Foreign Institutional Investors Post Budget Analysis

8/6/2019 Foreign Institutional Investors Post Budget Analysis

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Foreign Institutional InvestorsPost Budget 2011 Analysis:Insight at a glance

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2

Budget 2011 snapshots

The Indian Finance Minister Mr. Pranab Mukherjee

presented the Union Budget 2011 in the Indian

Parliament on February 28, 2011.

The budget announcements as they may impact

regulations and taxation o FII in India are highlighted

hereunder.

Industry Overview

There has been a marginal growth in the number

o FIIs and Sub-accounts registered during the year

2010-11. The FIIs have been net buyers in the Indian

equity and debt market activity during 2010-11,

however there is a decline o 10.5% in the amount

invested in 2010-11.

The ollowing table depicts the growth in the FII and

their transaction value during the year.

Transactions o FIIs Calendar Year

2008-09 2009-10 2010-11*

Number o FIIs (actual) 1635 1713 1718

Number o Sub-accounts (actual) 5015 5378 5503

1. Equity Market Activity (Rs crore)

Gross Buy 5,54,585 7,05,523 6,03,406Gross Sell 6,02,292 5,95,302 4,90,785

Net -47,706 1,10,221 1,12,622

2. Debt Market Activity (Rs crore)

Gross Buy 59,993 1,40,914 1,54,081

Gross Sell 58,098 1,08,477 1,29,241

Net 1,895 32,438 24,839

3. Total Activity (Rs crore)

Gross Buy 6,14,579 8,46,437 7,57,487

Gross Sell 6,60,389 7,03,779 6,20,026Net -45,811 1,42,658 1,37,461

Source: SEBI

Notes: * As on 31 December 2010


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Foreign Institutional Investors Post Budget 2011 Analysis: Insight at a glance | 3

Key announcements / changes to policy

framework and related impact

Tax Reorms

The introduction o the DTC will result in moderation

o rates, simplifcation o laws and better compliance.

The DTC Bill was introduced in Parliament in August,

2010. Presently the Bill is under discussion with the

Parliamentary Standing Committee. Ater receivingthe report o the Standing Committee, the Code will

be fnalised or its enactment during 2011-12. This

has been a pioneering eort in participative legisla-

tion. The Code is proposed to be eective rom April

1, 2012 to allow taxpayers, practitioners and adminis-

trators to ully understand the legislation and adjust to

the revised procedures.

Investment Environment

Investment in SEBI Registered Mutual Funds

Currently in case o oreign investors, only FIIs and

sub-accounts registered with the SEBI, and NRIs are

allowed to invest in mutual und schemes under

the RBI Portolio Investment Scheme. To liberalize

the portolio investment route, it has been decided

to permit SEBI registered Mutual Funds to accept

subscriptions rom oreign investors who meet the

KYC requirements or equity schemes. This would

enable Indian Mutual Funds to have direct access

to oreign investors and widen the class o oreign

investors in Indian equity market.

Way Forward

These are broad policy ramework and necessary

amendments to the SEBI / RBI regulations areexpected or allowing oreign investors to invest

in mutual unds through the portolio investments

scheme.

KYC requirements and orms are prescribed

and inormation regarding the name, address,

status, date o incorporation etc. are to be flled

in. Further the proo o overseas address, PAN

card, list o authorised signatory etc. are to be

submitted alongwith the orms.

The Budget has not indicated the specifc

mechanism o taxing the oreign investors in

Mutual Funds, and so the normal provisions under

section 115A o the Act, should apply unless

specifed otherwise [as covered under the tax

provision or FIIs (section 115AD) or tax provisions

applicable to Oshore Fund (section 115AB)]:


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Taxation o the oreign Investor

Normal rate o Tax as per section

115A or section 115AB

Rate o Tax applicable to FII Section

115AD

Income Rate o Tax

(Corporate)

(Non-corporate) Rate o Tax

(Corporate)

(Non-corporate)

Income distributed by the

mutual Fund is exempt rom

tax or the oreign investors

Nil Nil Nil Nil

Taxation o Capital Gains

Short Term capital gains on

sale o units o equity oriented

unds (subject to STT)

15% 15% 15% 15%

Short Term capital gains on sale

o units o debt oriented unds

40% 30% 30% 30%

Long Term capital gains on

sale o units o equity oriented

unds (subject to STT)

Nil Nil Nil Nil

Long Term capital gains on sale

o units o debt oriented unds

20%/10% 20%/10% 10% 10%

The rate o tax will be increased by appli-

cable surcharge and cess. Further there may

be requirements to withhold tax on capital

gains arising on sale o units by the oreign

investors i purchase o mutual unds were

treated as normal investment.

