Sebi set to accord same tax treatment to FIIs, QFIs

In consultation with the Finance Ministry, market regulator Sebi has decided to treat all classess of foreign investors uniformly for tax purposes.

Simply put, foreign institutional investors (FIIs), qualified foreign investors (QFIs) and FII sub-accounts will soon be subjected to similar tax treatment under the new foreign portfolio investment (FPI) category.

Sebi made it clear that it recieved a note from the Department of Economic Affairs in the Finance Ministry suggesting that FPIs (foreign portfolio investors) be treated akin to FIIs for tax purposes. The proposal was originally made by the K M Chandrashekhar panel that reviewed various classes of foreign investors.

Currently, long-term capital gains on listed equities are not taxed in the case of both FIIs and QFIs. But FIIs and their sub accounts enjoy a more attractive tax regime than QFIs for short-term capital gains. With the new rule, all these investors, now categorised as FPIs, will be treated alike.

 “Another area where FIIs have a more favourable tax treatment over QFIs at present is that FIIs are not required to deduct tax at source on capital gains made on every transaction. They only need to pay advance tax on estimated income, which enables set off of capital loss, if any, on a transaction against capital gains on another,” said Vipul Jhaveri , partner, financial services taxation, Deloitte. Under the new regime, QFI are also likely to have the same treatment as FIIs.

FIIs (and sub-accounts) are taxed at 30 per cent currently on short-term capital gains on sale of unlisted equity or non-equity oriented fund, compared to 40 percent plus for QFIs. On long-term capital gains on non-equity oriented funds, the rate for FIIs is 10 percent, compared to 20 per cent plus for QFIs. Hence, once the tax treatment notification for FPIs comes in, QFIs stand to benefit the most.

FIIs and sub-accounts are taxed at 15% on short-term capital gains, while interest earned on bonds are taxed at 20 per cent. The interest on government bonds and certain prescribed corporate debt, however, attract tax of only 5 per cent instead of 20 percent.

Sebi insiders said the main change in the new regime is that the existing tax treatment on FIIs will be applicable on FPIs. “As regards FPI Regulations, the communication from the department of economic affairs to the CBDT and Sebi, conveying the decision that all three categories of FPIs would be given similar tax treatment as available to FIIs, was noted (at the board meeting).”