InvestorQ : I understand that because of the latest budget the FPIs will have to pay higher taxes. Will this impact the FII flows into India?
prachi Patwardhan made post

I understand that because of the latest budget the FPIs will have to pay higher taxes. Will this impact the FII flows into India?

Answer
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1 year ago


The Union Budget 2019 announced an additional surcharge for higher income groups. Currently, all persons earning more than Rs.2 crore are paying 15% surcharge over and above the 4% cess and 30% base tax rate. Post the current Union Budget, the persons earning between Rs.2 crore and Rs.5 crore will now pay an enhanced surcharge of 25% instead of 15% while the persons earning above Rs.5 crore will pay a still higher surcharge of 37%. For persons earning above Rs.5 crore, therefore, the effective tax rate goes up to 42.74% (30% tax rate X 4% cess X 37% surcharge).

Now the question is, why are FPIs are worried? That has to do with the structuring of FPIs. Nearly 60% of the FPIs operating in India are structured as corporates and they note have much to worry in this case. However, the balance 40% are operating as trusts or as AOPs and the higher surcharge will apply to such FPIs. The FPIs do have a choice of converting themselves into corporates but that has other implications in the form of STT payments and applicability of GAAR (retrospective taxation).

However, as of now, it does not look like there is any degree of panic among the FPIs or any kind of selling. The government may give a detailed clarification on this subject to allay doubts and fears in the minds of global investors.