Uniform tax rate for foreign portfolio investors

The Union Government stated that Foreign Portfolio Investors (FPIs) will attract uniform tax rate in all categories. The Central Board of Direct Taxes notified that the new class of investors, FPIs, would be treated as FIIs under the Income Tax Act, 1961. As per their risk profiles, FPIs are divided into three categories.

These are as follows:-

• Category I - the lowest risk entities comprises foreign government and government-related foreign investors.
• Category II – regulated entities such as university funds, university-related endowments and pension funds, etc.
• Category III – other entities viz. Qualified Foreign Investors (QFIs), etc.

FPIs brought together all the three investment categories — Foreign Institutional Investors (FIIs), their sub-accounts and Qualified Foreign Investors (QFIs). The tax rate for FPIs would be the same as that extended to FIIs. The new system would be especially beneficial for QFIs, who were subjected to higher tax rate earlier.

As per the new norms:-

• FPIs have been divided into three categories as per their risk profile and the KYC (Know Your Client) requirements, and other registration procedures would be much simpler for FPIs compared to the current practices.
• The new class would be given a permanent registration, as against the current practice of granting approvals for one year or five years to the overseas entities seeking to invest in Indian markets.
• Such registration would be permanent unless suspended or cancelled by SEBI or surrendered by the FPI.

In the new tax regime, there would be no deduction of tax at source on income earned by way of capital gains by FPIs (including erstwhile QFIs) but a discharge of tax by QFIs themselves only post which remittances outside India would be permitted.