China and India have announced tax changes that affect investors. China announced that dividend income that certain individual shareholders receive on shares of Chinese companies will be exempt from personal income tax. In a separate announcement, India said that the minimum alternative tax (MAT) would not apply to certain foreign institutional investors (FIIs) and foreign portfolio investors (FPIs).
Troubled Chinese stock markets
The Chinese measures are the latest in a series of moves Beijing hopes will encourage longer-term investment and halt a slide in Chinese equities. The troubled Shanghai and Shenzhen stock markets have rattled global investors and raised fresh doubts about the strength of the world’s second-biggest economy.
The Ministry of Finance, the State Administration of Tax, and the China Securities Regulatory Commission jointly announced that dividend income received by Chinese investors on certain shares will be exempt from personal income tax. The shares must have been acquired through public offerings or stock transfers. Investors must have held the shares for more than one year.
Dividends on such shares held for less than one month will be taxable. If the shares are held for more than one month and less than one year, 50% of the dividend income will be taxable. In both cases, the uniform Chinese tax rate of 20% will apply.
In India, the Ministry of Finance announced that the MAT would not apply to FIIs and FPIs that don’t have a place of business or permanent establishment in India for the period prior to January 4, 2015. The move is aimed at trying to retain and attract foreign investment.
The MAT was originally introduced to levy a minimum tax on “zero tax” companies by deeming a certain percentage of their book profits as taxable income. According to India’s Committee on Direct Tax Matters, many companies were paying marginal or no tax despite showing high profits and paying substantial dividends.
A controversy arose after the Authority for Advance Rules issued inconsistent rulings on the matter. As a result of one ruling, India’s tax authorities attempted to bill foreign investors for years of retroactive taxes under the MAT.
A special advisory committee charged with examining the controversy recommended that the MAT not be applied to FIIs and FPIs that don’t have a place of business or permanent establishment for the period prior to January 4, 2015.
The next step
Finance Minister Arun Jaitley said that the government had accepted the recommendation and that he would make the change permanent through legislation in the next parliament session, which is expected to take place in late November.