Budget 2024: 3.5x surge in capital gains tax on CCDs stuns foreign investors

livemint.com:

Mumbai: India’s latest union budget had a rude shock for foreign investors because their tax liability on capital gains in the country will surge across asset classes, experts said, which is likely to make them weigh the impact of the move before investing in the country. The biggest hit will be on foreign direct investments (FDI) in compulsorily convertible debentures (CCD), where the income tax rate on capital gains has gone up to 35% from 10%. Earlier, gains on unlisted CCDs held directly by foreign companies for more than three years were treated as long-term capital gains (LTCG) and taxed at 10%.

Now, these gains will be treated as short-term capital gains (STCG), regardless of the holding period. The increased taxation rate arises as the latest union budget changed the characterisation of these assets by amending Section 50AA of the Income Tax Act. Capital gains on CCDs will now be taxed at the maximum marginal rate, which is 35% for foreign companies.

The corporate tax rate on foreign companies was lowered to 35% in the budget on Tuesday. It was 40% earlier. CCDs are bonds that must be converted into equity by a specified date.

Issuance of CCDs is one of the most popular ways of raising FDI by Indian companies. “The amended section 50AA covers any gains on transfer or redemption of unlisted debentures as short-term capital gains, which will be taxed at the maximum marginal rate," said Vaibhav Gupta, a partner at Dhruva Advisors. “Taking positions on taxability of CCD capital gains under the tax treaties will now need to be considered in light of the impact of the tax rate going up 3.5 times in India." To be sure, unlisted CCDs held for less than three years were already taxed at the maximum marginal rate.