FinMin expects no flight of FPIs on higher tax

Companies won’t be hit, she says
The increase in tax on high net worth individuals, announced in the Union Budget, will not result in an outflow of Foreign Portfolio Investments (FPIs), Finance Minister Nirmala Sitharaman informed the Lok Sabha on Thursday. The higher tax will only apply to individuals and FPIs registered as trusts, which are also treated as individuals. The FPIs that are registered as companies will not be affected, she said. “The increase in the effective tax rate is only on individuals who are earning above a certain amount per year, and this includes forms of FPIs that are registered as trusts, which are treated as individuals,” Ms. Sitharaman said in her reply during the debate on the Finance Bill in the Lok Sabha.
The House passed the Finance Bill after the debate.
In the Budget, Ms. Sitharaman had announced an increase in the surcharge paid by high net-worth individuals, effectively increasing their tax rate by 3% for those earning between Rs. 2 crore and Rs. 5 crore a year, and 7% for those earning more than Rs. 5 crore annually. The decision immediately drew criticism from FPIs and also from economists who predicted that it would result in an outflow of foreign funds from India. The issue was raised by several MPs during the debate on the Finance Bill. Ms. Sitharaman suggested that FPIs structured as trusts could consider restructuring themselves as companies.
The Finance Minister also clarified that the Budget proposal of a 2% TDS on cash withdrawals exceeding Rs. 1 crore a year from a single bank account would be adjusted against the tax paid by that individual at the end of the financial year. “The tax on cash withdrawals will be adjusted with the tax paid at the end of the year by the taxpayer,” Ms. Sitharaman said. “It is not a tax that is over and above the tax they pay in the year, and it is not a parallel tax. It will be adjusted.” In response to some comments by Opposition members that the tax on cash withdrawals would hurt small tea plantation workers, the Finance Minister said that the limit of Rs. 1 crore was high enough that the small workers would not be affected. It means that cash withdrawals of a little more than Rs. 8 lakh a year would not attract the TDS. The larger tea plantations are encouraged to transact digitally, she said.

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