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Foreign Institutional Investors(FII) over High Net Worth Individuals(HNI): Government has made its choice

Due to the obvious benefits of classifying the Income accrued from Trading as Capital Gains, High net worth Individuals have always wanted to classify their Income from Trading as Capital Gains and not Business Income. But, looks like that it has been the case of preferences for the Government…

A History lesson

In most cases, the interest of Assessing Officers and CBDT has always been in treating Income from Trading as Business Income (as they are taxed at slab rates). Usually, taxability for High-Income Individuals is more when their Income from Trading is classified as a Business Income over Capital Gains.

Hence, the AOs used to treat the Income from Trading for FII’s as Business Income and taxed them at higher slab rates. Due to this, Foreign Investments weren’t growing at the speed that the Government wanted.

To address this issue, the CBDT published a circular stating that Income from Trading for FIIs will be treated as Capital Gains and not Business Income. To further boost Investments, it was announced that Income from F&O trading will also be considered as a Capital Gains for the FIIs.

The HNI situation

Investments from HNIs and Promoters are great contributors to the Economic Development and the Market. A Report from Fortune India states that the number of HNIs in India is expected to increase by nearly 88% in the coming 5 years. However, due to the recent sluggish economic trends, that figure has taken a hit. But since the economy is growing at snail’s speed, HNIs and promoters were expecting Tax reliefs in the Budget 2020. But it looks like the Government has preferred FIIs over Indian HNIs and promoters.

HNIs and Promoters are still confused as to how to treat their Income from Trading. If you wish to read more, we have a comprehensive Blog on that- Income from Trading: Is it Business Income or Capital Gains?

It’s a Numbers game!

let us Understand this scenario from a Taxation Point of View.

Let us assume that Jhon and Saurabh are friends. Jhon is a FII while Saurabh is a HNI. They have been buddies for long and talk regularly and share a common interest i.e Global Stock Markets. One time they had a debate regarding the taxability for FIIs and HNIs in India. Unconvinced, both of them decided to Trade worth INR 20 Lakh. Saurabh was surprised to know how much more Tax he paid on Trading Income. Unsurprisingly, Jhon was relatively happy as he paid INR 3,12,000 Tax as a Capital Gains Tax (15% +4% cess) while Jhon paid INR 4,24,000 Tax at Higher Slab rates.

Why the Bias?

It is safe to say that Investment in India has been increasing since the economic reforms. We have welcomed FIIs and also promoted HNIs to invest in our markets. But since 2018-2019 Markets and the Economy haven’t been up to the mark. India’s GDP is at 13-year low amid this situation.

CBDT’s decision to allow FIIs to treat their Income from Trading as Capital gains will make Indian Markets more competitive and encouraging. FIIs are the most powerful players who not only drive Domestic markets but also International markets. Hence it is rational to reduce their Tax Liability and attract more Foreign Investments.

When a country receives Foreign Investment…

While boosting Domestic Investment is always good for the long term, it isn’t entirely possible for India right now. As Markets face a liquidity crisis HNIs and Promoters will naturally refrain from investing in the stock market. So the CBDT had to conjure ways to keep the wheels churning.

Finance Minister Nirmala Sitharaman is expecting a huge inflow of foreign capital in her bid to make the Indian Economy Stable and push towards the $5 Trillion Economy.

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