A new panel comprising regulators and certain Government agencies will be set up to look into procedural and other issues faced by foreign institutional investors (FIIs), the Finance Secretary, Mr Ashok Chawla, said here on Wednesday.

Besides procedural issues, the FIIs had also raised taxation issues under the proposed new direct taxes code. These issues were taken up with the Finance Minister, Mr Pranab Mukherjee, who addressed both FIIs and domestic institutional investors at a meeting organised by the National Stock Exchange (NSE).

They (FIIs) raised issues regarding securities transaction tax and capital gains in the tax regime under the proposed new direct tax code. We told them that the draft of the direct taxes code was in public domain and that they could respond with their views, Mr Chawla told reporters here.

SEEKing their perception

The Finance Secretary said that this was part of the continuing series of meetings that Government had with FIIs to get their perception on the investment climate and the procedural hurdles, if any, under various regulations.

However, Wednesdays meeting was the first that the Finance Minister had with FIIs after the presentation of the Budget for 2009-10.

This meeting should be seen more as a sequel to the new direct taxes code rather than one highlighting the procedural difficulties, sources familiar with the developments said.

Most of the FIIs registered here had so far not paid income tax. They have enjoyed tax exemption on their profits either through treaty benefits (for capital gains) or by contending that they do not have a permanent establishment in India and therefore their business income was not taxable in India.

Either way, they were getting away without paying taxes here. But the new code proposes to change that. The STT will go, but all their capital gains will be included in total income and become taxable. They are unlikely to get tax exemption on their profits as the code will override treaty, sources said. This has, in a way, made them jittery and compelled them to raise tax issues with the Finance Minister, they said.

The Government and SEBI had, in recent years, taken steps to simplify the registration process so that more foreign portfolio money could come in through direct route rather than through participatory notes. There has also been an increase in the number of FIIs registered with the capital market regulator.