Foreign portfolio investors (FPIs) will have to wait for any relief — higher super rich surcharge, as the Finance Bill has become an Act now. The higher rate will come into effect from April 1.
Passed by the Lok Sabha and returned by the Rajya Sabha, the Finance Bill got assent from President Ram Nath Kovind.
The Finance Act 2019 prescribes levying of a higher surcharge on persons earning more than ₹2 crore. Since this higher surcharge covers individuals or Hindu undivided family or association of persons or body of individuals, domestic or foreign, there is a fear that tax on the sale of equity will rise to 21.3 per cent from 18 per cent for short-term capital gains, and to over 14 per cent from 12 per cent for long-term capital gains.
It is also estimated that post-surcharge, the effective income-tax rate for high net-worth individuals will go as high as 42.5 per cent and there is an apprehension that this might lead to flight of capital. But, Finance Minister Nirmala Sitharaman does not think so and, therefore, she remained firm to her Budget proposal while replying to the debate on Finance Bill on both the houses of Parliament.
With the Presidential assent, any change in the provision will now be possible either by amendment Bill to be moved in Parliament during next session or by promulgation of an ordinance. Normally, Ordinance route is avoided in making any change in the provision of Finance Bill. Also, amendment (s) in the Income Tax Act takes place usually in Budget.
Sitharaman has also advised FPIs to register themselves as a company to protect themselves from the super-rich surcharge. When FPIs register themselves as a trust, it means that they are a body of individuals, and hence, liable to pay higher surcharge on earning more than ₹2 crore. However, such a surcharge is not applicable on companies. According to various industry estimates, nearly 40 per cent of FPIs have non-corporate structure and are likely to be affected by the increase in surcharge
However, experts feel that converting into company is not easy. First of all, it will require change in the Income Tax Act, which can at the best be done during winter session. Now common believe is that when the Finance Minister defended her proposal at least twice on the floor of house, the government might not make change so soon.
Meanwhile, higher tax has impacted the sentiment of the stock market and net outflow was over ₹12,400 crore during July and even during first two days of August, FPI’s net outflow was over ₹2,600 crore.
Another contentious proposal, now coming into effect, is TDS (tax deducted at source) on cash withdrawal above ₹1 crore from banks. This could be adjusted against the liability of the assessees, and hence, there will be no additional burden on them.