One interesting move in the Budget is to classify gains of foreign portfolio investors (FPIs) as capital gains. Foreign investors that buy and sell stocks or derivatives are in the business of doing so, and some income tax rulings have concluded that their income, thus, is business income.

Business income is taxable in India only if the business is located in India. Investors therefore did not want any office in India, including of their managers or otherwise.

This budget has now cleared the confusion and classified all such gains as capital gains. This means the managers can be located in India and be on the ground, without the fear that they will get taxed heavily.

The unintended consequence will be for investors coming from locations that don’t exempt capital gains (Mauritius and Singapore exempt it, the US doesn’t). Such investors will have to pay tax in India on capital gains.

The extra tax won’t hurt the fund much. A US Fund will pay capital gains taxes in the US also, and if it paid such a tax in India, it can claim credit for that tax. What it does, though, is to increase India’s share of that tax to 15% from zero.

According to Business Standard, more than 556,000 cr. is currently invested in India by US based investors.

Impact: Nothing will change for funds, but since they can set up operations in India, we might see some action in terms of hiring people on the ground and in investment in market research. The government will see more revenue.

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