Watch out! FPIs may rush to stock up to avail treaty tax benefits
Mumbai: India-focused offshore funds are asking clients to advance their planned investments into them before April 1 -the deadline for foreign portfolio investors to avail treaty tax benefits. From the new financial year, foreign investors using countries such as Mauritius and Singapore to route their investments into India will have to start paying capital gains, though at a reduced rate for the time being. Also, the tax department will not question investors for bringing money through this route till March 31.
“Foreign investors may upfront their planned purchase of Indian stocks to before March 31 to take advantage of the grandfathering window so they don't have to pay any extra capital gains tax,“ said Samir Arora, fund manager, Helios Capital.
Last year, India amended its tax treaty with Mauritius and Singapore, from where close to 80% of foreign portfolio money flows into the country. The amended treaty says that FPI investments in India held before April 2017 can still avail treaty benefits, which they call 'Grandfathering'. This means FPIs holding stocks before April 2017 will not be subject to any tax or even scrutiny under the General Anti Avoidance Rule (GAAR), a rule which gives the taxman power to question foreign investors on their investments into the country .
The rule has prompted hedge funds and exchange traded funds (ETFs) which invest in India to push investors to use this window to bring in money . “Grandfathering ensures that investments before April 2017 are not scrutinised under GAAR and investors will try to take advantage of this,“ said Suresh Swamy , partner, PwC.
Most of these offshore funds have seen a sharp slowdown in inflows due to uncertainty about the impact of demonetisation on economic growth and a general aversion to emerging markets.
Foreign portfolio investors have dumped shares worth almost `30,000 crore since October. Though the selling has slowed down and the market has seen modest inflows so far in 2017, it is nowhere close to the interest that Indian stocks saw in the last few years. “I can easily imagine a scenario where both domestic and foreign investors become buyers together,“ said Arora.
A large number of investors coming via Mauritius and Singapore also invest via various structures including the off-shore derivative instruments like participatory notes. According to experts, it is some of these investors who are concerned over GAAR.
“Foreign investors may upfront their planned purchase of Indian stocks to before March 31 to take advantage of the grandfathering window so they don't have to pay any extra capital gains tax,“ said Samir Arora, fund manager, Helios Capital.
Last year, India amended its tax treaty with Mauritius and Singapore, from where close to 80% of foreign portfolio money flows into the country. The amended treaty says that FPI investments in India held before April 2017 can still avail treaty benefits, which they call 'Grandfathering'. This means FPIs holding stocks before April 2017 will not be subject to any tax or even scrutiny under the General Anti Avoidance Rule (GAAR), a rule which gives the taxman power to question foreign investors on their investments into the country .
The rule has prompted hedge funds and exchange traded funds (ETFs) which invest in India to push investors to use this window to bring in money . “Grandfathering ensures that investments before April 2017 are not scrutinised under GAAR and investors will try to take advantage of this,“ said Suresh Swamy , partner, PwC.
Most of these offshore funds have seen a sharp slowdown in inflows due to uncertainty about the impact of demonetisation on economic growth and a general aversion to emerging markets.
Foreign portfolio investors have dumped shares worth almost `30,000 crore since October. Though the selling has slowed down and the market has seen modest inflows so far in 2017, it is nowhere close to the interest that Indian stocks saw in the last few years. “I can easily imagine a scenario where both domestic and foreign investors become buyers together,“ said Arora.
A large number of investors coming via Mauritius and Singapore also invest via various structures including the off-shore derivative instruments like participatory notes. According to experts, it is some of these investors who are concerned over GAAR.
