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Government proposes to cap surcharge on dividend income for FPIs with trust structure at 15%

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New Delhi: India has proposed to cap the surcharge levied on the dividend income of foreign portfolio investors (FPIs) that use a trust structure at 15% against 25-37% charged now, offering them significant relief after the row that broke out over the so-called super-rich tax last year. FPIs that operate as trusts now face a surcharge as high as 37% if dividend income is over 5 crore and 25% if it is between 2 crore and 5 crore, following measures in the 2019 budget. This had led to criticism that it would discourage FPIs from investing in India.

The government has also proposed tax exemption on the income of category III Alternate Investment Funds in the International Financial Services Centre from masala bonds, derivatives or overseas investments.

About 45% of FPIs have invested in the country as trusts. They will be eligible for refunds as the provision will be retrospectively applicable from April 1, 2020.

Finance minister Nirmala Sitharaman introduced the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill, 2020, in the Lok Sabha on Friday to replace the ordinance promulgated to provide relief to taxpayers due to the Covid-19 pandemic. However, the legislation also included relief measures for FPIs and AIFs.

“In view of stakeholders’ representations received after enactment of the Finance Act, 2020, and due to need for further rationalisation of some provisions of certain Acts, further amendments are considered necessary to be incorporated in the proposed Bill replacing the ordinance,” the government said in the statement of objectives accompanying the bill.

The Finance Act of 2003 had made dividends tax free in the hands of recipients and instead imposed a dividend distribution tax on companies and mutual funds distributing dividends. From April 1 this year, the dividend distribution tax was abolished and dividends made taxable in the hands of investors or recipients taxable at their applicable rate. Being in the nature of income, it also attracted a surcharge that goes up to 37% on dividend income of over 5 crore. The amendment will cap this surcharge at 15% for FPIs.

The new legislation also proposed the Faceless Assessment Scheme, 2019, empowering the central government to notify schemes for anonymous processes. It also proposes to amend the Direct Tax Vivad se Viswas Act, 2020, to extend the date for payment without any additional levy to December 31, 2020, or a further date as and when notified.

The proposed bill will enable extension of time limits for compliance or completion of actions by taxpayers between March and June 2020 because of the pandemic. Donations to the PM CARES Fund will be tax deductible–this will get codified in the Act. Deductions are generally claimed against donations made to certain funds and charitable institutions.

On GST Amendments
Responding to opposition criticism on the payment of goods and services tax (GST) dues to the states, Sitharaman said the Centre was not shirking its duty.

“We’re not taking away any state’s right and we’re not running away from our responsibility… We will give what is due to them,” she told the lower house of parliament amid heated debate on GST amendments.

She said the government is using force majeure in retrospect to give states what is due to them. “To say that it is not our objective to give states their dues is not correct,” she said.

However, Sitharaman said that the provisions made would require approval by the GST Council, without which no changes can be implemented.

“Section 168A of the CGST Act only provides that provisions can be made on the recommendation of the GST Council. We’re not introducing any such provision under which we are bypassing or violating (rules of) the council,” she replied.

She added that the bill was intended to allow relaxations in tax payment, filing and returns, which were within the Central government’s purview.

Among other changes, the government has proposed tax deduction at source or tax collection at source (TDS, TCS) at three-fourth the rate on specific transactions from May 14, 2020, till March 31, 2021, as a relief. The bill will replace the ordinance issued earlier.

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