By Suraj Malik and Alka Agarwal
Indian investors have lately shown enhanced interest in offshore equities and FANG stocks. Facebook, Amazon, Netflix and Google are some of the prominent options. Portfolio diversification, possibilities in offshore markets and the worldwide footprint of FANG like stocks are drivers for wealth-owners to develop an overseas portfolio. Technology and digitalisation have also enabled higher comfort of investment in overseas monetary stocks and items.
As investors chase the returns and added benefits from the offshore investment, it is significant to have an understanding of applicable BITs i.e. Banking, Investment restrictions and Taxes on such investments.
Banking: Regulations permit an person resident investor to make portfolio investments inside the all round annual limit of USD 2,50,000 below the liberalised remittance scheme. The investor is only essential to submit Type A2 even though remitting funds. The earnings earned can be retained outdoors for reinvestment and there is no mandatory requirement to repatriate it back to India.
Investment: Portfolio investment can be produced in shares and debt instruments like mutual funds and venture capital funds. Investments in businesses engaged in actual estate, banking and monetary services are also permissible. It is not mandatory for the investee to be a listed entity. Further, the ODI/FDI restrictions do not apply to portfolio investments. Investments can be produced to any nation other than Pakistan and these identified non-cooperative nations by FAFT. It is significant to note that remittance for the incorporation of a foreign entity or for holding a stake that offers rights for managing the affairs of the offshore entity are not covered below the portfolio investment route, and there are other restrictions and circumstances applicable to such investments.
Taxes: Starting October 2020, at the time of overseas remittance the bank would make a tax collection of 5% exactly where amounts exceed USD 9454 (Rs 700,000) in a year. Full credit for such tax collected is offered to the remitter against taxes due on earnings.
Once invested, earnings from overseas investments can generally take the kind of a dividend, interest, or capital gains. Dividends and interest are liable to tax as ordinary earnings and at applicable slab prices, with the exception that the surcharge on dividend earnings is capped at 15% for the highest slab. Amount of dividend or interest received demands to be grossed up for any taxes paid or deducted outdoors India. The credit of such foreign tax must be separately claimed in the tax return.
Capital obtain on shares held for far more than 24 months (36 months for debt and other instruments) are treated as lengthy term capital obtain (LTCG). LTCG is taxed at the price of 22.9% and can go as higher as 28.5% based on applicable surcharge price on the unique slabs of earnings. Gain on shares held for much less than 24 months (36 months for other instruments) is treated as quick term obtain and is taxed as per applicable slab and surcharge prices. Here once again credit of taxes paid overseas can be claimed.
Another significant aspect is the currency conversion price for earnings arising in foreign currency. One demands to apply the Telegraphic Transfer (TT) getting price as on the final day of the month promptly preceding the month in which the earnings becomes due.
Finally, as component of the tax return, the person is essential to disclose particulars of capital gains (Schedule CG), earnings from outdoors India along with taxes paid outdoors India (Schedule FSI) and tax relief claimed for taxes paid outdoors India (Schedule TR). In case the total earnings of the resident investor exceeds Rs 50 lakh, or the total earnings consists of any quantity of capital obtain, the investor is also essential to disclose particulars of foreign assets (Schedule FA).
Investors must element these elements to get the maximum bite out of their investments in FANG. There are other elements of dangers, currency volatility, and transactions expenses that must also be factored ahead of investing in the overseas markets.
(The authors: Suraj Malik, Partner – Transaction Tax, BDO India with help from Alka Agarwal, Assistant Manager – Transaction Tax, BDO India)