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Govt rolls back super-rich tax on foreign portfolio investors, local institutions, HNIs
India's Finance Minister Nirmala Sitharaman | Photo Credit: Reuters

Finance minister Nirmala Sitharaman on Friday announced the reversal of a Budget proposal to levy higher surcharge on capital gains arising from short- and long-term dealings in India’s capital markets for foreign and domestic investors. Also, in a bid to revive economic growth, the goverment would recapitalise state-run banks immediately with an infusion of Rs 70,000 crore ($9.76 billion at current exchange rate). 

This higher surcharge reversal will be applicable with immediate effect and changes to the Income-Tax Act will be made soon. The government said the move will reduce the estimated tax revenue collection by Rs 1,400 crore.

Capital gains made on buying and selling of Indian equities and equity derivatives (future and options or F&O) within one year are classified as short-term capital gains. Capital gains on dealings in shares and derivatives held for more than a year are considered long-term capital gains.

"The withdrawal of enhanced surcharge on FPIs is a big positive for Indian markets as it could reverse the outflows seen since after Budget. It should also help rupee appreciation. Overall, a good sentiment booster for the Indian economy," said Rusmik Oza, head of fundamental research, Kotak Securities. “Maintaining its position that reform is a continuous process, and witnessing significant downturn in the capital markets due to many FPIs withdrawing from their Indian investments, the finance minister has announced the removal of higher surcharge. This should help calm the nerves of capital markets," said Daksha Baxi, head, international taxation partner, law firm Cyril Amarchand Mangaldas. 

In her maiden Union Budget, Sitharaman had proposed to increase the surcharge to 25% from 15% for those with taxable incomes between Rs 2 crore and Rs 5 crore, and to 37% for those earning Rs 5 crore and more, taking the effective tax rate on them to 39% and 42.74%, respectively.

The increased surcharge affected an estimated 40% of foreign portfolio investors (FPIs) registered in India, besides having a negative impact on individuals, Hindu Undivided Families (HUFs), trusts and associations of persons. 

Following the Budget announcement, FPIs have been net sellers in Indian capital markets, especially equity markets. Foreign institutions had sold Indian shares (cash segment) worth Rs 12,419 crore in the month of July 2019, the first monthly net selling of shares since January this year.

So far this August, FPIs have sold Indian shares worth Rs 12,105 crore, according to data compiled and published by NSDL, one of the two central securities depositories in India.

In the Budget, besides higher surcharge on capital gains, the government had proposed several other capital market measures such as relaxing know-your-customer (KYC) norms for FPIs, enabling social sector enterprises to list, and increasing minimum public shareholding.

To invite greater market participation, the government had said it would relax KYC norms for FPIs, and merge the non-resident Indian (NRI) portfolio investment scheme route with the FPI route.

The government was also looking to organise and host an annual meet for top global investors and get global industrialists, corporate leaders, sovereign and venture funds on a single platform.

In last year’s Budget, the Narendra Modi-led government had re-introduced long-term capital gains tax on equities and equity-linked securities such as mutual funds. The government had proposed a 10% tax on gains of more than Rs 1 lakh from investments in listed securities exceeding one year. The tax on short-term capital gains was not changed at 15%.

In addition to relief for foreign investors pumping money into the country’s capital markets, the finance minister announced that the ‘angel tax’ provision, which had caused much consternation in the startup community, will be withdrawn.

The minister also had some good news for government banks, which will get an upfront infusion of Rs 70,000 crore to provide additional credit facilities. 

Moreover, Sitharaman also announced measures for the home finance sector as well as the automobile segment, which have faced headwinds over the past few quarters. 

For home finance companies, liquidity support has been increased to Rs 30,000 crore from Rs 20,000 crore, the minister said. For home buyers, a separate set of measures will be announced in the next few days, Sitharaman added. 

Sitharaman said that banks had agreed to link their lending rates to the repo rate, so as to better transmit the central bank’s measures. This, she said, will mean cheaper loans for homes, vehicles and others. This will also make working capital loans cheaper. 

To kickstart automobile demand, the minister said that, as a first step, the government will again begin buying new vehicles to replace old ones, a practice that had been stopped for the last few years. In addition to this, the government will bring about a new policy in the coming days to incentivise people to scrap their old vehicles. Moreover, BS-IV compliant vehicles will be allowed to be registered till the end of March 2020, Sitharaman said. Also, revision of one-time registration fee has been deferred till June 2020. Moreover, there will be an additional 15% depreciation on all vehicles, besides depreciation will be raised to 30% for vehicles acquired during the period from now till March 31, 2020. All these steps will allow automobile makers to clear some of their piled-up inventory, she said.  

In addition to these, the minister announced a slew of measures to reduce harassment of income-tax assesses, and simplify KYC procedures for non-banking financial companies, which will now be allowed to use Aadhaar for the same. 

Sitharaman also announced that, going forward, violations of corporate social responsibility (CSR) norms will not be treated as a criminal offence, but as a civil offence. She also said that all pending Goods and Services Tax (GST) refunds to small and medium enterprises will be released within 30 days from Friday.

Moreover, Aadhaar-based KYC for opening demat accounts and mutual fund investments will now be permitted.  

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