Finance ministry to consult law ministry on FPI surcharge

The finance ministry is soon going to consult the law ministry on how to provide relief to foreign portfolio investors from the super-rich surcharge that was announced in the budget session on July 5.

The government is trying out different options and the one that will prove to be most effective and legally feasible will be implemented said people with knowledge of the matter. The surcharge has taken effect after the presidential assent to the finance bill.

Among the many options available are relief via a circular, an announcement to be followed up with an amendment later or an ordinance to immediately amend the Finance act.

When asked, a government source said:

“These would have to be taken to the law ministry for examination to assess effectiveness and doability.”

Earlier the government had issued beneficial circulars in order to provide relief to the taxpayers which were upheld by the Supreme Court.

But whether a circular under section 119 can be stretched to imposing an embargo on tax rates or surcharges needs to be examined. This particular section empowers the Central Board of Direct Taxes to issue these type of circulars.

In relation to an announcement and subsequent amendment in the winter session of Parliament, officials need to check the effectiveness of this as tax rates for the financial year will be levied from April 1. Amending the Finance act via ordinance is considered to be more preferable.

According to some of the well-known tax experts, the best legal option for the government would be to consider an amendment to exempt all alternate FPIs and investment funds that are registered with the Securities and Exchange Board of India from the increased surcharge.

According to Sudhir Kapadia, national tax leader:

“For now, the government should bring an ordinance to this effect or at least a definitive announcement which will give a great deal of comfort to investors and capital markets followed by a formal amendment proposal before Parliament.”

Kapadia also pointed out that there are precedents for allowing exemptions such as that of minimum alternate tax on foreign institutional investors and the applicability of the lower rate of withholding tax of 5% on masala bonds.

Rajesh H Gandhi, partner, Deloitte Haskins and Sells LLP said, “If the intention is to reduce the surcharge for the current year itself, then my view is that it might not be possible to do this simply by way of issuing a circular or notification since the change in surcharge will require an amendment in law and would not be a mere clarification of law.”