Finance Ministry promises to resolve tax concerns of FPIs

New Delhi: Government today promised to address tax concerns of foreign portfolio investors (FPIs) even as it nudged them to set up permanent establishment in the country.

Ahead of the Budget for 2016-17, the Finance Ministry in a bid to ease doing business in financial market met over two dozen FPIs including Citibank, Deutsche Bank, Fidelity, Goldman Sachs and BlackRock, and sought their views on various issues related to the sector.

"Number of suggestions have come and they have to be looked into and it will be placed in front of the government and government will take a decision. Tax issues were naturally raised... We discussed fund management industry in India," Economic Affairs Secretary Shaktikanta Das said.

The meeting was attended by top officials of RBI, Sebi, and CBDT.

According to sources, the government wanted to know from FPIs about the steps needed to encourage them to set up business in India.

Currently, foreign investors routing funds through countries with which India has Double Taxation Avoidance Agreement (DTAA) are exempt from paying short-term capital gains tax.

However, if foreign fund houses set up business in India, they would be liable to capital gains tax as per the domestic taxation law.

"The whole intention was to basically understand the suggestions and difficulties...And try to resolve those issues and whatever issues can be immediately dealt with will be dealt with by the government," Das said.

Nomura Fixed Income Securities MD Neeraj Gambhir said the issue of withholding tax of 5 per cent on corporate bonds was discussed at the meeting.

"The industry has been asking for a more longer-term treatment on it. It's 5 per cent, it's due to expire in 2017. Lot of people are making long-term investment. They need clarity on how long this is going to stay," Gambhir said.

Since the beginning of the year, overseas investors have made a net investment of Rs 24,342 crore in equities, and Rs 53,091 crore in debt market.

The meeting also discussed operational issues like registration and reporting for FPIs, Das said, adding that some of the suggestions are "very useful" in the run up to the Budget.

Besides, there were discussion on way to deepen and enhance liquidity in the corporate bond market.

The government has taken several steps for deepening of bond market and some suggestions were made to further enhance liquidity in the sector, Kakhu Nakhate, President and Country Head India, Bank of America Merrill Lynch.

"Government has been trying to be assertive about the fact that they want to maintain certainty around tax framework as far as foreign investors are concerned and they continue to remain committed on that," Vineet Bhatnagar, President and Head, Phillip Capital said after the meeting.

The Finance Ministry will hold similar consultation with the domestic financial institution tomorrow.