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Grandfathering fears shake up FPIs

Mumbai: Finance Secretary Hasmukh Adhia on Friday said that ..

Mumbai: Finance Secretary Hasmukh Adhia on Friday said that the 'grandfathering' provision for long-term capital gains tax is equally applicable to foreign portfolio investors (FPIs) after some experts expressed concern over the wording of the amendment in the Finance Bill.

The Income-Tax Department also tweeted that 'grandfathering' will be applicable to FPIs.

The fear was that due to the way the amendment was made in the Income-Tax Act, it could mean that FPIs may have been excluded from 'grandfathering' longterm capital gains tax. "As far as 'grandfathering' and the limit for levy of tax (LTCG) is concerned, it applies to both residents and non-resident investors," Adhia said.

Before the clarification, tax experts were of the opinion that the Income-Tax Act amendment allowing LTCG tax to be imposed at 10% appeared to leave out FPIs from the 'grandfathering' benefit. This would have meant that foreign investors would have had to pay tax on gains exceeding Rs 1 lakh in a financial year from the sale of shares and equity mutual funds. Other classes of investors are exempt from the levy for such gains made up to January 31.

Earlier on Friday, foreign investors went into a huddle with tax experts amid concerns that they may not get the benefit of 'grandfathering' — or exemption from — of the LTCG tax proposed in the Budget.

Tax advisors of FPIs rushed to New Delhi to meet senior tax officials and get clarity on the matter. Some experts said the exclusion of FPIs from the 'grandfathering' benefit may not have been intentional.

Industry experts said they expect the government to issue a clarification in the coming days. Many FPIs will now have to shell out 10% LTCG tax on their investments unless they move their base to the Netherlands or France to take advantage of tax arbitrage.

Tax-treaty shopping, a practice where foreign investors shift to a country to obtain the benefit of lower or no tax, is set to return to the Indian capital markets following the introduction of LTCG tax, ET reported on Thursday.

While India's tax treaties with Mauritius, Singapore and Mauritius have been amended to make investors liable to pay tax on their gains, such agreements with the Netherlands and France have not been similarly revised. Many FPIs may now consider setting up a pooling or investment vehicle in the Netherlands or France to obtain the tax advantage.

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