Today, we will delve into a rather complex topic of Forex Benefit Denied to Non-Resident Investors on Sale of Unlisted Shares. While the forex market can offer lucrative opportunities, lacking knowledge or understanding of regulations can lead to benefit denial. Non-Resident Investors who invest in unlisted shares may need help accessing their forex benefits, which, in turn, affects their returns on investment. Let’s explore this topic in detail.
What Is Forex Benefit?
The definition of “Forex Benefit” refers to the advantages or profits gained by individuals or organizations who engage in foreign exchange trading. The benefits can vary based on the trader’s approach, the currency pair traded, market conditions, and Forex Benefit Denied to Non-Resident Investor on Sale of Unlisted Shares Forex Benefit Denied to Non-Resident Investor on Sale of Unlisted Shares the trading strategy used. Some commonly identified benefits of Forex trading include high liquidity, 24/7 market access, low transaction costs, and the potential for significant returns. However, it is essential to note that Forex trading is highly speculative and carries a high risk of loss. Hence, it only suits some and requires proper knowledge and risk management.
Who Is a Non-Resident Investor on Sale of Unlisted Shares?
A Non-Resident Investor on the Sale of Unlisted Shares refers to an investor who is not a resident of India but has invested in shares of an unlisted Indian company. When these shares are sold, tax regulations and rules apply based on the nationality and residency status of the investor and the profit or gain made on the transaction. Non-Resident Investors may have different tax implications and rates than Resident Investors in India.
Denial Of Forex Benefit to Non-Resident Investor on Sale of Unlisted Shares
The Foreign Exchange Management Act 1999 (FEMA) regulates foreign exchange transactions in India. It governs all foreign exchange transactions and transactions in securities and immovable property. One of the aspects that FEMA regulates is the sale of unlisted shares by non-resident investors. Under FEMA, non-resident investors are not entitled to certain benefits when they sell unlisted shares. It has been a point of contention for some investors, who feel they are being unfairly treated and not receiving the full benefits they are entitled to.
The non-resident investors’ sale of unlisted shares is governed by Rule 9 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. This Rule states that non-resident investors are not entitled to the benefit of indexation on the cost of acquiring shares. Indexation is the process of adjusting the cost of acquisition of shares for inflation so that the profit or loss on the sale of the shares can be calculated accurately. This method calculates the gain or loss on the sale of shares, which reflects the current inflation rate.
The rationale behind denying indexation to non-resident investors is that the profit or loss on the sale of shares made by non-resident investors is subject to taxation in India. However, non-resident investors may have already paid tax in their home country on the same income. It has led to double taxation of the same income, disincentives non-resident investors to invest in India.
Another benefit denied to non-resident investors is the benefit of capital gains tax exemption for investments made before April 1, 2017. This benefit is available to resident and non-resident investors, who can show proof of their residential status in India for more than 182 days in a financial year. However, non-resident investors who cannot meet this criterion are not entitled to the capital gains tax exemption.
Despite these restrictions, non-resident investors can still invest in unlisted shares in India. They can sell their shares and repatriate the sale proceeds to their home country, subject to the regulations of FEMA. Non-resident investors can also claim credit for taxes paid in India against taxes paid in their home country under the provisions of the Double Tax Avoidance Agreement (DTAA) signed between India and their home country.
Why Forex Benefit Denied to Non-Resident Investor on Sale of Unlisted Shares?
Forex benefit is denied to non-resident investors on the sale of unlisted shares because the tax laws in most countries do not allow such benefits to foreign investors. Unlisted shares are those that are not traded on a stock exchange, and they are typically bought and sold privately between parties.
When non-resident investors sell unlisted shares, they may receive a capital gain in the local currency of the country where the shares are located. However, when they convert the proceeds to their home currency, they may be subject to foreign exchange (forex) fluctuations and currency conversion costs.
Some countries offer forex benefits to foreign investors when they sell listed shares on a stock exchange to address this issue, as the sale and purchase are made in the same currency. However, unlisted shares are not traded on a stock exchange, so they are not eligible for the forex benefit.
Therefore, non-resident investors who sell unlisted shares may have to bear additional costs associated with currency conversion, which reduces their overall return on investment.
The Acts and Legal Provisions Related to The Topic Forex Benefit Denied to Non-Resident Investor on Sale of Unlisted Shares
Foreign Exchange or Forex transactions have constantly been subjected to regulatory laws and policy guidelines to ensure a stable economic environment and promote international trade[1] and investment. The forex market is one of the most dynamic and complex, changing rapidly. The Indian forex regulation framework is guided by The Foreign Exchange Management Act (FEMA), 1999, which replaced the Foreign Exchange Regulation Act (FERA), 1973. The act governs all forex-related matters in India, including forex trading, investments, contracts, acquisitions, and borrowings.