Increase in FII limit for investment in

Corporate Bonds

To enhance the fow o unds to the inrastructure

sector, the FII limit or investment in corporate

bonds, with residual maturity o over ve years

issued by companies in inrastructure sector, is

being raised by an additional limit o US Dollar

20 billion taking the limit to US Dollar 25 billion.

This will raise the total limit available to the FIIs

or investment in corporate bonds to US Dollar

40 billion.

FIIs allowed to invest in bonds of unlisted

infrastructure SPVsSince most o the inrastructure companies are

organised in the orm o SPVs, FIIs would also

be permitted to invest in unlisted bonds with a

minimum lock-in period o three years. However,

the FIIs will be allowed to trade amongst them-

selves during the lock-in period.


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Way Forward

Since it is an unlisted security, necessary

amendments are expected in the SEBI / RBI

regulations. Whether the FII would require

approval rom the Reserve Bank o India or

the pricing o the Bonds beore making such

investment may be clarifed when the regula-

tions are amended.

The withholding tax on interest payments

on unlisted inrastructure bonds should be at

the rate o 20% plus surcharge and cess, and

could be on accrual basis.

Black Money

The generation and circulation o black money

is an area o serious concern. To deal with this

problem eectively, Government has put into

operation a ve-old strategy which consists o

Joining the global crusade against black

money;

Creating an appropriate legislative ramework;

Setting up institutions or dealing with illicit

unds;

Developing systems or implementation; and

Imparting skills to the manpower or eective

action.

During the year, India has concluded discus-

sions or 11 TIEAs and 13 new DTAAs along with

revision o provisions o 10 existing DTAAs. Toeectively handle the increase in tax inormation

exchange and transer pricing issues, Foreign

Tax Division o CBDT has been strengthened. A

dedicated Cell or exchange o inormation is

being set up to work on this agenda.

The Ministry o Finance has commissioned

a study on unaccounted income and wealth

held within and outside India. It would suggest

methods to tax and repatriate this illicit money.

Way Forward

Non-cooperative jurisdictions / areas to be

notifed.


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Proposed Tax Amendments

Surcharge on Income Tax

The existing surcharge o 7.5% on a domestic

company is proposed to be reduced to 5%.

In case o companies other than domestic

companies, the existing surcharge o 2.5% is

proposed to be reduced to 2%.

Toolbox o counter measures in respect o

transactions with persons located in a notifed

jurisdictional area

In order to discourage transactions by resident

taxpayers with persons located in any country or

jurisdiction which does not eectively exchange

inormation with India, anti-avoidance measures

have been proposed in the Act.

It is proposed to insert a new section 94A in the

Act to specically deal with transactions under-

taken with persons located in such country or

area.

The proposed section provides

1) An enabling power to the Central Government

to notiy any country or territory outside

India, having regard to the lack o eective

exchange o inormation by it with India, as a

notied jurisdictional area;

2) That i an assessee enters into a transaction,where one o the parties to the transaction

is a person located in a notied jurisdictional

area, then all the parties to the transaction

shall be deemed to be associated enterprises

and the transaction shall be deemed to be

an international transaction and accordingly,

transer pricing regulations shall apply to such

transactions;

3) That no deduction in respect o any payment

made to any nancial institution shall be

allowed unless the assesse urnishes an

authorization, in the prescribed orm, author-

izing the Board or any other income-tax

authority on its behal, to seek relevant inor-

mation rom the said nancial institution;4) That no deduction in respect o any other

expenditure or allowance (including depre-

ciation) arising rom the transaction with a

person located in a notied jurisdictional area

shall be allowed under any provision o the

Act unless the assesse maintains such other

documents and urnishes the inormation as

may be prescribed;

5) That i any sum is received rom a person

located in the notied jurisdictional area,

then, the onus is on the assesse to satisac-

tory explain the source o such money in the

hands o such person or in the hands o the

benecial owner, and in case o his ailure to

do so, the amount shall be deemed to be the

income o the assesse;

6) That any payment made to a person located

in the notied jurisdictional area shall be liable

to deduction o tax at the higher o the rates

specied in the relevant provision o the Act

or rate or rates in orce or a rate o 30%.

