The Union finance ministry is considering a proposal to relax the tax structure for Qualified Foreign Investors.This is a sequel to the decision of early January to allow QFIs "to directly invest in the Indian equity market in order to widen the class of investors, attract more foreign funds, reduce market volatility and to deepen the Indian capital market".
The Reserve Bank of India and the Securities and Exchange Board of India have come out with operational circulars for implementation of this regime.
However, not much has moved, with concerns raised on several grey areas, including lack of clarity on taxation issues.
The latest proposal came at a meeting last week, chaired by Thomas Mathew, joint secretary, capital markets. The ministry has said it is keen to improve the attractiveness of the new regime.
Key demands
i) A well-defined simple tax structure on the lines of Securities Transaction Tax
ii) Do away with the hassle of filing returns by Qualified Foreign Investors
iii) A provision for changing the "Designated Bank Account" of Qualified Foreign Investor in his resident country
iv) Documents for account opening may be attested by reputed banks or other such overseas entities
v) The declarations that need to be obtained from the Qualified Foreign Investors may be standardised by Securities and Exchange Board of India
"We should now work together to ensure we are able to attract greater interest from investors abroad in the Indian markets. We may be able to achieve this if we are able to publicise the scheme and the attractiveness it holds for potential investors.
"To evolve a cogent strategy, we would require your views/suggestions," it said in a note to representatives from Sebi, stock exchanges, market participants, tax consultants and custodians approved by Sebi to operate as Qualified Depositary Participants.
QDPs are required to play a pivotal role in routing of investments under the QFI regime.
So far, Kotak Mahindra Bank, HSBC, Deutsche Bank, Citibank, SBISG Global securities and two entities of India Infoline have been approved by Sebi to operate as QDPs.
Under the new regime, the responsibility of deduction of tax incurred by the foreign investor lies with the QDPs.
They feel this will require them to maintain records and take on unlimited liability for QFIs, beyond the normal business relationship.
"The QDPs do not have the expertise of being a tax consultant. Also, there will be various issues like treaty exemptions for various countries and international taxation. There is no separate taxation regime prescribed for QFIs," said an official with one of the QDPs.
They have suggested a structure similar to that on foreign institutional investors.
"There is no tax deducted at source for FIIs. They pay advance tax and are allowed adjustments against losses," said a market participant who attended the meeting.
For QFIs, however, the deductions are to be made on a gross basis.
This means QFIs cannot net off losses made against gains, leading to higher tax outgo. The marketing head of a global custodian said the ministry of finance was extremely forthcoming in resolving issues.
"Participants are keen to receive a well-defined simple tax structure on the lines of STT (Securities Transaction Tax), which will be easier to implement by the QDPs, as that will help to do away with the hassle of filing returns.
"Also for the benefit of the market, the declarations to be obtained from the QFIs by the QDPs need to be standardised by Sebi," the official said.
QDPs also feel it may not be feasible for them to ensure compliance with laws, rules and regulations of the jurisdictions of all countries where QFIs are based.
"The QFI has to be made responsible for compliance with the laws of his country," the official added.
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