US Foreign portfolio investors ask India to amend capital gains tax treaty
Foreign portfolio investors based out of the US have collectively approached the India with a request to amend the India-US tax treaty, exempting them from paying capital gains tax , people close to the development said. These investors — mainly pension funds —are those who had invested in Indian equities through Mauritius route. They say the India-US treaty should be amended in a way that there’s no capital gains on those investors who do not pay taxes back home in the US.
They also expressed their wish to directly come to India rather than route through an investment vehicle based in a third country such as Mauritius or Singapore, a person in the know said. “Many US taxexempt investors like the US pension funds do not pay any tax in the US subject to certain conditions. Investing via structures that invested in India through Mauritius enabled them to keep their tax cost low. But now, with capital gains tax introduced in the Mauritius treaty, there would be a tax cost for these investors,” said Suresh Swamy, Partner, Financial Services, PricewaterhouseCoopers India.
Funds argue that since they are unable to claim credit of Indian taxes in the US, their cost structures, and hence return to investors, could go for a toss. They do not have tax liability in the US against which they can take credit for India tax.
“There’s no specific provision in the US India treaty which allows US investors to get a US tax credit for capital gains tax paid in India. US investors coming to India through a private vehicle unlike a mutual fund find it challenging to get a tax credit in their home country because capital gains is not considered as foreign sourced,” said Rajesh H Gandhi, partner, tax, Deloitte Haskins and Sells.
Industry trackers say this is mainly going to impact those who have short term investment strategy in India. “The Mauritius treaty amendment could lead to double taxation for such investors which would impact their returns, especially on the short term investments,” said Gandhi.
In a recent interaction with analysts and investors, Seth Freeman, chief executive officer of US-based investment manager EM Capital Management, said, “The benefit of such an amendment is huge as in that case, US investors would be able to invest directly, saving huge operating expense and therefore give higher returns,” said Freeman.
Industry trackers hint there may not be too many negative implications. “Many may have to live with this situation. India taxes only short term capital gains (STCG) earned on transactions on the stock exchange at 15%. Long term capital gains are exempted. Unless and until relative performance of funds investing in India vis-a-vis their peer funds is not impacted, an additional 15% STCG tax is unlikely to affect India strategy,” said Swamy.