Our Observation:

This should have implications or FIIs even i

it is transacting through the recognized stock

exchange in debt securities and block shares

(other than normal equity transactions) as the

counter party is known. The local custodians,


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brokers, depositories, FIIs etc who are in

receipt o any sum rom a Person rom such

notifed jurisdiction may also have implica-

tions unless they can satisactorily explain the

source o unds.

Inrastructure Debt Fund

In order to augment long-term, low cost undsrom abroad or the inrastructure sector, it is

proposed to acilitate the setting up o dedicated

debt unds. Income o such inrastructure debt

und should be exempt rom tax. Interest received

by a non-resident investor rom such notied

Inrastructure debt und shall be taxable at the

rate o 5% plus surcharge and cess on the gross

amount o income, as per section 115A o the

Act. Withholding o tax should also be at the rate

o 5% plus surcharge and cess.

Our observation:

Section 115AD o the Act has not been

amended to tax income rom debt unds

at concessional rates o 5% i the FIIs are

permitted to invest in the debt unds under

the Portolio Investment Scheme.

Collection o inormation on requests

received rom tax authorities outside India

It is proposed to acilitate prompt collection oinormation on requests received rom tax author-

ities outside India in relation to an agreement

or exchange o inormation under section 90 or

section 90A o the Act.

The new sub-section 131(2) has been inserted

or the purpose o conerring authority on the

tax ocer to make an enquiry or investigation.

Further, section 131(3) has been amended to

empower the authority to impound and retain

any books o account and other documents

produced beore Income-tax authority in any

proceeding under the Act.

Extension o time limit or assessments in

case o exchange o inormation

It is proposed to exclude the time taken in

obtaining inormation rom the tax authorities

in jurisdictions situated outside India, under an

agreement reerred to in section 90 or section

90A, rom the statutory time limit prescribed or

completion o assessment or reassessment.

Reporting o activities o liaison ofces

A non-resident does not le a return o income

with regard to its liaison oce on the ground

that no business activity is allowed to be carried

out in India.

It is proposed to seek regular inormation rom

non-residents regarding the activities o their

liaison oces in India. The non-residents as per

new section 285 is required to le the annual

inormation, within 60 days rom the end othe nancial year, in the prescribed orm and

providing prescribed details by non-residents as

regards their liaison oces.


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Tax Rate Card for ForeignInstitutional Investors (FIIs)

The below rates are subject to enactment o the Finance Bill 2011. The rates are or the nancial

year 2011-2012.

There has been no change in the tax rates applicable to the FIIs.

1. Capital Gains

Capital Gains Corporate1 Non-Corporate2

Total Income

upto `10mn

Total Income

exceeding

`10mn

Total Income

Sale o equity shares, units o

equity oriented und (STT paid)

Short-termcapitalgains

Long-termcapitalgains

15.45%

Exempt

15.759%

Exempt

15.45%

Exempt

Sale o equity shares, units o

equity oriented und (Non- STT

paid)Short-termcapitalgains

Long-termcapitalgains

30.90%

10.30%

31.518%

10.506%

30.90%

10.30%

2. Other Income

Nature o Income Corporate11 Non-Corporate2

Total Income

upto `10mn

Total Income

exceeding

`10mn

Total Income

Dividends / Income rom units3 Exempt Exempt Exempt

Interest rom and in respect o

securities

20.60% 21.012% 20.60%

Business Income 41.20% 42.024% 30.90%

1 The tax rates or

Corporate assessee are

inclusive o surcharge

@ 2.0% [AY 2010-11,

surcharge @ 2.5%] (where

income exceeds `10mn)

and cess @ 3%2 The tax rates or

Non-Corporate assessee

are inclusive o cess @ 3%3 The Dividends / income

rom units will be exempt

provided the Indian

Company declaring the

dividend pays DDT on the

dividends declared


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3. Securities Transaction Tax (STT)

No change proposed in rate o STT.

