Can you throw some light on how the capital markets and F&O transactions of FIIs are taxed in India?

Cost and Taxation

A “foreign portfolio investor” means a person who satisfies the eligibility criteria prescribed under regulation 4 and has been registered under Chapter II of these regulations;

Section 2(h) of Securities Contracts (Regulation) Act, 1956 defines “securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like

nature in or of any incorporated company or other body corporate;

(ia). derivative;

(ib). units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic). security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id). units or any other such instrument issued to the investors under any mutual fund scheme;

[Explanation— For the removal of doubts, it is hereby declared that “securities” shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called which provides a combined benefit risks on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938);]

(ie). any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt as the case may be;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities.

Income Tax

Section 115AD of the Income Tax Act, 1961, deals with Tax on income of Foreign Institutional Investors from securities [excluding dividend income which is exempt u/s 10(34) and income from units of mutual fund which is exempt u/s 10(35)] or capital gains arising from their transfer. The section provides that the word "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956.

The section further defines the expression "Foreign Institutional Investor" - means such investor as the Central Government may, by notification in the Offical Gazette, specify in this behalf.

The following notifications are issued by the Central Government in this regard:

1. Notifications No.SO 155(E), dated 7-2-1994;

2. Notification No.9527 [F.No 149/33/93 - TPL (Pt.)], dated, 30-3-1994;

3. Notification No. SO 112(E), dated 21-2-1995;

4. Notification No.SO 282(E), dated 31-3-1995;

Further the Ministry of Finance, Department of Economic Affairs (Investment Division), has clarified through a Press Note that the FIIs are registered with the Securities and Exchange Board of India will be automatically notified by the Central Government for the purposes of section 115AD. [Press Note: F.No.5(13) SE/91-FIV, dated 24-3-1994]

Taxes * applicable to FII's in INDIA, is depicted in the table : (AY: 2013-2014)

Notes:

1. Taxes are inclusive of surcharge @ 2% wherever applicable and education cess @ 3% on the tax amount

2. 12 months in case of shares held in a company or any other security listed in a recognised stock exchange in India or a unit of the UTI or a unit of a Mutual Fund specified under section 10(23D) or a zero coupon bond. In all other cases 36 months.

3. DTAA denotes Double Taxation Avoidance Agreement signed by the Government of India with the contracting state

Section 90(2) of the Income Tax Act , 1961 prescribes that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.. Accordingly the rates as per the Income Tax Act, 1961 or as prescribed under the relevant DTAA, whichever is more beneficial can be applied. To claim the benefit of DTAA, certificate of residency from the Government of other contracting state is a must.

Futher section 196D of the Income Tax Act, 1961 prescribes the rate of tax deducation at source (TDS) for income referred to in section 115AD(1)9a), i.e. on income in respect of securities. It further states that there will be no TDS on capital gains arising under section 115AD(1)(b). It has been clarified in the press note given above that in order that the tax on capital gains arising to FIIs can be realised, each FII, while applying for initial registration with the Securities and Exchange Board of India, will have to specify an agent, including a person who is treated as an agent under section 163 of the Income-tax Act for the said purpose. Thus FII's have to meet the obligations of the Advance Tax liability arising within India as per the provisions of Part C of Chapter XVII of the Income Tax Act 1961. Futher FII's claim TDS (witholding tax) credits in the respective countries as per the provisions of DTAA or respective tax laws prevailing in that country.

Other Levies & Taxes

SEBI Turnover fees

Stamp Duty

Stamp duty is levied on value of shares transferred. In India stamp duty is levied by various states and hence rate of stamp duty varies from state to state. In Maharashtra, the stamp duty rate for Cash Market (other than Government Securities) and Derivatives Market Turnover (non-delivery) is :

Service Tax

Securities Transaction Tax (STT)

Futher as per SEBI guidelines FII's are required to settle the transactions by delivery only and therefore sr. no.3 of the above table is not applicable in case of FIIs

Dividend Distribution Tax