FPIs bring together all the three investment categories — foreign institutional investors (FIIs), their sub-accounts and qualified foreign investors (QFIs).
Besides, the tax rate for FPIs would be the same as that extended to FIIs. The new system would be especially beneficial for QFIs, who were subjected to higher tax rate earlier.
The Central Board of Direct Taxes has notified that the new class of investors, FPIs, would be treated as FIIs under the Income Tax Act, 1961.
With the notification, issued on January 22, FPIs would now be subject to the same tax treatment as is applicable to FIIs under the current tax regime. The move clears the air over taxation regime for FPIs, created with the aim of rationalising overseas investments in the domestic capital market.
Global consultancy EY said that QFIs would also become eligible to concessional tax rates in respect of, inter-alia, capital gains earned on off-market transactions in securities (such as buyback and open offers in equity shares).
The Securities and Exchange Board of India notified the FPI norms on January 7, replacing the regulations for FIIs.
Under the new norms, FPIs have been divided into three categories as per their risk profile and the KYC (Know Your Client) requirements, and other registration procedures would be much simpler for FPIs compared to the current practices.
Besides, the new class would be given a permanent registration, as against the current practice of granting approvals for one year or five years to the overseas entities seeking to invest in Indian markets.
Such registration would be permanent unless suspended or cancelled by SEBI or surrendered by the FPI.
Category I FPIs, classified as entities with lowest risk, would include foreign governments and government related foreign investors.
Category II would cover appropriately regulated broad based funds, appropriately regulated entities, broad-based funds whose investment manager is appropriately regulated, university funds and pension funds, among others. Those who are not eligible to be in the first and second set of classifications would be considered under Category III.