Research and Articles
NDA-Hotline
- Capital Markets Hotline
- Companies Act Series
- Climate Change Related Legal Issues
- Competition Law Hotline
- Corpsec Hotline
- Court Corner
- Cross Examination
- Deal Destination
- Debt Funding in India Series
- Dispute Resolution Hotline
- Education Sector Hotline
- FEMA Hotline
- Financial Service Update
- Food & Beverages Hotline
- Funds Hotline
- Gaming Law Wrap
- GIFT City Express
- Green Hotline
- HR Law Hotline
- iCe Hotline
- Insolvency and Bankruptcy Hotline
- International Trade Hotlines
- Investment Funds: Monthly Digest
- IP Hotline
- IP Lab
- Legal Update
- Lit Corner
- M&A Disputes Series
- M&A Hotline
- M&A Interactive
- Media Hotline
- New Publication
- Other Hotline
- Pharma & Healthcare Update
- Private Client Wrap
- Private Debt Hotline
- Private Equity Corner
- Real Estate Update
- Realty Check
- Regulatory Digest
- Regulatory Hotline
- Renewable Corner
- SEZ Hotline
- Social Sector Hotline
- Tax Hotline
- Technology & Tax Series
- Technology Law Analysis
- Telecom Hotline
- The Startups Series
- White Collar and Investigations Practice
- Yes, Governance Matters.
- Japan Desk ジャパンデスク
Tax Hotline
October 5, 2005Indian Government to re-examine tax impact on FII's investment income in India
The Indian government is set to take a fresh look into the existing tax treatment of the income of foreign institutional investors ("FIIs") operating through sub-accounts. The review will be conducted by an internal sub-group set up by the Central Board of Direct Taxes ("CBDT").
This review has been proposed in light of a number of FIIs having approached the Authority for Advance Ruling ("AAR"), following the ruling in the case of a US based fund, namely, Fidelity Advisor Series VIII, wherein the AAR held that the trading income of Fidelity Advisor Series VIII from Indian securities would be classified as "business income" and not as "capital gains" thereby not being subject to tax in India in the absence of a permanent establishment ("PE") in India. The new advance ruling applications are filed by several FIIs to determine the tax treatment of their income from investments in securities, in the hope to get exemption from short-term capital gains tax. Currently, short-term capital gains from sale of listed securities are taxed at 10%.
Fidelity Advisor Series VIII had approached the AAR to specifically determine whether gains accruing from trading in Indian securities would be treated as "business income or capital gains". The AAR, took into consideration various factors including the frequency and magnitude of purchase and sale of securities, and held that the gains on sale of securities were in the nature of "business income" which would not be subject to tax in India in the absence of a PE in India.
The internal sub-group set up by the CBDT will examine if there is a case for treating income accruing to FIIs operating through sub-accounts as "business income". The business income of an FII can be taxed in India only if it has a PE in India. It is interesting to note that the Comptroller and Auditor General of India had earlier this year recommended to the Indian government that the income of FIIs from trading in Indian securities should be treated as business income. It has also asked the CBDT to clarify whether sub account arrangements would constitute PE in India.
However, a policy change, if at all, to the existing tax treatment will have to wait till the above proposal has been approved by the Parliament and if it does undergo a change, then capital flows could surge from destinations other than Mauritius or Singapore.