Soon after Finance Minister Nirmala Sitharaman announced to roll back higher surcharge on foreign and domestic portfolio investors, the Income Tax (I-T) department on Saturday clarified that the tax payable at normal rate on the business income from the transfer of derivatives to a person other than Foreign Portfolio Investments (FPIs) will be liable for the enhanced surcharge.

"The derivatives (future & options) are not treated as capital asset and the income arising from the transfer of the derivatives is treated as business income and liable for normal rate of tax," an official statement said.

Tax experts said that the clarification has watered down the expected benefits of the government announcement and can make return-filing very complicated. One of them said that the structure is very "ridiculously worked out" as it makes things very complex.

"So, what it means that capital gains on listed entities will be exempted from higher surcharge for everybody. But when it comes to derivatives, all incomes of the FPIs will be at lower rate of lower surcharge but all other entities will be subject to higher surcharge," he said.

As a result of the clarification, the expert said, even Alternative Investment Fund (AIF) would also be paying higher surcharge. Further, government has protected the market on listed entities and protected FPIs but everybody else is at ransom.

Riaz Thingna, director, Grant Thornton Advisory, said that the impact of the press release (clarification) can be summarised to state that long term capital gains (LTCG) on all listed securities will not be subjected to higher surcharge for all assesses.

"Business income on derivative trading would not be subjected to higher surcharge for FPIs only. Entities like AIFs however will not enjoy the relief. The tax impact differential between listed and unlisted securities has also widened. In short, the impact of the press release is likely to provide only partial relief while creating complications in tax compliance for a large section of assesses," Mr Thingna said.

The Finance Minister on Friday announced to withdraw the enhanced surcharge levied by Finance (No. 2) Act, 2019 on tax payable at special rate on income arising from the transfer of equity share/unit referred to in section 111A and section 112A of the Income-tax Act, 1961 from FY20.

In its official statement on Saturday, the tax department said that the enhanced surcharge shall be withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term and short-term capital gains from the transfer of equity share in a company or unit of an equity-oriented fund/business trust which are liable for securities transaction tax and also on tax payable at special rate under section 115AD by the FPI on the capital gains arising from the transfer of derivatives.

"However, the tax payable at normal rate on the business income arising from the transfer of derivatives to a person other than FPI shall be liable for the enhanced surcharge," the statement said.

The decision to roll-back surcharge came weeks after FPIs turned net sellers of stocks after levy of surcharge in the Union budget.

In her maiden budget Finance Minister Nirmala Sitharaman, raised surcharges on those having annual taxable income more than Rs 2 crore. The surcharge of 25 per cent was levied on those having taxable income between Rs 2 crore and 5 crore, and 39 per cent on those with taxable income over Rs 5 crore.