Highlights
CBDT recently clarified differential regime between domestic investors (which includes AIF category III) and FPIs existed even previous to General Budget 2019 and was not creation of the Finance (No. 2) Act, 2019.
AIFs are privately pooled investment finances of Indian or foreign sources and could operate in the form of a trust or a corporation or a body corporate or a limited liability partnership (LLP).
The CBDT clarified to roll back higher surcharge on foreign as well as domestic portfolio investors has not created any differential regime amid foreign portfolio investors (FPIs) and domestic investors.
Tax body clarifies no differential regime on foreign portfolio investors
The Central Board of Direct Taxes (CBDT) stated recently that an incorrect perception has been created in the media as if announcements made by Union Minister of Finance and Corporate Affairs Nirmala Sitharaman, in a press conference on 23rd August 2019, which brought various responsive structural measures to boost up the economy, have created a differential regime amid FPIs and domestic investors including AIF category III.
Dismissing this false impression that has been created in some sections of media which includes social media, CBDT also stated that the differential regime amid domestic investors (including AIF category III) and FPIs existed even before the 2019 budget and was consequently not the creation of the Finance (No 2) Act, 2019 or the announcement made by the Finance Ministry recently.
AIFs are privately pooled investment finances of Indian or foreign sources and could operate in the form of a trust or a corporation or a body corporate or a limited liability partnership (LLP). Category-I AIFs mostly invests in startups, SMEs or any other economically as well as socially viable areas recognized by the government.
The Category-II AIFs make investments in private equity or debt funds that do not enjoy particular incentives or concessions through the government. The category-III AIFs consist of hedge funds or capitals which trade with a view to make short term returns with no particular incentives or concessions given through the government or the regulator.
Relating to this, CBDT stated on this matter that in case of Foreign Institutional Investors (FPIs), Income Tax Act, 1961 (the Act) contains special provisions [section 115AD read with section 2(14) of the Act] for taxation of income from derivatives.
Under this regime, incomes of Foreign Institutional Investors arising from derivatives were treated as capital gains as well as liable for the special rate of tax according to section 115AD of the Act.
Though, income arising from derivatives for the domestic investors which includes Alternative Investment Funds (AIFs) Category-III in addition to for foreign investors who are not FPIs, were always been treated as business earnings and not as capital gains, as well as taxed at applicable normal income tax rates.
Conclusion
The differential regime thus already existed for Foreign Institutional Investors through Section 115 AD. Hence, to state that General Budget 2019 or Finance Minister's announcement made on 23rd August 2019 has created a differential regime between FPI and the domestic investor would be incorrect.
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