STT leviable on the value o taxable securities transaction are as under:

Taxable Securities Transaction Payable by Rates

Purchase / Sale o equity shares, units o equityoriented und (delivery based)

Purchaser /Seller 0.125%

Sale o equity shares, units o equity oriented

und (non-delivery based)

Seller 0.025%

Sale o an options in securities Seller 0.017%

Sale o an option in securities where option is

exercised

Purchaser 0.125%

Sale o utures in securities Seller 0.017%

Sale o unit o an equity oriented und to the

Mutual Fund

Seller 0.25%

4. Income Distribution Tax (IDT) rates or Mutual Funds

Income distributed Recipient Rate o IDT *

By equity oriented unds Nil

By a money market mutual und or liquid und Individual / HUF 27.0375%

Any other person 32.445%

By a debt und other than a money market

mutual und or a liquid und

Individual / HUF 13.51875%

Any other person 21.63%

* The tax rates or both Individual / HUF and Corporate assessee are inclusive o surcharge @ 5.0% (AY 2010-11 @ 7.5%)

and cess @ 3%.


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International TaxTax Treaty roundup

India - Mexico

The 2007 treaty between India and Mexico

entered into orce on 1 February 2010 and

will apply in India as rom 1 April 2011 and in

Mexico as rom 1 January 2011. Once in eect,

a withholding tax rate o 10% will apply to

dividends (although India does not currently

levy withholding tax on dividends), interest orroyalties.

India - Switzerland

When in eect, the protocol signed on 30

August 2010 to the existing treaty, provides

that interest paid to a resident o the other

contracting state that is engaged in the

operation o ships or aircrat in international

trac will be taxable only in the residence

state to the extent the interest is paid on unds

connected with those activities.

India - Mozambique

On September 30, 2010, India and

Mozambique signed a DTAA or support o

economic co-operation: one regarding mineral

resources, the other small and medium sized

enterprises. This treaty has not come into orce.

India - Finland

The treaty signed on 15 January 2010, appliesin India with eect rom 1 April 2011; provides

or a withholding tax o 10% on dividends,

interest, royalties and ees or technical services.

India - Luxembourg

The 2008 treaty applies as rom 1 April 2010

in India (1 January 2010 or Luxembourg) and

provides or a 10% withholding tax rate on

dividends, interest and royalties.

India-Myanmar

The 2008 treaty applies as rom 1 April 2010

and provides or 5% withholding tax rate

on dividends and 10% rate on interest androyalties.

India-Norway

On 2 February 2011, an agreement or the

avoidance o double taxation and preven-

tion o scal evasion with respect to taxes on

income and on capital was signed between

India and Norway. This will replace the existing

Convention signed between the two countries

on the same subject on December 31, 1986.

In the Article concerning Residence, the new

DTAA allows the place o eective management

o an entity to be determined through Mutual

Agreement Procedure in case it cannot be

determined otherwise. A provision or insurance

PE has been inserted in the new agreement. The

new DTAA provide or lesser rate o taxation o

dividend and interest in the source country. It

provides or 10% rate as against 15% or 25%

in existing DTAA. The new DTAA has an article

on Limitation o Benet. The new DTAA hasan article on exchange o Inormation, which

specically provide or exchange o banking

inormation and inormation without domestic

interest.


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Tax Inormation Exchange Agreement

India has entered into TIEA with 10 countries,

which are:

Argentina, Bahamas, Bermuda, British Virgin

Islands, Cayman Islands, Isle o Man, British

Island o Jersey, Marshal Islands, Monaco, and

Saint Kitts and Nevis. Cabinet Approval, we

understand, has been granted in case o 8 othem.


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Glossary

Abbreviation Long Form

Act The Income-tax Act 1961

CBDT Central Board o Direct Taxes

Cess Education cess

DDT Divident Distribution tax

DTAA Double Tax Avoidance Agreement

DTC Direct Tax Code

FII Foreign Institutional Investor

IDT Income Distribution Tax

KYC Know Your Client

PAN Permanent Account Number

PE Permanent Establishment

Mn Million

NRI Non Resident Indian

RBI Reserve Bank o India

SEBI Securities and Exchange Board o India

SPV Special Purpose Vehicle

STT Securities Transaction Tax

TIEA Tax Inormation Exchange Agreement


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Foreign Institutional Investors Post Budget Analysis