Consequent to the implemented economic liberalisation in India during the 1990s, substantial international investment activity began within the Indian capital markets and through corporate vehicles with an increasingly vibrant fervour. In fact, today, Foreign Institutional Investors (FIIs) play a crucial role in the liquidity, growth and vitality seen in Indian capital markets. Simultaneously, along with increasing FII activity, as a result of the favourable economic and political climate, India also witnessed an increasing quantum of Foreign Domestic Investment (FDI). The regulation of these investment channels and instruments was at the front and centre of economic policy debate, a part of which revolves around taxation. There is undoubtedly a proximate and intelligible nexus between taxation and the employment of these investment tools. A taxation regime that is favourable can work in effectively attracting more international investment which in turn would enhance market liquidity, activity, and growth.1 While FIIs and FDIs may appear to be similar investment channels, for the most part, they serve entirely different objectives, and operate in substantially different manners and are subject to different regulatory regimes in terms of exchange, economic and taxation policy. In the coming sections of this paper, the authors have attempted to analyse several aspects of FII and FDI taxation in India. The first section delineates the differences in FIIs and FDIs, their market strategy, modus operandi, and objectives, while ascertaining what exactly these investment channels imply and the various investment vehicles that may be employed by foreign actors. The subsequent section of the paper outlines the tax regime applicable to such FDIs and FIIs, depending on the organisational scheme and objective of the business vehicle so employed for the investment. Given that FIIs and FDIs essentially involve a foreign element, the question of double taxation is one which necessarily requires to be addressed. To that end, in the third section of this paper, the authors have looked at Double Taxation Avoidance Agreements (DTAAs) (Tax Treaties) in the context of FIIs and FDIs.

1. IMPACT OF
TAXATION ON
CROSS
BORDER
INVESTMENT
Presented by:
Isha Joshi
MBA(IB) – III sem

2. CONTENTS
Introduction
FII Taxation
FDI Taxation
Double Taxation Avoidance
Agreement
Conclusion

3. INTRODUCTION
Consequent to the implemented economic liberalisation
in India during the 1990s, substantial international
investment activity began within the Indian capital markets
and through corporate vehicles with an increasingly
vibrant energy.
In fact, today, Foreign Institutional Investors (FIIs) play a
crucial role in the liquidity, growth and vitality seen in
Indian capital markets.
Simultaneously, along with increasing FII activity, as a
result of the favourable economic and political climate,
India also witnessed an increasing quantum of Foreign
Direct Investment (FDI).

4. Foreign investment in India is regulated by the Reserve Bank of
India (RBI), through SEBI as a nodal agency, as is envisaged under
Sections 6 and 47 of the Foreign Exchange Management Act,
1999 and under the Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident outside India) Regulations,
2000.
FIIs under Indian law are defined as institutions established or
incorporated outside India which propose to make investments
in securities in India.
These FIIs, governed by the SEBI (Foreign Institutional
Investors) Regulations, 1995, must make an application for
certification for the purpose of purchasing and selling Indian
securities as FIIs from the Indian market regulator.

5. According to the stipulations of International
Monetary Fund (IMF) and Organization for
Economic Co-operation and Development (OECD),
the acquisitions of at least ten per cent of the
equity capital or voting power in public or
private corporations by non-resident investors
qualifies such investment to be designated as
FDI.

6. FII TAXATION
FIIs are subjected to a special scheme of taxation in the
Income – tax Act, 1961. Section 115 AD of the Act is a self-
contained code which provides for their taxation.
Section 115 AD of the Act is however subject to Section
90 of the Act read with the provisions of the Double Tax
Avoidance Agreement (DTAA) of the home country of the
FII which if more beneficial will override the provisions of
section 115 AD.

