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Sitharaman’s Move Could Prompt FPIs To Shift To Other Countries

Author: AN Shanbhag Sandeep Shanbhag/Wednesday, July 31, 2019/Categories: Exclusive

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Sitharaman’s Move Could Prompt FPIs To Shift To Other Countries

Finance minister Nirmala Sitharaman's tax surcharge on the super-rich will impact at least 9,400 Foreign Portfolio Investors (FPIs) registered in India. The FPIs have pumped in a whopping $50 billion in Indian equity, debt and hybrid instrument markets. The new rules could affect around 40% of the FPIs registered as trusts. FPIs prefer the route of private trusts mainly to navigate cumbersome disclosure rules and other compliance requirements. If structured as a corporate, they may have to pay a minimum alternate tax of 18.5%. In a trust structure, it is easy for investors to move capital in and out of trusts without paying high taxes.

FPIs registered as trusts are taxed as Associations of Persons (AoPs) at the new rates. Though they will continue to be charged at the basic tax rate of 15% and 10% on short-term and long-term capital gains, the increase in the overall income tax rates will raise their tax bills substantially. All this implies that India could become uncompetitive and expensive, prompting such FPIs shift to other countries.

Surely, all those who are affected will find ways to avoid this super-rich tax by shifting to other entities which do not fall under the surcharge structure. This surcharge is at 12% in the case of co-operative societies, firms, local authorities and those persons who are subject to AMT if their income exceeds Rs 1 crore. For domestic companies, it is 7% for income between Rs 1 crore and Rs 10 crore and 12% if it exceeds Rs 10 crore.

A surcharge is a tax on tax and is a close cousin of cess. It was first introduced by FA13 at 10% of income tax on every individual, Hindu Undivided Family (HUF), Associations of Persons (AOP), Body of Individual (BOI), whether incorporated or not, and every artificial juridical person whose income exceeds Rs 1 crore. This surcharge was increased at 12% by FA15 and further increased to 15% by FA16. FA17 has roped in assessees having income exceeding Rs 50 lakh but not exceeding Rs 1 crore, by levying on them a surcharge at 10%. And now, the current budget proposes to introduce two more slabs ---i) 25% on total income exceeding Rs 2 crore but not exceeding Rs 5 crore; and ii) 37%on total income exceeding Rs 5 crore.

All this essentially means that those persons who have income over Rs 5 crore have to pay a whopping marginal tax at 42%! It is this rate of 42% which has irked the markets, the main reason for its tanking, in spite of the fact that all the rest of it is geared towards growth of the economy.

A marginal relief is put in place ensuring that the total income over each threshold does not exceed the tax payable. For clarity, have a good look at the following Table.

Surcharged on super rich explained ---

Suppose the person has income of Rs 1 crore and Rs 3 lakh. Surcharge applicable to him is 15%.

Tax on Rs 1 crore and Rs 3 lakh = Rs 1,12,500 + 30% of Rs 93,000,000 = Rs 29,02,500. Surcharge thereon at 15% = Rs 4,35,375.

Total Tax on Rs 1 crore and Rs 3 lakh = Rs 33,37,875.

Consequently, on extra income of Rs 3,00,000, the surcharge applicable is Rs 4,35,375.

Marginal relief allows the assessee to pay tax of Rs 3,00,000 only.

The marginal relief becomes nil when the extra income reaches Rs 4,41,754.

The total tax payable on income of Rs 1 crore and Rs 3 lakh with cess = (Rs 29,02,500 + Rs 3,00,000)*1.04 = Rs 33,30,600.

Deemed accrual of gift made to a person outside India

The Union Budget has also extended tax on NRIs for receiving gifts from resident Indians. Currently, gifts made by residents to NRIs are being claimed to be non-taxable in India as the income does not accrue or arise in India. Income arising from any sum of money paid or any property situate in India transferred by a resident to an NRI shall be deemed to accrue or arise in India. In a treaty situation, the relevant article of applicable DTAA shall continue to apply for such gifts as well. Gifts include shares, property, vouchers, cash more than Rs 50,000 made to anyone will be taxable in accordance with the normal slab rates applicable towards resident Indians. The authors A.N Shanbhag and Sandeep Shanbhag are leading financial advisors. Write to them at wonderlandconsultants@yahoo.com

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