Overseas investors may struggle to circumvent India’s plan to tax the very rich as the option proposed by the tax authorities to sidestep the levies isn’t easy to implement.

With frightened investors wiping off ₹2.9 lakh crore ($42 billion) from the benchmark S&P BSE Sensex since the budget on July 5 through Wednesday, tax officials have suggested that global funds convert themselves from trusts -- a structure followed by several foreign funds that invest in India -- to corporates as a way to avoid paying the higher surcharge.

Read also - Opt for ‘corporate’ structure to avoid additional surcharge: FPIs, AIFs told

The devils in the detail. Under General Anti-Avoidance Rules, tax authorities can question the move and even deny tax benefits to an entity if the change in the structure is purely led with an intention to avoid tax, said Punit Shah, a partner at Mumbai-based tax consultants Dhruva Advisors LLP.

Here are some other deterrents:

FPI trusts need to provide non-tax reasons for changing the structure under the GAAR Investors need to re-evaluate costs and benefits of alternative arrangements as the choice of a particular structure is driven by administrative convenience or local rules A change in structure will require the transfer of current holdings to another company

Read more: Why did FPIs spook market on additional surcharge?

Note: About 40 per cent of FPIs registered in India and operating as trusts are likely to be impacted by the proposal, though there could be many that are inactive, according to Dhruva Advisors The government has maintained that it is not specifically targeting overseas investors and that the increase in surcharge applies to individuals and entities -- including funds -- who invest in local assets through structures like trusts.

Fore more, read: Super-rich tax on FPIs - We’ll take it as it comes, says FM

Related Topics