The tax benefits enjoyed by FPIs with regard to transfer of securities should be extended to "fund entities such as AIFs, venture capital, and private equity investors, given that the investment made by these entities is long term in nature and is in similar nature compared to FPIs", KPMG (India) head-PE tax Saumil Shah said.
The government should consider changes in the tax laws in the forthcoming budget as these would encourage the PE sector and give momentum to the 'Start-Up India' action plan, he suggested.
In order to resolve the problem being faced by foreign investors, the government in 2014 budget decided to treat income arising from transfer of securities by FPIs as capital gains.
Earlier, it was not clear whether income from sale of securities would be business income or capital income.
"The government had announced a series of initiatives focusing on ease of doing business in India. The proposed Start up India Action Plan just adds to the momentum," Mr Shah said.
Experts suggested that provisions relating to 10 per cent withholding tax on income distributed by AIFs should be rationalised as it's creating unnecessary hardships for foreign investors.
Currently, the provision of the withholding tax applies on payments made to tax-exempt entities.
"The 10 per cent withholding tax on all incomes distributed by AIF to all kinds of investors is quite unfair and unreasonable, considering the fact that such distributions may be tax-exempt receipts such as dividends from portfolio companies," Mr Shah said.
He said the withholding tax obligation on AIF should be much rationalised on the basis of self-certification by investors. This will shift the burden of proof from AIF to investors.
"In several cases, the payment may not be subject to tax in accordance with the treaty and the non-resident may suffer due to the unnecessary withholding... The non-residents may not be able to take credit of such withholding in their home countries since these deductions are not in accordance with the treaties," Ashok Maheshwary & Associates managing partner Amit Maheshwari told PTI.
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