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The Concept of FPI in Income Tax Law
The Concept of FPI in Income Tax Law
Are you a unit holder of FPI??? Or a novice in the arena of Foreign Portfolio Investment?? Income tax laws treat the unit-holders of FPI and FPI itself as separate entities...Since they are separate entities, tax treatment will not be alike for both of them… In this write up, an attempt has been made to understand in simple lucid language, the taxability of both, the investor of FPI and FPI..
Understanding The Concept of FPI in Income Tax
1. FPI are similar to mutual funds.
2. In FPI, non residents provide their money to FPI and then FPI on behalf of non residents invest in India.
3. When FPI sale its investment in India, it may result in profit on its investment. Such profit can be business profit or capital gain profit.
4. Since FPI invested in Indian assets, such profit is taxable in India in the hands of Non Resident.
5. But what about treatment of tax in the hands of investor of FPI’s???
Lets understand this with the help of an illustration.
a. Mr John invested $1,00,000 in a FPI. FPI allotted 10,000 units to Mr John being $10 value of each unit of FPI.
b. Subsequently FPI invested in India and earned profit on its investment. The profit earned will increase the fair value of its unit. Suppose the fair value increased from $10 to $ 20.
c. FPI would be chargeable to tax in India on its investment. The rate of tax will depend upon specific provisions of the Act.
d. Simultaneously, its been a year and Mr John wants to redeem his investment in FPI. He will receive $200000 on redemption, as fair value is now $20.
e. Now an important question arises…..On redemption of units, the gain which accrued to Mr John shall be taxable in India???
f. The Act says yes since its an indirect gain earned by Mr John…..Had Mr John not invested through FPI route but directly invested, then such gain would have been taxable in India…..The genesis behind this crux is found in Explanation 4 and 5 to Section 9 of the Act.
g. So the argument of Mr John that FPI has already paid taxes to Indian Government could not find any support…..As its said, life is unfair, so are taxes in India…...
But there are few exceptions where investors of FPI will not be chargeable to tax in India. For that read this article.
