Domestic Investors Will Continue To Pay Enhanced Surcharge On Derivatives
Finance minister Nirmala Sitharaman announced as many as 32 measures in six “silos” that included dropping the contentious surcharge on foreign portfolio investors (FPIs). 

Domestic Investors Will Continue To Pay Enhanced Surcharge On Derivatives

The government included relief provided to domestic and foreign investors from enhanced surcharge on equity capital gains in its ordinance to make changes in the Union Budget.

Finance Minister Nirmala Sitharaman reiterated the decision while announcing corporate tax cut—bringing it on a par with several Asian peers—ahead of the GST Council meet in Goa today.

The enhanced surcharge will no longer apply on foreign portfolio and domestic investors—in the hands of an individual, Hindu Undivided Family, Association of Persons, Body of Individuals and Artificial Judicial Person—on capital gains arising on sale of equity share in a company or a unit of equity-oriented mutual fund or a unit of business trust liable for securities transaction tax, Sitharaman said.

While overseas investors have also been exempted from the higher levy on futures and options trading, their local peers will continue to pay the increased surcharge. The changes were first announced in August amid chorus for relief as foreign investors began selling Indian stocks.

Domestic investors had sought parity with foreign peers on the enhanced surcharge on capital gains in futures and options but the finance minister stuck to the August position.

For overseas investors, the law prescribes the gains on derivatives as capital gains and the enhanced surcharge does not apply, Punit Shah, senior adviser at Dhruva Advisors, told BloombergQuint over phone. For domestic investors, the law is silent on this aspect, he said.

Depending upon several factors specific to the taxpayer such as volume of trade and treatment in the books of account, the gains could be classified as capital gains or business income; Shah said. “Enhanced surcharge may apply in most cases where it is classified as business income.”

The finance ministry’s stated position is that derivatives are not treated as capitals asset and the income arising from their transfer is treated as business income and is liable for normal rate of tax for domestic investors. In the case of foreign portfolio investors, the derivatives are treated as capital assets and the gains from the transfer are treated as capital gains and subjected to a special rate under the provisions of section 115AD of the Income Tax Act.

Also read: Fiscal Deficit Set To Widen Sharply On Corporate Tax Cuts, Bond Yields Spike

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