“All FIIs will be subject to the capital gains tax after implementation of the Direct Taxes Code,” said a Finance Ministry official.
The proposal was included in the revised draft on DTC to plug the loophole whereby some FIIs report their capital gains as business income and claim total exemption in the absence of a permanent establishment in India. This has resulted in lots of litigation.
However, most FIIs report their income from such investments as capital gains.
Those showing their gains from investment in securities as business income also escape tax since it comes under the purview of the Double Taxation Avoidance Agreement (DTAA) that India has with other countries.
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