The Hindu Business Line : CAG faults tax treatment of FII income from stocks

INCOME of foreign institutional investors (FIIs) and their sub-accounts from stock market activities should be treated as business profit and taxed accordingly, according to the Comptroller and Auditor-General of India (CAG).

A CAG report tabled in Parliament on Friday said that the income of FIIs/sub-accounts was often being "erroneously categorised as capital gains and being exempted from tax by routinely invoking the Double Taxation Avoidance Agreements (DTAAs)."

As the tax treatment has major revenue implications, the CAG has said the Central Board of Direct Taxes (CBDT) should clarify its position on the matter.

"The board (CBDT) may issue necessary clarifications to ensure correct and proper taxation of income arising to FIIs/sub-accounts," the CAG has suggested.

It has also specifically sought clarification on whether sub-account arrangements would constitute a `permanent establishment' under tax treaty.

Further, the CAG has recommended that the CBDT should strengthen mechanism of coordination with regulatory bodies such as the Securities and Exchange Board of India (SEBI) and the RBI so that vital information relating to the income of FIIs/sub-accounts is obtained regularly and acted upon promptly by assessing officers with a view to bringing the same to tax.

It has also said that legislative amendments, if necessary, could also be opted for to achieve this objective.

The CAG report noted that the Income-Tax Department did not have any centralised or alternative effective mechanism to correlate or utilise the details available with SEBI relating to inflows and outflows of FIIs.

The CAG has also been given to understand from SEBI that application for registration did not have details of an agent as provided under Section 163 of Income-Tax Act and no details such as local address were available relating to FIIs.

Further, the CAG has recommended that the board (CBDT) should ensure that a database of FIIs/sub-brokers relating to all entities operating in India be prepared and their "liability to tax examined critically so that benefits of DTAA are availed only by assesses actually and rightfully entitled to the same."

While highlighting that cost-benefit analysis of DTAAs had not been conducted, the CAG report recommended that DTAAs be examined critically through a phased and well-monitored programme so that the interests of the revenue are safeguarded and one-sided concessions are avoided.

The CAG suggested that the board may "assess the costs and benefits from each DTAA transparently and objectively, especially as DTAAs are not placed before Parliament."

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CAG faults tax treatment of FII income from stocks