The Central Board of Direct Taxes (CBDT) said today that an incorrect perception is being created in a section of media as if announcements made by Smt. Nirmala Sitharaman, Union Minister of Finance & Corporate Affairs, in a press conference on 23rd August 2019, which brought in a number of responsive structural measures to boost up the economy, have created a differential regime between FPIs and domestic investors including AIF category III.

Dispelling this false impression being created in certain sections of media including social media, CBDT said that differential regime between domestic investors (including AIF category III) and FPIs existed even prior to the General Budget 2019 and was therefore not the creation of the Finance (No. 2) Act, 2019 or the announcement made by the Finance Ministry on 23rd August 2019.

In this regard, CBDT has further stated that in case of Foreign Institutional Investors (FPIs), Income Tax Act, 1961 (the Act) contains special provisions [section 115AD read with section 2(14) of the Act] for taxation of income from derivatives. Under this regime, income of FPIs arising from derivatives was treated as capital gains and liable for special rate of tax as per section 115AD of the Act. However, income arising from derivatives for the domestic investors including Alternative Investment Funds (AIFs) category-III as well as for foreign investors who are not FPIs, has always been treated as business income and not as capital gains, and taxed at applicable normal income tax rates. The differential regime therefore already existed for FPIs through section 115AD. Therefore, to say that General Budget 2019 or FM’s announcement on 23rd August 2019 created a differential regime between FPI and domestic investor is incorrect.

Differential taxation of derivatives: FPIs taxed as capital gains while domestic investors face business income treatment. Differential taxation applies to income from derivatives: FPIs' derivative income has been treated as capital gains under a special taxation regime, whereas domestic investors including AIF category III and non-FPI foreign investors have historically had derivative income treated as business income taxed at normal income rates; this distinction predated recent budget announcements.