In a major relief to Foreign Portfolio investors (FPI), Central Board of Direct Taxes on 24th August 2019 has announced to scrap the enhanced surcharge on long and short-term capital gains arising from the transfer of equity shares.
This decision has been taken as one of the economic measures announced by Finance Minister in press conference dated 23rd August, 2019. The enhanced surcharge levied by the Finance (No. 2) Act, 2019 on long / short term capital gains arising from transfer of equity shares/ units referred to in sections 112A and 111A of the Income-tax Act, 1951 (the Act) respectively has been withdrawn.
The following capital assets are mentioned in section 111A and section 112A of the Act:
- Equity shares in a company;
- Unit of an equity oriented fund; and
- Unit of a Business Trust
Derivatives are not usually treated as capital asset and income arising from the transfer of the derivatives is treated as business income. But in case of FPIs, derivatives are treated as capital assets and the gains arising from their transfer is treated as capital gains. Such gain is subjected to a special rate of tax as per Section 115D of the Act. The tax levied under said section on the capital gain has also been exempted from the levy of the enhanced surcharge. However, the tax payable at normal rate on the business income arising from the transfer of derivatives to a person other than FPI shall be liable for the enhanced surcharge.
Therefore, enhanced surcharge has been withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term and short-term capital gains arising from the transfer of equity share in a company or unit of an equity oriented fund or business trust which are liable for securities transaction tax and also on tax payable at special rate under section 115AD (of the Income Tax Act) by the FPI on the capital gains arising from the transfer of derivatives.
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