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Taxation for International Investor


A “Foreign Portfolio Investor” means a person who satisfies the eligibility criteria prescribed under regulation 4 and has been registered under Chapter II of these regulations;

Section 2(h) of Securities Contracts (Regulation) Act, 1956 defines “securities” include—

nature in or of any incorporated company or other body corporate;

(ia).    derivative;

(ib).    units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic).    security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id).    units or any other such instrument issued to the investors under any mutual fund scheme;

[Explanation— For the removal of doubts, it is hereby declared that “securities” shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called which provides a combined benefit risks on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938);]

(ie).    any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable,  including mortgage debt assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt as the case may be; 

(iia) such other instruments as may be declared by the Central Government to be securities; and

more on taxation

Section 115AD of the Income Tax Act, 1961, deals with Tax on income of Foreign Institutional Investors from securities [excluding dividend income which is exempt u/s 10(34) and income from units of mutual fund which is exempt u/s 10(35)] or capital gains arising from their transfer. The section provides that the word "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956.

The section further defines the expression "Foreign Institutional Investor" - means such investor as the Central Government may, by notification in the Offical Gazette, specify in this behalf.

The following notifications are issued by the Central Government in this regard:

  1. Notifications No.SO 155(E), dated 7-2-1994;
  2. Notification No.9527 [F.No 149/33/93 - TPL (Pt.)], dated, 30-3-1994;
  3. Notification No. SO 112(E), dated 21-2-1995;
  4. Notification No.SO 282(E), dated 31-3-1995;

Further the Ministry of Finance, Department of Economic Affairs (Investment Division), has clarified through a Press Note that the FIIs are registered with the Securities and Exchange Board of India will be automatically notified by the Central Government for the purposes of section 115AD. [Press Note: F.No.5(13) SE/91-FIV, dated 24-3-1994]

Taxes * applicable to FII's in INDIA, is depicted in the table : (AY: 2013-2014)

 

Income
Company Defined Under section 2(17)
Non-Company
  Where aggregate of income exceeds on crore rupees (surcharge @ 2% applicable) Where aggregate of income does not exceed one crore rupees (no surcharge applicable) (no-surcharge applicable)
Dividends
- Exempt under section 10(34) of the Income Tax Act 1961 - 
provided Dividend Distribution Tax (DDT) under section 115O of the Income Tax
Act 1961, is paid by the Indian Company declaring the dividend.
Income from Units - Exempt under section 10(35) of the Income Tax Act, 1961 -
Income (other than above) in respect of securities
21.012%
20.60%
20.60%
Capital Gains - where Securities Transaction Tax (STT) is chargeable
Short Term (where holding period is upto 12 months)2
15.759%
15.45%
15.45%
Long Term (where holding period is beyond 12 months)2
- Exempt under section 10(38) of the Income Tax Act, 1961 -
Capital Gains - where Securities Transaction Tax (STT) is not chargeable
Short Term (where holding period is upto 12 months)2
31.518%
30.90%
30.90%
Long Term (no benefit of indexation) (where holding period is beyond 12 months) 2
10.506%
10.30%
10.30%
Income from transfer of such securities if chargeable under the head business income
Business Income (where no DTAA 3 / where DTAA 3 - to the extent of PE)
42.024%
41.20%
30.90%
Business Income (where no DTAA 3 exists - in case of no PE)
NIL
NIL
NIL

Notes:

  1. Taxes are inclusive of surcharge @ 2% wherever applicable and education cess @ 3% on the tax amount
  2. 12 months in case of shares held in a company or any other security listed in a recognised stock exchange in India or a unit of the UTI or a unit of a Mutual Fund specified under section 10(23D) or a zero coupon bond. In all other cases 36 months.
  3. DTAA denotes Double Taxation Avoidance Agreement signed by the Government of India with the contracting state

 

Section 90(2) of the Income Tax Act , 1961 prescribes that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.. Accordingly the rates as per the Income Tax Act, 1961 or as prescribed under the relevant DTAA, whichever is more beneficial can be applied. To claim the benefit of DTAA, certificate of residency from the Government of other contracting state is a must.

