Even as foreign portfolio investors (FPIs) find India to be an attractive emerging market destination, a large number of them continue to be wary of the overall tax and regulatory environment, a survey showed.

According to a survey of 203 FPIs by accounting, audit and tax consultancy firm PricewaterhouseCoopers (PwC) India between April and June, 77% found the overall regulatory environment challenging, while 81% cited the tax environment.

Concerns surrounding the amendments to GAAR (general anti-avoidance rule) were evident in the responses. Also, there is a need to rationalize provisions related to offshore transfer, safe harbour and the India-Mauritius tax treaty, said the PwC India survey.

For instance, the FPI registration process and KYC (know your customer) requirements, despite the government’s current initiatives, could benefit from further easing.

Under offshore transfer provisions, investors in India-centric FPI funds may possibly be taxed in India and FPIs may be obliged to withhold appropriate taxes thereon. The potential tax risk resulting from these indirect transfers is creating concerns among the FPI community, especially investors in India-focused funds.

“These funds are at a tax disadvantage compared to global funds which bring in a small portion of their total investments into India,” said the survey

Around 64% of the respondents said that they were worried about the introduction of GAAR. At a granular level, tax managers (78%) were more concerned about GAAR than portfolio managers (42%), showed the survey.

“GAAR, offshore transfer tax provisions, fund manager safe harbour provisions and developments around the India-Mauritius tax treaty, however, continue to be areas which have engaged attention, and need ongoing discussion and clarity—efforts that are, to some extent, already in progress. The survey also indicates that, on the whole, the investors were satisfied with Indian income-tax rates on capital gains, the outcome of the MAT controversy and tax audits, the regulator’s response to queries, and the trade and settlement process,” said Gautam Mehra, leader-tax and regulatory at PwC India.

More than 4,800 FPIs are registered with the Securities and Exchange Board of India (Sebi), according to the latest monthly bulletin released by the market regulator. FPIs are categorized under three sections: 1) government and government-related foreign investors and sovereign wealth funds; 2) regulated broad-based funds including mutual funds, investment managers, asset management companies and university funds among others; and 3) endowments, charitable societies, corporate bodies, trusts, family offices and individuals.

The survey also showed that investors were positive about the India’s trade and settlement processes. India follows a T+2 rolling settlement cycle for non-government securities and T+1 for government securities, and nearly two out of three respondents rated the India’s current trade and settlement process as either good or great.

On the other hand, 45% of the participants in the survey observed the cost of trading in securities market is high. An additional 52% observed the costs are moderate, and that there is scope of further reduction in costs.

In India, the cost of trading includes several levies like brokerage, service tax, stamp duty, STT (securities transaction tax), Sebi turnover fees, exchange transaction fees and custody fees. Though these costs might seem small on first glance, they can have a major impact on investment portfolios, which churn frequently. These costs, coupled with high tax, administrative and compliance costs and hedging costs, result in the cost moving upwards.

“The FPI community expects a lot more. There still exists a significant minority that feels that the cost of trading is high. It is a known fact that STT, transaction fees, statutory compliances, etc., add to the operating cost, and a lot more can be done to bring down the cost of trading. Interoperability between clearing corporations, allowing offset of positions across exchanges and taxing dollar gains as against rupee gains are some of the potential solutions,” said Suresh Swamy, partner-tax and regulatory at PwC India. Swamy co-presented the survey on Wednesday.

The findings are important as a greater number of foreign funds are looking at India as the investment destination. The survey showed that 67% of the participants see India as the preferred destination and 73% of FPIs like direct access to markets over participatory notes (P-Notes).

In May 2016, Sebi proposed tighter rules for P-Notes in an attempt to curb the potential for money laundering through this investment route, popular among rich individuals and hedge funds. The change in rules on P-Notes followed recommendations made by a Supreme Court-appointed Special Investigation Team (SIT), which was set up to address the issue of black money, or unaccounted and untaxed wealth. The SIT report in July 2015 made some critical observations on P-Notes and suggested increased regulation of fund flows through this route.