Clipped from: https://www.business-standard.com/article/markets/no-relief-on-fpi-withholding-tax-india-inc-dreads-higher-borrowing-cost-123020301127_1.html
Industry to make representations to Finmin seeking grandfathering on existing investment
Raising capital via debt could become expensive for India Inc once the concessional tax of 5 per cent enjoyed by foreign portfolio investors (FPIs) on their debt investments is raised to 20 per cent. Experts said that since the central government has not provided any extension on the concessional tax, FPIs may look to pass on the additional burden to portfolio companies.
Stakeholders plan to approach the government on the issue. Among other things, they are seeking grandfathering on their existing investment.
“As most of the portfolio companies have tax-bearing contracts with FPIs, the tax burden can eventually fall on the borrower. This can significantly raise the cost of borrowing for the corporates. It is expected that the Indian companies will also request for an extension,” said Suresh Swamy, Partner, Price Waterhouse & Co LLP.
FPIs were hoping the lower tax rate would be extended in the Budget. But since there was no announcement, they are planning to make a representation to the Central Board of Direct Taxation (CBDT) to request grandfathering of incomes on investments done till June 2023, said experts.
With grandfathering, any lending done after June will be taxable at the higher rate but the returns on the previous investments will be taxed at 5 per cent.
“FPIs have been making representations to the Finance Ministry before the Budget too. Certain kinds of non-resident lenders may get the benefit of grandfathering, but FPIs at present won’t get this benefit. Certainly, the foreign investors will request the Finance Ministry for grandfathering of the previous returns,” said Rajesh Gandhi, Partner, Deloitte.
Interests from FPI investments in government securities and rupee-denominated corporate bonds are currently taxed at 5 per cent. Come June 2023, FPIs will face a tax rate of 20 per cent on these investments. The concessional tax was implemented in 2013 to bring inflows in the debt market amidst a flight of offshore investors.
“Apart from the request for grandfathering, there may be representations to implement the higher tax in a staggered way over the period of next 3-4 years,” Swamy added.
In 2022, India witnessed a total outflow of nearly Rs 1.33 trillion of which Rs 15,911 crore outflows were from the debt segment.
Certain FPIs do have an option claiming tax treaties benefits for bringing down the tax outgo. However, if selecting a jurisdiction only treaty benefits can lead to other complications such as attracting general anti-avoidance rules or GAAR.
For availing the relief, the entity must be a resident in the country or have offices there and they should be the beneficial owners. GAAR is to check that the investors do not use a tax friendly country to only channel their money.
Another option to lower taxes, experts said, is to look at investments through Gift City IFSC, which can lower taxation to 10 per cent with some additional surcharges.
“Section 197 of the IT Act currently does not enable FPIs to apply for lower withholding tax for receiving interest income. It may be appropriate for FPIs to make a representation for suitable amendment of section 197 so that FPIs can apply to the tax officer for a withholding tax rate which is below 20 per cent as mandated by section 115AD,” said Punit Shah, Partner, Dhruva Advisors.
- With no concessional tax, FPIs may pass the burden to portfolio companies
- FPIs can pass the outgo to companies under tax bearing contracts
- FPIs may request for grandfathering on returns till June 2023
- Withholding tax to rise to 20% from current 5%
- Offshore investors will have option to take tax treaty reliefs, IFSC route