When New Delhi opened the doors some months ago to allow foreign individuals and institutions to directly trade in Indian stocks, it was widely felt that money would rush in with rich investors around the globe waiting in the wings to step in. But it did not happen that way. Now, capital market regulator Sebi has proposed that laws should be tweaked to make it easier for offshore individual investors to put money in listed stocks.

After discussing the matter with experts in security market regulations and custodian banks, the regulator has, in a note to the finance ministry, suggested, among other things, that 'qualified foreign investors' - better known as QFIs - should be assured of tax certainty and exempted from filing income-tax returns.

"If it's clearly spelt out that the money QFIs make from trading is capital gain and not business income, custodians may be encouraged to withhold tax," said a person familiar with the proposal. For the QFI regime to take off, custodians will have to take the responsibility of deducting 15% tax on short-term capital gains on investments made by QFIs. Custodians do not want to find themselves in a position where the Income Tax department claims 30% tax well after funds have been remitted to a foreign investor who has let the custodian withhold 15% tax.

"Sebi has given these suggestions. It's up to the government to decide," said a source who attended the meetings that Sebi had with other institutions. It has also proposed that QFIs should be spared of advance tax and custodians should not insist on receiving the physical permanent account number (PAN) card of QFI. Instead, they can verify the electronic version once investor details are uploaded with on the depository. "This would save time and avoid complications. There is no need for the investor to first receive the card and then send it back to the custodian. A PAN card will anyway be generated from personal details like passport copy and income statement that an investor shares for opening a demat account to trade and complying with the standard know your customer rules," said a source.

"PAN and filing of tax returns are required for opening demat accounts and investing. So, some of the laws need to be tweaked a little in order to simplify procedures for QFI investments," said the person.

The QFI route for stock market investment places individual investors of countries that are not blacklisted by India at par with NRIs. Among other things, it's perceived as a more transparent way to invest in Indian securities and mutual funds. Sebi has discussed the operational and tax issues ICICI BankBSE -0.65 % (which may act as one of the several custodians for QFIs) and PwC. "QFIs who want to claim treaty benefit or offset gains with losses to lower tax outgo may file returns. But even this will not be required as custodians can pay tax once a year on the net amount," said a senior accountant.

At present, FII rules allow portfolio investors to get a tax certificate from a tax consultant based on which custodians deduct tax and then repatriate the balance amount to the investor. But, the QFI rules explicitly state that the authority of deduction of tax is with the qualified depository participant or the custodian. Since custodians are not experts on taxation they are reluctant to take this responsibility. Besides, custodians say they have very little to do with pre-trade activity.