Foreign portfolio investors are worried about government’s clarification on investments. Here’s why

The Foreign Portfolio Investors (FPIs) are worried as they fear Indian government’s clarification on investments and shares will impact them severely.

The government stated if the shares of an Indian company held by a fund constitute more than 50% of its total assets, and the value of the holding exceeds Rs 10 crore, indirect transfer of these shares abroad would be taxed in India.

In this regard, the FPIs may face up to 40% tax. As per experts, FPIs may have to start paying the tax within two years.

"Investors in FPIs can face 10%-20% tax on long-term capital gains and higher tax of 30%-40% on short-term capital gains as per the current law. This is because the concessional rate of 0-15% is available only for sale of securities listed in India and not foreign securities," Rajesh H Gandhi, partner at Deloitte Haskins & Sells, told ET.

However, senior government officials played down the development.

"The clarification was issued only to address queries and if anyone wants to have a legally binding opinion they can go to AAR (Authority of Advanced Ruling)," a senior tax official told ET.

While theoretically the government can also levy tax retrospectively for the last seven years, a tax official told ET that is unlikely, adding “As per the current law, tax department can go back till seven years but these issues are only theoretical in nature. In case of such demand (retrospective) the tax official will have to go through a high-level committee.”

However, there is a view in the industry that while the revenue officials may not demand tax retrospectively, prospective adjustments could start happening soon.

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