To boost dollar inflows, the Finance Ministry plans to address the complicated taxation issues for Foreign Portfolio Investors (FPI) without waiting for the next Budget.

FPIs are a new category of investors created by merging existing Foreign Institutional Investors (FIIs), sub-accounts and qualified foreign investors (QFIs).

Indications are that FPIs will get the tax benefits available to FIIs. “The new taxation regime for FPIs will be prescribed through a notification shortly,” a senior Finance Ministry official told Business Line, adding that this neither requires any amendment to the Income Tax law or any change to the Rules. This means that foreign investors will not have to wait till the next full-fledged Budget and the Finance Bill for the new regime to kick in.

In fact, Finance Minister P. Chidambaram has called for a meeting of the Economic Affairs Secretary, the Revenue Secretary and officials from the Tax Department to discuss the issue. The meeting will take place in a couple of days and, based on the discussion, a notification will be issued after being vetted by the Law Ministry.

NOTIFICATION SOON

The notification will prescribe the mechanism for tax compliance besides rates and other matters.

The key issue is who will ensure compliance. Currently, for the FIIs, it is the Custodian who normally takes responsibility for FII clients. However, this is not so easy with Qualified Foreign Investors.

“Considering the size of individual QFI accounts, Qualified Depository Participants do not find it viable to provide tax compliance services. This creates problems,” the official added.

On October 5, the Securities and Exchange Board of India announced a new category of foreign investors as FPI. The decision was taken on the basis of recommendations by the K. M. Chandrasekhar Committee, which suggested that the Government could consider bringing more clarity and certainty while prescribing tax provisions for FPIs.

TAX TREATMENT

In an interview to Business Line in October, SEBI Chairman U. K. Sinha had said, “We have recommended to the Government that the same (what is available for FII) tax treatment and procedures should be available for FPI category. My impression is that it is going to happen soon. Once that happens, the foreign portfolio investment part will become very smooth and we can expect foreign portfolio investment to be high.”

Commenting on the latest move, Vasudha Sundararaman, MD and CEO, SBISG Global Securities Services, said that it is important to communicate to foreign investors willing to come via the proposed FPI route that “the same taxation will be applicable to them as that of FII/Sub-Accounts. The sooner we communicate this to them, the better our chances to bring them on board.”