Income Tax

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.

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