Uniform tax rate for foreign portfolio investors

In a major boost for overseas entities, the government has said that Foreign Portfolio Investors would attract uniform tax rate across categories.

FPIs bring together all the three investment categories -- FIIs, their sub-accounts and QFIs.

Besides, the tax rate for FPIs would be the same as that extended to Foreign Institutional Investors. The new system would be especially beneficial for Qualified Foreign Investors who were subjected to higher tax rate earlier.

The Central Board of Direct Taxes has notified that new class of investors, FPIs, would be treated as FIIs under the Income-tax Act, 1961.

With the notification, issued on January 22, FPIs would be now subject to the same tax treatment as is applicable to FIIs under the current tax regime.

The move clears the air over taxation regime for FPIs, created with the aim of rationalising overseas investments in the domestic capital market.

Global consultancy EY said that QFIs would also become eligible to concessional tax rates in respect of, inter-alia, capital gains earned on off-market transactions in securities (such as buy-back and open offers in equity shares).

"As per the new tax regime, there would be no deduction of tax at source on income earned by way of capital gains by FPIs (including erstwhile QFIs) but a discharge of tax by QFIs themselves only post which remittances outside India would be permitted," EY said.

The Securities and Exchange Board of India notified the FPI norms on January 7, replacing the regulations for FIIs.

Under the new norms, FPIs have been divided into three categories as per their risk profile and the KYC (Know Your Client) requirements and other registration procedures would be much simpler for FPIs compared to current practices.

Besides, the new class would be given a permanent registration, as against the current practice of granting approvals for one year or five years to the overseas entities seeking to invest in Indian markets.

Such registration would be permanent unless suspended or cancelled by Sebi or surrendered by the FPI.

Category I FPIs, classified as entities with lowest risk, would include foreign governments and government related foreign investors.

Category II would cover appropriately regulated broad based funds, appropriately regulated entities, broad-based funds whose investment manager is appropriately regulated, university funds and pension funds, among others.

Those who are not eligible to be in the first and second set of classifications would be considered under Category III.