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Union Budget 2018: Foreign Investors To Get Same Relief As Local Investors In Long-Term Capital Gains Tax

The same grandfathering benefits that domestic investors will get on the reintroduction of the long-term capital gains tax will also apply to foreign portfolio investors, the government clarified today.

As a consequence of the fineprint in the Budget, tax experts were concerned that FPIs would not get these benefits. Early Friday morning, Pranav Sayta, tax partner at EY pointed out that confusing language seems to suggest the Budget included a separate provision that dealt with taxation of FIIs. This provision did not include the grandfathering benefits available to local investors.

Fears that foreigners may be taxed retrospectively on capital gains saw the S&P BSE Sensex equity index drop 2.3 percent, the most since November 2016.

In his Union Budget 2018 speech, Finance Minister Arun Jaitley proposed the re-introduction of a 10 percent tax on long term capital gains that arise on the sale of listed equity shares. But, he said, gains up to Jan. 31 will be grandfathered, that is, not subject to tax. This new tax applies to equity sales starting April 1, 2018 and only on gains exceeding Rs 1 lakh or more.

Here are edited excerpts from the conversation with Pranav Sayta.

Please shed some light on how FPIs will be taxed because of LTCG?

There is some confusion because of the language used in the Finance Bill that seems to suggest there is a separate provision which deals with taxation of FPIs and the provision that is proposed in that particular section is such that it leaves room for debate and probably gives rise to the impression that grandfathering benefit that we just described – the value as of Jan. 31, 2018 being allowable as a deduction – is not mentioned in the case of the provision or the section that deals with FPIs. And therefore the confusion is that do FPIs qualify for the grandfathering benefits that we just described, or do they not.

My feeling is that the intention probably was to allow grandfathering to all, and it’s a slight miss in the language, which probably should get corrected. As the provisions in the Finance Bill stand now, there is some confusion on whether or not FPIs qualify for grandfathering benefits.

How do you think this will impact FPI investments that will come into India and already existing investments?

The way I look at it is, if an FPI is protected already under a treaty – for example, under the Mauritius India Treaty or Singapore India Treaty capital gains was exempt and probably continues to be exempt, grandfathered under the treaty, for investments that were made on or before March 31, 2017.

If an FPI, and most FPIs maybe, are already protected under the treaty, then investments made on or before March 31, 2017, were in any case grandfathered and will continue to qualify for the benefit of the treaty, both under the amendment that happened to the treaty, Mauritius as well as Singapore under the protocol some time back, as well as the general anti-avoidance rule (GAAR) provisions, both of which grandfather investments made upto March 31, 2017, from any future capital gain tax on sale. And therefore those might still be well protected if the FPI qualifies for the benefit of the relevant treaty.

The other might be investments made on or after April 1, 2017. Those now may not get the benefits of the proposed grandfathering under LTCG which has been introduced. Meaning, if the sale of the shares were to happen on or after April 1, 2018, the shares acquired on or after April 1, 2017, then those will be taxable under the capital gain at 10 percent, without the grandfathering, meaning value as on Jan. 31 2018 being allowable or the appreciation up to Jan. 31, 2108 being protected or grandfathered, without that benefit it might get taxed at 10 percent, if the sale happens after April 1, 2018.

And if they sell before April 1, 2018, because we are talking of shares acquired on or after April 2017, they might get taxed at short term capital gain at 15 percent as it will be sell within one year. So if the grandfathering is not available to FPIs, then the grandfathering protection of appreciation up to Jan. 31 2018, in short may not be available to FPIs. I think this should get clarified, but we will have to wait and see.