Foreign portfolio investors pulled out around $1bn from Indian equities in this month so far following the 'super-rich' tax announced in the budget for 2019-20, according to analysts.
In her budget speech on July 5, the country's finance minister, Nirmala Sitharamanhad, proposed a tax increase of 3% for individuals with an annual income between 20 and 50 million rupees ($291,205-$728,014), and 7% higher tax for those earning more than 50 million rupees.
Addressing lawmakers last week, Sitharaman said FPIs could restructure their trusts as companies to avoid the surcharge.
Restructuring global funds only for Indian tax reasons is not a joke"
"FPIs should consider the option of structuring themselves as companies rather than trusts to avoid paying the increased surcharge announced in Budget 2019," she said.
According to experts, FPIs - foreign entities investing in Indian stocks, bonds, and other such instruments - can choose to either come as a non-corporate entity or as a corporate. Around 2,000 of them, or 40% of the total pie, automatically come under the higher tax rate as they have been investing as a non-corporate entity such as a trust or Association of Persons (AoPs), which are classified as an individual for the purpose of taxation as per the Income Tax law.