The introduction of the Direct Taxes Code (DTC), which will replace the 50-year-old Income Tax Act, will make Foreign Institutional Investors (FIIs) liable to pay capital gains tax on their income from securities trade. All the FIIs will be subject to the capital gains tax after implementation of the Direct Taxes Code.
The proposal was included in the revised draft on DTC to plug the loophole whereby some FIIs report their capital gains as business income and claim total exemption in the absence of a permanent establishment in India. This has resulted in lots of litigation.
However, most FIIs report their income from such investments as capital gains.
Those showing their gains from investment in securities as business income also escape tax since it comes under the purview of the Double Taxation Avoidance Agreement (DTAA) that India has with other countries.
“It is, therefore, proposed that the income arising on purchase and sale of securities by FIIs shall be deemed to be income chargeable under the head capital gains,” said the revised DTC draft.
To plug the loopholes in the double tax avoidance pacts, the government had proposed that domestic laws will override the bilateral tax agreements in the first draft itself.
It has diluted this proposal in the revised draft of the DTC.
The revised draft imposes three conditions when domestic laws will override tax pacts. One of them is when the government decides to impose branch profit tax.