Foreign portfolio investors (FPI) play an important role by investing in the Indian stock market. One of the ways used by FPI’s to earn money is through buying and holding the shares for short to mid term and thus earn dividend. A news broke out last year according to which, it was believed that the FPI’’s is the so-called super-rich tax as they received a significant relief.

It was recently proposed that India might cap the surcharge i.e. extract/additional fee on the dividend earned by the FPI’ at the rate of 15%. The surcharge of 15% will be charged against the 25-37% charged now. The FPI’s operate through trusts, will not face a surcharge of as high as 37% dividend is over 5 crores. If the dividend income is between 2-5 crores the rate of surcharge is 25%.

The decision taken by the government has received criticism that this will discourage FPIs to invest in India. The government has also proposed tax exemption on the income of category III Alternate Investment Funds in the International Financial Services Centre from masala bonds, derivatives or overseas investments.

Out of 100, 45% of FPIs operate through trusts and thus they will be eligible for refunds as the provision will be valid from April 01, ’20. The government made a statement which mentions the objectives which shall be accompanied with the bill, “In view of stakeholders’ representations received after enactment of the Finance Act, 2020, and due to need for further rationalization of some provisions of certain Acts, further amendments are considered necessary to be incorporated in the proposed Bill replacing the ordinance.”

The finance act 2003, had made dividend tax-free for shareholders while the company will be paying the tax, but lately they abolished this rule and put out a new rule according to which the shareholder needs to pay tax and not the company.