Tweaks to the FPIs in Union Budget

The Indian Government has made a few tweaks to the norms of foreign portfolio investors (FPIs) to attract funding for the Indian capital market.

What has happened?

• The Indian Government had, in the recent Union Budget, announced that increased surcharge will now be applicable to the FPIs.
• The Indian Government had levied an increase in the surcharge individuals who earn more than INR 2 crore a year.
• The increased surcharge was also applicable to the FPIs (which are structured as trusts) as they are treated as individuals for tax purposes.
• This caused some concerns as the investors were starting to pull out capital out of India.
• To reduce the concerns of the Investors, the Indian Government has decided to consider ?grandfathering? the income earned by FPIs in the Budget.
• Under the new proposal put forth by the Government, the FPIs have been structured as trusts that will not pay the increased surcharge.
• However, if the FPIs do not change their structure, they will need to pay the surcharge on the amount in FPIs.

What is Grandfathering?

A grandfather clause (or policy) is a special provision (usually related to taxation and accounting) in which an old rule will continue to apply on some existing situations while in other situations, a new rule will apply.