Nirmala Sitharaman, India's finance minister, at news conference in New Delhi, India, July 5 2019. Picture: BLOOMBERG/T NARAYAN
Nirmala Sitharaman, India's finance minister, at news conference in New Delhi, India, July 5 2019. Picture: BLOOMBERG/T NARAYAN

Mumbai — It’s an old saw of India’s budget documents — the devil lies in details of the fine print.

A higher surcharge on wealthy Indians in the budget has spooked non-resident and overseas funds enough to erase 2.3-trillion rupees ($30bn) in market value from companies in the S&P BSE Sensex over the past three sessions.

The reason? The realisation that the new tax rate applies not just to the super-rich but also to trusts — a structure of choice for a large number of foreign funds that invest in India.

The proposal “seems to have inadvertently” dragged foreign portfolio investors into the tax net and must be clarified by the government, said KR Sekar, a partner at Deloitte Touche Tohmatsu India.

In her budget speech on Friday, finance minister Nirmala Sitharaman  proposed increasing the surcharge from 15% to 25% for those with taxable incomes of between 20-million rupees and 50-million rupees, and to 37% for those earning more than 50-million rupees. This takes the effective tax rate for those two groups to 39% and 42.74%, respectively.

Global and non-resident investors participate in India via non-corporate trusts and the so-called association of persons. The problem is, the structures are treated on par with individuals for tax purposes. This has stoked concerns about the levy encompassing foreigners at a time when the nation has emerged as Asia’s biggest destination for equity money in 2019.

“An investment vehicle — such as a category III alternative investment, or an FPI — taxed at a fund level is likely to get affected as the income may easily exceed 50-million rupees,” said Vaibhav Sanghavi, co-CEO at Avendus Capital public markets alternative strategies in Mumbai. Alternative investments, such as hedge funds, which use complex trading strategies, are classified as category III by the markets regulator.

The head of the nation’s direct-tax department said on Monday that the government would clarify the applicability of the higher levy on global investors, but a few hours later, Sitharaman ruled out an immediate clarification.

Bloomberg