The Income Tax (I-T) department came up with a clarification on Saturday, soon after Finance Minister Nirmala Sitharaman announced to roll back  higher surcharge on foreign and domestic portfolio investors, that the tax payable at normal rate on the business income from the transfer of derivatives to a person other than Foreign Portfolio Investments (FPIs) will be liable for the enhanced surcharge.

Sitharaman on Friday announced a series of decisions including the rollback of the controversial tax surcharge on the Foreign Portfolio Investment (FPIs) announced in the Union Budget last month.

According to the official statement of the I-T department, “The derivatives (future & options) are not treated as capital asset and the income arising from the transfer of the derivatives is treated as business income and liable for normal rate of tax.”

Tax experts opined that the clarification has watered down the expected benefits of the government announcement and can make return-filing very complicated. “It makes things very complex, ” said one of them as the structure is very “ridiculously worked out.”

“So, what it means that capital gains on listed entities will be exempted from higher surcharge for everybody. But when it comes to derivatives, all incomes of the FPIs will be at a lower rate of lower surcharge but all other entities will be subject to a higher surcharge,” he said.

After the clarification of the government, the expert said, “even Alternative Investment Fund (AIF) would also be paying higher surcharge.” Further, government has protected the market on listed entities and protected FPIs but everybody else is at ransom.

Riaz Thingna, director, Grant Thornton Advisory Pvt Ltd, said that the impact of the press release (clarification) can be summarised to state that long term capital gains (LTCG) on all listed securities will not be subjected to higher surcharge for all assesses.

Thinga further said, “Business income on derivative trading would not be subjected to higher surcharge for FPIs only. Entities like AIFs, however, will not enjoy the relief. The tax impact differential between listed and unlisted securities has also widened. In short, the impact of the press release is likely to provide only partial relief while creating complications in tax compliance for a large section of assesses.”

The Finance Minister on Friday announced to withdraw the enhanced surcharge levied by Finance (No. 2) Act, 2019 on tax payable at special rate on income arising from the transfer of equity share/unit referred to in section 111A and section 112A of the Income-tax Act, 1961 from FY20.

In its official statement on Saturday, the tax department clarified that the enhanced surcharge shall be withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term and short-term capital gains from the transfer of equity share in a company or unit of an equity-oriented fund/business trust which are liable for securities transaction tax and also on tax payable at special rate under section 115AD by the FPI on the capital gains arising from the transfer of derivatives.

“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,” the official statement said.

The decision to roll-back surcharge came weeks after FPIs turned net sellers of stocks after levy of surcharge in the Union budget.

in this year’s budget, Finance Minister Nirmala Sitharaman raised surcharges on those having annual taxable income more than Rs 2 crore. The surcharge of 25 per cent was levied on those having taxable income between Rs 2 crore and 5 crore, and 39 per cent on those with taxable income over Rs 5 crore.