FPIs investing through Mauritius hit by budget provision

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Mumbai: The tax avoidance provisions on bonus stripping will hit foreign portfolio investors (FPIs) by investing in Indian companies and acquiring bonus debentures. This budget provision has angered FPI investors. In order to curb such activities in the budget, it has been decided to make provision in the Income Tax Act that the loss cannot be set-off through bonus stripping against other capital gains.

It may be mentioned that till now these provisions applicable to mutual funds have now been implemented for the units of shares and rates, invitations and AIFs from the budget of FY 207. This budget provision will hit particularly large institutional investors who have sold their original units within nine months of the record date to offset the losses from the sale of these original units against capital gains.

The anti-avoidance provisions of the Income Tax Act relating to bonus stripping now also include units and shares of Infrastructure Investment Trust (INVIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIF).

Bonus stripping was done in such a way that the units of the fund were bought for the purpose of obtaining bonus units and then selling the original units at a reduced price. As a result, sales losses at these reduced prices are used as a set-off against other capital gains. For example, an X person buys 500 units at a price of Rs. 100 before the record date of 1: 1 bonus issue. After the bonus issue this X person has 1000 units and the unit price goes down to Rs.30 after the bonus.

In case of bonus stripping, X sells 200 units at Rs. 30 per unit after bonus issue and decides to use the loss of Rs. 5,000 on these units as a set-off against capital gains. The remaining units received as a bonus are retained for a period of more than one year, according to which in case of gain of more than Rs.


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