No differential regime, tax body clarifies on foreign portfolio investors

AIFs are privately pooled investment funds of Indian or foreign sources and can operate in the form of a trust or a company or a body corporate or a limited liability partnership (LLP).

The Central Board of Direct Taxes (CBDT) on Wednesday clarified that the Friday announcement to roll back higher surcharge on foreign and domestic portfolio investors have not created any differential regime between foreign portfolio investors (FPIs) and domestic investors, including Alternative Investment Fund (AIF) category III.

CBDT said in a statement that “an incorrect perception is being created in a section of media as if last Friday announcements made by the Hon’ble Minister of Finance which brought in a number of responsive structural measures to boost up the economy, have created a differential regime between FPIs and domestic investors including AIF category III”.

“Differential regime between domestic investors (including AIF category III) and FPIs existed even prior to the 2019 budget and was therefore not the creation of the Finance ( No 2) Act, 2019 or the announcement made by the Finance Ministry on last Friday,” it said.

AIFs are privately pooled investment funds of Indian or foreign sources and can operate in the form of a trust or a company or a body corporate or a limited liability partnership (LLP). Category-I AIFs mainly invests in start- ups, SMEs or any other economically and socially viable sectors identified by the government.

The category-II AIFs invest in private equity or debt funds that do not enjoy specific incentives or concessions by the government. The category-III AIFs include hedge funds or funds which trade with a view to make short term returns with no specific incentives or concessions given by the government or the regulator.

Clarifying the position on the matter, CBDT said “in case of FPIs, Income Tax Act, 1961 contains special provisions [section 115AD read with section 2(14) of the Act] for taxation of income from derivatives”.

“Under this regime, income of FPIs arising from derivatives was always treated as capital gains and liable for special rate of tax as per section 115AD of the Act. However income arising from derivatives for the domestic investors including AIFs category-III as well as for foreign investors who are not FPIs, has always been treated as business income and not as capital gains, and taxed at applicable normal income tax rates,” it said.

It said that the differential regime, therefore, always existed for FPIs through Section 115 AD. “Therefore to say that this year’s budget or FM’s announcement on the last Friday created a differential regime between FPI and domestic investor is incorrect,” it said.