securities subject to fulfilment of prescribed conditions upto 1 July 2023. In order to ensure a steady flow of foreign investor funds into debt securities, the beneficial tax rate of 5 percent should be extended for eligible investments made after 1 July 2023 as well.
Also Read: Budget 2023: Some relief expected for individuals on the tax front, says MK Ventures founder Madhusudan Kela
Reduction in tax on long-term capital gains (‘LTCG’) earned by FPIs
With effect from 01 April 2018, LTCG earned on sale of listed equity shares in excess of INR 1 lacs is being taxed at the rate of 10 percent. To promote long term investment and induce stability in the Indian securities market, the Government may consider reducing the tax rate to 5 percent or providing an exemption on LTCG earned, as was the case prior to 2018.
To have uniform surcharge rates for all stream of income received by non-corporate FPIs
As per the extant provisions, the tax due on capital gains and dividend income earned by non-corporate FPIs is subject to a maximum surcharge of 15 percent whereas the tax due on interest income earned by them is subject to a maximum surcharge of 37 percent. Parity should be brought about in the surcharge rates applicable to non-corporate FPIs.
Clarification that interest on REITs and INVITs will be subject to tax at the rate of 5 percent
Interest income distributed by REITs and INVITs has been historically taxable in the hands of non-resident investors at the rate of 5 percent. The definition of the term “securities” was amended with effect from 1 April 2021 to include units of REITs and INVITs under its ambit. With this amendment, interest income arising to an FPI from REITs and INVITs would, as an unintended consequence, be taxable at the rate of 20 percent. To clear ambiguity on the subject matter and to promote real estate as well as infrastructure investments into India, the Government should clarify that the beneficial rate of 5 percent should prevail while determining the taxability of interest income earned by FPIs from REITs and INVITS.
Simplify operational and administrative processes
In order to strengthen investor’s confidence, the Income Tax department should revisit current processes to cast out operational and administrative hurdles. Some key aspects that may be considered is introduction of a standard declaration and common portal for submission of supporting documents by FPIs who seek lower withholding of taxes on dividend income distributed by respective issuing companies, repeal the requirement of digital signature based verification of online Form 10Fs filed by FPIs, upgrade the tax return processing software that is currently laden with errors, option to receive credit of income tax refunds to overseas account for liquidated FPIs and extend the reduced timeline of 30 days to 120 days for submitting ITR V (tax return acknowledgement) for non-corporate taxpayers.
Tax and regulatory reforms are the fulcrum of any evolving economy. Strategic reforms are expected to be on the top of the Government's agenda while formulating the budget initiatives. With the 2024 Union elections in the horizon, the forthcoming budget on 1 February 2023 is one of the most anticipated budgets to be tabled in recent years. One will have to wait for the 'Grand Reveal' to decipher the cognizance of the aforesaid aspects taken by the Government.
(The authors -- Sunil Badala is Partner and Head, Financial Services, Tax, KPMG in India & Vinod Teckchandani, Chartered Accountant. Views expressed are personal.)
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