Futher section 196D of the Income Tax Act, 1961 prescribes the rate of tax deducation at source (TDS) for income referred to in section 115AD(1)9a), i.e. on income in respect of securities. It further states that there will be no TDS on capital gains arising under section 115AD(1)(b). It has been clarified in the press note given above that in order that the tax on capital gains arising to FIIs can be realised, each FII, while applying for initial registration with the Securities and Exchange Board of India, will have to specify an agent, including a person who is treated as an agent under section 163 of the Income-tax Act for the said purpose. Thus FII's have to meet the obligations of the Advance Tax liability arising within India as per the provisions of Part C of Chapter XVII of the Income Tax Act 1961. Futher FII's claim TDS (witholding tax) credits in the respective countries as per the provisions of DTAA or respective tax laws prevailing in that country.

Any 'non-residents' can approach "Advance Rulings Authority" under Chapter XIX-B of the Income Tax Act, 1961, to determine the tax implications in India for the transaction proposed to be entered.

The above information provided is for a general guidance only. However, in view of the specific nature of the transactions and its tax implications, FIIs are advised to consult their own tax advisors with respect to the specific tax implications arising out of India.

SEBI Turnover fees

Sr. No. Nature of securities Rate of Fee
1. All sale and purchase transactions in securities other than debt securities 0.00015 per cent of the price at which the securities are purchased or sold (Rs.15 per crore)
2 All sale and purchase transactions in debt securities 0.000005 per cent of the price at which the securities are purchased or sold (Rs.5 per crore)

 

Stamp Duty

Stamp duty is levied on value of shares transferred. In India stamp duty is levied by various states and hence rate of stamp duty varies from state to state. In Maharashtra, the stamp duty rate for Cash Market (other than Government Securities) and Derivatives Market Turnover (non-delivery) is :

Type of Trade Stamp Duty Rate
Non-delivery trade 0.002%
Delivery trade 0.01%

 

Service Tax

Category Tax Rate Payable By
Stock brokers Services 18.00% (GST) Brokers and collected from their clients.  However if the services are partly performed outside India and payment is received in convertible foreign exchange within 6 months, then the services will be treated as Export of Services and will be exempt from levy of Service Tax

 

Securities Transaction Tax (STT)

Sr. No. Taxable securities transaction Tax rate from June 1, 2013 upto May 31, 2016 Tax Rate w.e.f. June 1, 2016 Payable by
1. Purchase of an equity share in a company, where such contract is settled by the actual delivery or transfer of such share or unit. 0.100 per cent 0.100 per cent Purchaser- on the value of taxable securities transaction based on the volume weighted average price.
  Purchase of a unit of an equity oriented fund, where such contract is settled by the actual delivery or transfer of such share or unit. NIL NIL NA
2. Sale of a equity share in a company, where such contract is settled by the actual delivery or transfer of such share or unit 0.100 per cent 0.100 per cent Seller - on the value of taxable securities transaction based on the volume weighted average price.
  Sale of a unit of an equity oriented fund, where such contract is settled by the actual delivery or transfer of such share or unit 0.001 per cent 0.001 per cent Seller - on the value of taxable securities transaction based on the volume weighted average price.
3 Sale of an equity share in a company or a unit of an equity oriented fund, where such contract is settled otherwise than by the actual delivery or transfer of such share or unit. 0.025 per cent 0.025 per cent Seller - on the value of taxable securities transaction based on the volume weighted average price.
4a Sale of an option in securities 0.017 per cent 0.05 per cent Seller - on the option premium..
4b Sale of an option in securities, where option is exercised 0.125 per cent 0.125 per cent Purchaser - on the settlement price.
4c Sale of a futures in securities 0.010 per cent 0.010 per cent Seller - on the price at which such futures is traded.

Futher as per SEBI guidelines FII's are required to settle the transactions by delivery only and therefore sr. no.3 of the above table is not applicable in case of FIIs

Dividend Distribution Tax

Payable by Tax Rate Income in the hands of the recipient
Domestic Company 16.225% (15% + surcharge @ 5% + education cess @ 3%) Exempt
Equity Oriented Fund NIL Exempt
Money market Fund or Liquid Fund - if recipient is individual or HUF - 27.0375% (25% + surcharge @ 5% + education cess @ 3%) 
- if recipient in others - 32.445% (30% + surcharge @ 5% + education cess @ 3%)
Exempt
Other Funds - if recipient is individual or HUF - 13.5188% (12.50% + surcharge @ 5% + edcuation cess @ 3%) 
- if recipient in others - 32.445% (30%+ surcharge @ 5% + edcuation cess @ 3%)
Exempt

 

The above information provided is for a general guidance only. However, in view of the specific nature of the transactions and its tax implications, FII’s are advised to consult their own tax advisors with respect to the specific tax implications arising out of India.

Updated on: 05/12/2019 12:00
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