By Sunil Gidwani
Since financial service sector plays a pivotal role in measures adopted by the government to boost growth, it always finds a place of prominence in the budget proposals. This year the Economic Survey among other observations mentioned that the credit growth (bank lending) rate has been declining since 2019 but picked up sharply in Dec21. However, interestingly, for revival of the economy, risk capital (thru capital markets) has been more important than bank funding in the last 2 years.
On NPA front while the ratio of gross NPA to GDP has improved in the last year, given the size of the aggregate NPAs, it was expected that certain serious measures would be announced to address the issue. The ARCs have managed to acquire only small NPAs, National ARC will acquire large loans, aggregating to Rs 2 lac crores. Further IBC has resulted in over 400 companies being rescued/revived thru resolution whereas over 1400 companies have been liquidated. Hence it was inevitable that the National ARC is given access to huge resources to be able to acquire sizeable chuck of NPAs from banks and NBFCs.
Given these factors, the government has announced measures that will attract more foreign capital in different sectors and asset classes. Some of the key changes proposed are discussed below.
A few years ago Post Office was given banking licence but all post offices were not actually converted into banks. In 2022 the plan is to bring all post offices on banking platform to be able to offer all banking products. Given post office’s reach in smaller towns and villages this should give a big boost to financial inclusion.
Digital rupee to be issued by RBI would certainly result in reduced printing costs, decreased settlement risks, avoidance of time zone issues, and cost-effective payment system going by the global experience.
World-class foreign universities and institutions will be allowed to set up shop in the GIFT City to offer courses in Financial Management, FinTech, Science, Technology, Engineering and Mathematics. This should give a flip to availability of a large talent pool in the long run for fintech, financial service and IT sectors much needed for innovation.
There are several path breaking change proposed on direct tax front. Exemption currently available for income arising from the transfer of an aircraft is also extended to the income arising from the transfer of a ship, leased by a unit in IFSC to any person if the unit has commenced operation on or before the 31 March, 2024. Similarly, exemption currently available to non-residents for aircraft leasing also extended to non-residents by way of royalty or interest, on account of lease of a ship paid by a unit in IFSC commencing operations by 31 March, 2024
At the same time, from foreign investors’ perspective, exemption currently available to non-residents from income from non-deliverable forward contracts would be extended to offshore derivative instruments and OTC derivatives issued by an Offshore Banking Unit in IFSC. Also , exemption granted for income received by a non-resident from portfolio of securities managed by a portfolio manager in IFSC will bring much needed certainly for investors.
One important change that would be welcomed by AIF sector and investors relates to investments made by AIFs located in IFSC. Currently, a closely held company issuing shares to a resident at premium is subject to tax. Exception provided for shares issued to AIFs, is proposed to be extended to AIF cat I and II in IFSC.
Though a lot was expected by investors on long term capital gains front, no major relief has been announced. Several industry bodies has sought complete exemption from LTCG tax, however a small relief is announced which will impact primarily the large institutional investors or HNIs. Currently the effective tax rate including highest surcharge of 37% on LTCG tax of 10% or 20% for highest income bracket applies to unlisted shares taking the effective tax rates to 14% or 28%. With proposed 15% surcharge for investors with no other substantial income, the effective tax would be 12% and 24%.
(Sunil Gidwani is Partner at Nangia Andersen LLP. The views expressed are author’s own.)