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Q. Tax on portfolio funds: Comment on CBDT’s circular that made foreign portfolio investors liable to tax when they redeem their units in the fund.
Jan 19, 2017 Related to : GS Paper-3

Ans :

Introduction-

Recently the Central Board of Direct Taxes (CBDT) has put on hold its earlier circular on taxing foreign portfolio investors (FPIs). The earlier circular issued by CBDT has mandated fund managers to withhold and pay taxes when investors in offshore vehicles make a profit selling units, if half or more of the investment is in Indian listed securities. 

What is the issue-?

A foreign fund making portfolio investments in India can derive an income only after the capital gains on its transactions in India bear the appropriate tax under Indian law. But recent CBDT circular has been made liable to tax when they redeem their units in the fund. This amounts to double taxation on same income.

Impact-

Generally fund managers keep churning portfolio, and a double tax burden on FPIs will only dampen the demand for Indian shares. It will have multifaceted impact on investments in India. Hence by withholding double taxation circular CBDT has done right thing. 

Conclusion-

Investors need certainty and stability in countries tax policy, hence the objective of law should be to make the country an attractive investment destination. The CBDT’s circular is ill-conceived, poorly drafted and goes against the grain of the Shome Committee’s recommendations on retrospective amendments relating to indirect transfers. In this background the CBDT has done right thing by withholding the double taxation circular. 


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