7. RULE 115 AD
1) Where the total income of a Foreign Institutional Investor includes—
(a) income [other than income by way of dividends referred to in section 115-O]
received in respect of securities (other than units referred to in section 115AB); or]
(b) income by way of short-term or long-term capital gains arising from the transfer of
such securities, the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated on the income in respect of securities
referred to in clause (a), if any, included in the total income, at the rate of
twenty per cent :
(ii) the amount of income-tax calculated on the income by way of short-term
capital gains referred to in clause (b), if any, included in the total income, at the
rate of thirty per cent :
(iii) the amount of income-tax calculated on the income by way of long-term
capital gains referred to in clause (b), if any, included in the total income, at the
rate of ten per cent; and
(iv) the amount of income-tax with which the Foreign Institutional Investor
would have been chargeable had its total income been reduced by the amount
of income referred to in clause (a) and clause (b).

8. RULE 115 AD
2) Where the gross total income of the Foreign Institutional
Investor—
(a) consists only of income in respect of securities referred to
in clause (a) of sub-section (1), no deduction shall be allowed
to it under sections 28 to 44C or clause (i) or clause (iii) of
section 57 or under Chapter VI-A;
(b) includes any income referred to in clause (a) or clause (b)
of sub-section (1), the gross total income shall be reduced
by the amount of such income and the deduction under
Chapter VI-A shall be allowed as if the gross total income as
so reduced, were the gross total income of the Foreign
Institutional Investor.

9. FDI TAXATION
FDI must be made subject to the provisions of the FDI
policy and the extant regulations in respect of procedural
compliance with the exchange control regulations.
FDI must be made in a business vehicle such as a
company, a partnership concern, a joint venture, or a sole
proprietorship and so on. The tax payable for the business
activities of the FDI will depend on the business vehicle so
employed.

10. ASPECTS OF TAXATION
Direct Taxes:
The investor is required to pay tax on net income earned in India. The rates
of taxes differ among structures.
Company:
The company incorporated in India is required to pay 30%
tax+surcharge+education cess on net income earned. It is also required to
deduct tax on profits distributed @15.5%+surcharge+education cess.
Limited Liability Partnerships (LLPs):
LLPs are required to pay tax @30%+surcharge+education cess. There is no
tax on profits distributed.
Minimum Alternate Tax (MAT):
18.5%+SC+EC- Indian tax law requires MAT to be paid by corporations in
cases where the tax payable according to the regular tax provisions is less
than 18.5% of their book profits. However MAT credit (MAT-actual tax) can
be carried forward in next 10 years for set-off against regular tax payable
during the subsequent years subject to certain conditions.

11. DOUBLE
TAXATION
AVOIDANCE
AGREEMENT
(DTAA)

12. ×The DTAA, or Double Taxation Avoidance Agreement is a tax treaty
signed between India and other countries so that taxpayers can avoid
paying double taxes on their income earned from the source country as
well as the residence country.
×At present, India has double tax avoidance treaties with more than 80
countries around the world.
×The need for DTAA arises out of the imbalance in tax collection on
global income of individuals.
×If a person aims to do business in a foreign country, he/she may end
up paying income taxes in both cases, i.e. the country where the
income is earned and the country where the individual holds his/her
citizenship or residence.

13. For instance, if you are moving to a different country
from India while leaving income sources such as interest
from deposits in here, you will be charged interest by
both India and the country of your current residence as
per your consolidated global earnings.
Such a scenario can have you pay twice the tax over
the same income.
This is where the DTAA becomes useful for taxpayers.

14. CONCLUSION
Whether your business in a corporation or a sole proprietorship,
you are going to pay taxes on the profit you make..
Different decisions, such as how long you hold an investment or
where you open a store, have different tax consequences.
Federal taxes are the same everywhere, but state income tax
rates vary across the country. Given their choice, companies prefer
to locate their operations in states that have favourable, low rates
on corporate income.
It's one of the things that explains why retail stores sometimes
cluster along the border of a low-tax state, where they can
compete for high-tax state customers without being subject to the
tax bills.

15. CONCLUSION
Time can make a big difference to your capital gains when you
sell stocks, bonds or other investments and assets.
Taxes reduce your investable income, that is, the amount of
income you can invest. When you pay taxes before you invest, you
have less money to invest into the stock market and other
investments.
Some investments are more tax-efficient than others. Interest
from municipal bonds are not usually taxed at the federal level.
There are other investments (like dividend paying stocks) that
sometimes come with preferred tax rates.
However, tax laws can change at anytime.

16. Thank You!