Surcharge on high networth individuals: What FPIs can do to escape net

Finance Minister Nirmala Sitharaman on Thursday said those FPIs who wish to be out of the net of the surcharge on high networth individuals may consider the option of structuring as companies as the foreign portfolio investors registered as trusts will have to pay the new tax surcharge. The Lok Sabha on Thursday passed the Finance Bill, 2019. The market -- BSE Sensex which has borne the brunt of this tax as FPIs are on a selling spree -- is likely to react and enter into red tomorrow. 

In Closing Bell, the late sell-off by FPIs dragged the Sensex 318 pts, Nifty below 11,600. All sectoral indices ended in red with Auto, Metal and PSU Bank indices falling 2.5-3 per cent. Ruling out tweaking the FPI surcharge, she said trusts should register as companies to be out of the ambit of the surcharge. The Budget had proposed levy of an additional surcharge on individuals and trusts earning more than Rs 2 crore and Rs 5 crore, respectively.

"Some FPIs are registered as trusts. Therefore as an individual entity he comes under the taxation. Such FPIs who have registered themselves as trusts may consider the option of wanting to move to register as company", she said in reply to Finance Bill, 2019. 

Markets fear that once implemented, this move may adversely impact FPIs which are set up as non-corporate vehicles. Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions. 

The definition of a partnership firm under Indian tax law refers to the Indian Partnership Act, which does not recognise foreign partnerships or limited partnerships.

होटल को दही पर GST वसूलना पड़ा भारी, कोर्ट ने लगाया ₹15,000 का जुर्माना। pic.twitter.com/6Urt2ivFom

— Zee Business (@ZeeBusiness) July 18, 2019

While the rationale behind such an increase in surcharge is to levy a higher surcharge only on HNIs to garner more revenues in tax falling scenario, it has sent jitters among FPIs, and partially triggered the subsequent crash in the stock market.

Taking this into account, the Central Board of Direct Taxes (CBDT) chairman P.K. Modi had offered a solution to such FPIs that restructure themselves as corporate entities.