Hasil gambar untuk The Good And Bad Side Of Foreign Investments: Taxation

Back in 2013, an OECD report came out as game-changer. Called Base Erosion and Profit Sharing or Beps, it demonstrated how the globalisation of commerce has helped reduce burden during Income tax return filing for multinational enterprises with a presence in India.

Due to centralisation of many functions that produce income either at the global or regional level, MNEs have been able to place the jurisdiction in areas where the tax burden is considerably less. By using these jurisdictions, companies are able to reduce the tax burden even if some of the economic activities are conducted in places with higher tax. Moreover, sometimes the different tax rules of various regions can have an unintended result, that of double non-taxation.

  •     An Upcoming Change In Tax Burden For Foreign Investors

The current budget proposal by the government might affect the tax benefit foreign investors have been leveraging. The proposed budget says that anyone with an income of over Rs. 2 crores will pay higher tax by 2%.  If the income is over 5 Crore, then the tax will increase by 7%. This change in the tax rate will apply to individuals and trusts. Since foreign investors use a trust registration to invest money in the Indian market, the change will impact them too.

If applied, the new budget will take tax rate to 39% for income above Rs. 2 crores and to 42.7% for income over Rs. 5 Crore. For foreign investors registered as Trust or AOP, the increase will be about 7%, which is pretty sharp. The likely increase in the tax burden of foreign investors will not change the original basic 15% tax rate and the 10% tax on capital gains, both short and long term. The surcharge will be on the overall income making the tax bill substantially steeper.

Even though the move is not welcomed by the Foreign portfolio investors, the chances of the rule being withdrawn are very low. The reason for it is that domestic investors may take umbrage as they would continue to pay a higher tax.

o  Currently, there are over 9000 FPIs registered in the country with a total investment of $50 billion. The investment is divided between debt and hybrid instruments along with Indian equity. Majority of the investors are from:

  • United States
  • Mauritius
  • Ireland
  • Luxembourg
  • Singapore
  • United Kingdom

Out of these, approximately 40% are trust registrations which are going to be impacted by the new rule. The reasons such a large number of foreign investors choose Trusts are:

  • Corporate structure funds necessitate the payment of 18.5% alternate tax
  • Trust structure circumnavigate disclosure and compliance rules, making them easier to manage. Moreover, moving the capital from or into the trust without an added tax burden is simpler.

o  Even if the proposed rule is set into motion, investors are not likely to withdraw the existing investments. This is especially true for debt market foreign investments. That said, FPIs will push forward for the removal of the new tax rule.

o  The rule is also not likely to impact trust registrations. The ease of setting up a trust and the convenient structure of it will balance out the higher tax rate for foreign investors. Though there is a chance and the opportunity for FPIs to shift to other markets.

If the new rule goes through, it may impact foreign investment flow altogether. Presently, India hopes to raise about 15 billion USD using sovereign bonds from overseas. The country wishes to attract more FI in both debt and equities market. But these aspirations may not see fruition. The outcome will depend upon the actual budget implemented by the government.

If they do announce some tax exemption to foreign investors, then there may be an increase. On the other hand, if they fail to offer any benefits on planned sovereign bonds from overseas, the impact on investment flow will be profoundly negative. At present, foreign investors can only presume and predict the consequences. The reality will only be crystal clear after the government of India makes and announces its final decisions.