The government’s approach to attracting foreign investment has noticed a noticeable shift in recent years. The government has taken steps to provide a conducive business environment for foreign investors to invest and grow their businesses in India. In line with this, in 2017, the government of India brought significant changes to FEMA that allow foreign residents to acquire shares in unlisted Indian companies.
However, despite these changes, non-resident foreign investors still need help realizing their investments’ full potential. One of the critical issues that foreign investors face in India is related to forex benefits. The Indian government does not provide forex benefits to non-resident investors on the sale of unlisted shares. It has been a significant concern for foreign investors as it significantly impacts their ROI, making their investments less attractive.
The Reserve Bank of India (RBI) governs these foreign exchange transactions. According to the RBI’s foreign exchange management regulations, non-residents can acquire shares in Indian companies on a repatriable or non-repatriable basis. Non-repatriable investment implies that the investor cannot take the investment proceeds out of the country, regardless of the gains or losses. On the other hand, repatriable investments allow the investor to take the profits and capital gains out of India after paying applicable taxes on the returns.
Despite the RBI’s guidelines, foreign investors are not entitled to Forex benefits on selling their shares in unlisted companies. It is because the Reserve Bank of India deems that the forex benefit on shares of unlisted companies cannot be determined. The RBI has also stated that forex benefits for non-residents on listed companies’ shares are only available if sold through the recognized stock exchange at the prevailing market price.
The income tax act of India also governs the taxation aspect of the sale of shares by non-repatriable investors. Non-resident investors must pay capital gains tax on selling their shares in unlisted Indian companies. The capital gains tax rate is calculated based on the investment period. If the investment period is less than or equal to 24 months, the short-term capital gain tax rate is applied to the sale proceeds. The short-term capital gain tax rate is 30% plus applicable surcharges and cesses. The long-term capital gains tax rate is applied if the investment period is greater than 24 months. The long-term capital gains tax rate is 20% plus surcharges and cesses.
The Indian government’s decision not to provide forex benefits to non-resident investors on the sale of their unlisted shares has been criticized by several foreign investors. This policy discourages foreign investors from investing in unlisted Indian companies. It is because they do not have the same potential for returns that they would have if they invested in listed Indian companies.
To address this issue, the Indian government needs to re-evaluate its policy on forex benefits for foreign investors. By providing forex benefits to non-residents on selling their shares in unlisted Indian companies, the government can create a more conducive investment environment for foreign investors. It will not only attract foreign investment but will also reduce the barriers that foreign investors face when investing in India.
Thus, the Indian government has made significant strides in creating a more conducive investment environment for foreign investors. However, denying forex benefits on selling unlisted shares to non-resident investors remains a significant issue. This policy discourages foreign investors from investing in unlisted Indian companies, which could significantly impact the country’s economic growth. The government needs to re-evaluate its policy on forex benefits and create a more conducive investment environment for foreign investors. It will not only attract foreign investment but will also reduce the barriers that foreign investors face when investing in India.
Landmark Case Laws Related to The Forex Benefit Denied to Non-Resident Investor on Sale of Unlisted Shares
Several landmark case laws relate to Forex Benefit Denied to Non-Resident Investor on Sale of Unlisted Shares. Some of the notable cases are:
Vodafone International Holdings B.V. V. Union of India (2012)
In this case, the Supreme Court of India held that the transfer of shares of an Indian company by a foreign company to another foreign company is not taxable under Indian law.
Azadi Bachao Andolan V. Union of India (2003)
In this case, the Supreme Court of India held that the benefit of Double Taxation Avoidance Agreements (DTAA) cannot be denied to non-resident investors.
Tata Sons Ltd V. The Deputy Commissioner of Income Tax (2017)
In this case, the Bombay High Court held that a non-resident shareholder who sells shares of an Indian company outside India is not liable to pay tax in India.
Castleton Investment Ltd. V. CIT (2018)
In this case, the Delhi High Court held that the gains made by a foreign investor on the sale of shares of an Indian company are not taxable in India.
These cases have established a clear legal framework for taxing non-resident investors for selling unlisted shares in India. The courts have consistently upheld the principle of non-discrimination against foreign investors and have emphasized the importance of complying with international tax laws and DTAA provisions.
Conclusion
In conclusion, the benefit of indexation on the cost of acquisition of unlisted shares and the benefit of capital gains tax exemption is denied to non-resident investors. It has been a concern for some investors, who feel they are unfairly treated. However, these restrictions have been implemented to prevent double taxation and ensure non-resident investors pay taxes in India. Non-resident investors can still invest in unlisted shares in India, subject to the regulations of FEMA. They can claim credit for taxes paid in India against taxes paid in their home country under the provisions of the DTAA.
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