Budget-2014: 15 Percent Tax for Foreign Portfolio Investors


BANGALORE: Union Budget-2014 has just kicked in few days ago and reforms in the economy are no new thing. But, this time the news is striking, the portfolio investors based out of the U.S. and other countries with which India does not have favorable tax treaties will have to pay a 15 percent tax on their derivative transactions

Simplifying further, Foreign Portfolio Investment is the entry of funds into a country that allows the foreigners to buy in country’s stock and bond shares in various business. Thus budget-2014 declared the portfolio income as capital gain.

U.S. has been the largest source of portfolio investments into India, estimated to be 5.56 lakh crore, accounting for almost one-third of the total foreign assets in Indian equity. It was reported that earlier many foreign portfolio investors portrayed such deals as business income.

Bijal Ajinkya, partner at law firm Khaitan & Co, said “Derivative trading was earlier generally characterised as business income, which was taxable only if the foreign institution had a business connection or a permanent establishment in India,” reports Business Standard.

“Because the fund manager was located abroad, no permanent establishment was established; this meant derivative trading was almost tax-free, derivatives will be taxed as short-term capital gains. Derivative trading will now attract a tax rate of 15 per cent, compared with zero earlier, unless, of course, a favorable tax treaty is relied upon,” added Bijal.

It is important to note that three among the top five sources for portfolios investments do not have favorable treaty with India on capital gains. The five countries include U.S., Luxembourg, U.K., Mauritius and Singapore. Among the top five Singapore and Mauritius do not have to pay tax various trades because of the tax treaties with India.

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