« Top Headlines » Open DEMAT Account in 24 hrs  Budget 2024 makes new income tax regime more attractive: See how much taxes you can now save  ITR filing 2024: New vs old income tax regimes, 6 key things to consider while filing your tax return  These five technical glitches may impact your Income tax return (ITR) filing. Know here  ITR filing 2023-24: How to optimise Section 80D deductions at the time of filing tax returns  ITR filing 2023-24: Top 7 mistakes to avoid for hassle-free income-tax return filing this year  Income tax returns for FY 2023-24: Keep these 8 tax law changes in mind while filing ITR this year  ITR Filing 2024: Know who can and cannot file income tax returns using ITR-1 this year  Income Tax Filing: 10 necessary guidelines that you must be aware of  Why you should file your income tax returns before July 31  What is Form 26AS? How to download Form 26AS to file Income Tax Return (ITR)  Income Tax Return: What are the alternatives to Form 16 that can be used while filing ITR? «  Valuation of related party transactions by taxmen... 'Tax revenues to cross $143 bn by 2010'... » FIIs in tax haze on share sale June, 18th 2007 Foreign institutional investors (FIIs), particularly funds operating from destinations other than Mauritius, will have to grapple with greater uncertainty surrounding the tax treatment of profits from the sale of shares. Last weeks circular issued by the Central Board of Direct Taxes has also raised the tricky issue on whether local investors in portfolio management services (PMS) will have to pay a higher tax. Significantly, even Mauritius-based FIIs, who pay no tax now on the back of a treaty that India has with the country, may find the going tough if tax authorities can prove that they have a permanent establishment (PE) here. A PE does not necessarily mean an office in India. It could also mean an FIIs relationship with banks and custodians in India. Most FIIs from destinations like the US pay a 10% tax on short-term gains profits from sale of shares within a year of purchase. This settled position may now come into question. The circular lays down the broad parameters to distinguish between a trader and an investor. However, it certainly does not rule out the possibility that FIIs can have business income. Such FIIs will not have to pay tax in the absence of a permanent establishment, international tax expert, Nishith Desai told ET. If shares are held as trading assets, profits from the sale of such shares are treated as business income and taxed at a maximum of 30% for individuals and 33.99% for companies. However, if the stocks are held as a capital asset, the earnings are treated as capital gains. An investor in shares does not have to pay any tax if he sells the shares after one year of holding them. Shares sold within a year of holding attracts a 10% tax. According to Punit Shah, leader-financial services of PwC, The uncertainty over the FII tax regime could grow. Our experience is that many FIIs are filing returns as capital gains, paying a 10% tax. The circular has reproduced certain principles laid down by judicial pronouncements which seem to hint FIIs are earning business income rather than capital gains. Mr Shah also felt tax obligation of PMS investors could go up. Currently, all PMS profits are shown as capital gains. With the circular, PMS investors, like other market players, will have to segregate their portfolio of stocks as capital assets and trading assets something they dont do now. The tax liability may go up since the profits from the two classes of assets will attract different taxes. The Central Board of Direct Taxes (CBDT) circular allows an individual, including an FII, to have two portfolios one for trading in shares and the other for investment. An investor pays a lower tax than a trader in shares. But taxpayers will have to produce records and evidence to prove that the stocks are held as a capital asset or a trading asset. Several traders in stocks have been camouflaging their income from shares as investment income to save on tax. The party will end now as assessing officers will be guided by three principles: whether the shares purchased were held and valued as stock-in-trade; whether the transactions were substantial or not and the motive was to realise profits or earn dividends.