If surcharge not meant for FPIs, a clarification should be given: Dinesh Kanabar

Maybe more than two-thirds of that money is in company form and there are no issues with it. It is only when it has come in as a trust, and that is about one-third of the money, that it faces the higher surcharge issue, says Dinesh Kanabar, CEO, Dhruva Advisors. Excerpts from interview with ETNOW.

Could you just tell us what does the higher surcharge on the income tax mean for FPIs?
The point is that if you are assessed for tax either in individual or as an AOP (association of persons) or a body of individuals (BOI), then if your income exceeds Rs 5 crore, it will fall under this threshold. I do not think when the government imposed this surcharge, they thought through it. Surcharge was supposed to be applicable only to individuals and was not supposed to apply to partnerships, companies, etc. It is simply that this a category between trusts and the AOPs and BOIs. Nobody thought through to say that the FDI investment which is coming into India is partly in the company form and partly in the trust form.

My own assessment is that maybe more than two-thirds of that money is in company form and wherever it is in a company form, there are no issues with it. It is only when it has come in as a trust, that the issue start to arise and that is about one-third of the money. It is in the fitness of things that if indeed this was not intended, this was supposed to be meant for resident individuals -- taxing the super rich is how the finance minister mentions it in her speech -- probably a clarification is needed that AOP and BOIs and trusts which are not resident of India will not be taxed so. That will put the entire controversy to rest.

Could some of these AOPs which were operating as trusts or these AOPs convert into company over a period of time?
You cannot convert an AOP into a company or a trust into a company. What you can do is to move the portfolio out from the trust to the company and when you move that portfolio out, that itself has tax implications.

Again there is a huge controversy and I do not want to get too technical but it concerns what is the residential status of the trust. Is the trust to be taxed as an individual, are the beneficiaries to be taxed, etc, etc. But the position of the government always has been that in the case of a trust, it is an AOP and therefore an AOP gets taxed at that rate.

But again going back to your question, it is not possible to change the form without there being a tax implication but the question which begs to be answered is do you really want everybody to start undertaking exercises on how to move portfolio out from a trust to a company or would you simply clarify which is this is not what we intended, this is meant only for individuals and not for AOPs and foreign trust and whatever else.

If no clarification comes and it is deemed that it is for AOPs as well, do you think it will dampen the FIIs sentiment? They were already paying 36-37% which now gets increased to 41-42%?
By law the income which they make is capital gains. There is a specific provision which deems the income which they make to be capital gains. They were not paying 35% tax though it was either long term or short term gain. When they were making those gains, they will pay capital gains tax. If they now go to this particular rate, they would not pay 43% but capital gains tax quantum will go up. Until now they were paying 20% capital gains tax with a surcharge of 15%. Now it is 20% of the surcharge of 37%, so virtually 28% as opposed to 22% or 23% which they were paying so far.