TAX NEWS - June 2010

India Tax: Revised DTC draft: FII income to be taxed as capital gains

The government has proposed to tax the income of FIIs from the sale and purchase of securities as capital gains under the proposed Direct Tax Code (DTC), which will replace the 50-year-old Income Tax Act.

The Direct Tax Code (DTC) draft also proposes to streamline the holding period of capital assets to one year uniformly. It has also suggested a deduction for a portion of capital gains on listed securities and equity-oriented funds.

It said so far, the majority of the FIIs are reporting their income from such investments as capital gains, but some of them were showing it as business income and claiming total tax exemption in the absence of a permanent establishment in India, leading to litigation.

"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 Direct Tax Code (DTC) draft.

KPMG Deputy CEO and Chairman, Tax, Dinesh Kanabar said that currently there is no taxation of capital gains on shares of listed companies shares and FIIs and the original Direct Tax Code (DTC) was proposing to tax all capital gains fully.

"The revised Direct Tax Code (DTC) goes mid-way. It provides that long-term capital gains will be partially exempt and everybody, including FIIs, will have to pay partial income tax," Kanabar said. "This is a very welcome step, in the right direction."