– By Sunil Gidwani and Naitik Doshi
It is encouraging to note that boosting the financial service sector has been recognized as one of the seven priorities in the Budget speech by the Union finance minister Nirmala Sitharaman. With India being the world’s fastest growing major economy in the face of global recession, it is imperative that financial institutions and markets are strengthened. This article summarises key proposals impacting the financial service sector in two baskets, i.e., Regulatory and Tax proposals.
Key Regulatory proposals
Simplification of common KYC across financial products adopting ‘risk-based’ instead of ‘one size fits all’ approach should certainly go a long way in increasing retail participation in the financial markets.
To further popularise GIFT city, the regulatory process simplified by providing ONE WINDOW registration instead of two separate SEZ authorities and the FS regulator IFSCA is a step in the right direction of ease of doing business.
A comprehensive review of existing regulations proposed through a public consultative process would iron out some of the pain points of the sector and market intermediaries as well as bring in global best practices in the system.
Key Tax proposals
Tax incentives for GIFT city: (i) A welcome step by incentivising offshore funds to move to GIFT city extending the tax neutrality or exemption for relocation to GIFT from 31st March 2023 to 31st March 2025 (ii) Current exemption for non-resident from transfer of offshore derivative instruments (ODIs) entered into with IFSC Banking unit to be extended to income distributed on ODIs to non-resident by IFSC banking unit provided the same is offered to tax by the IFSC banking unit.
Any income categorised as ‘repayment of debt’ distributed by REIT and InVIT to its unitholders which were currently not subject to any tax is now proposed to be taxed in the hands of the unitholders as income from other sources on the amount over and above the cost of acquisition of the units. While other streams of income like interest, dividend, rent, etc. are currently taxed in the hands of investors, any gain in the form of excess over cost of units would also be taxed.
Long pending demand of NBFCs for tax parity with banks, is partially accepted by exempting NBFCs from thin cap rules that limit deduction of interest payments to related parties to 30 per cent of profits. However, no change regarding taxation of interest on NPAs on receipt basis.
Eligible start-ups in India are currently granted a tax holiday for three consecutive years out of ten years provided they are incorporated before 31st March 2023. To further promote startups in India, the tax holiday is extended to startup incorporated upto 31st March 2024. Also, tax losses are now allowed to be carried forward and set-off for 10 years from existing 7 years for eligible start-ups.
Many wealth managers and NBFCs issue listed MLDs with variable interest linked with the performance of the market. The returns are often paid to investors in the form of redemption at the time of maturity of such securities and the same are currently taxed as long-term capital gains at 10 per cent (without indexation) at the time of redemption/maturity. The budget proposes that any gains from Market Linked Debentures (MLDs) would be taxed as short-term capital gains at the applicable tax rates. The tax rate is likely to be as high as 30 per cent /40 per cent. This would definitely remove a major incentive for investors to invest in such instruments and hence create a major hindrance for NBFCs to raise funds through this route.
In line with the demand from the mutual fund industry, withholding tax on income from mutual funds for non-residents now would be at the rates in force as per the applicable treaty rate instead of flat 20 per cent.
Surcharge rate for individuals, HUFs and Association of persons opting for tax under new regime is reduced from highest 37 per cent to 25 per cent thereby reducing the highest effective tax rates on short term capital gains from 43 per cent to 39 per cent.
Misses in Budget 2023
Rationalising of capital gains tax regime by streamlining various periods of holding for long term and short term and different tax rates for different types of securities. For the sake of reviving market participation and volumes, the stockbrokers association had requested to bring back rebates on Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT) that were earlier allowed but are not considered in the budget.
All transactions pertaining to off-market sale/ purchase of shares and securities (mutual fund, and AIF units), including shares of private and unlisted public companies are currently covered within the ambit of TCS/TDS provisions. The ask from the private equity investors is to exempt TCS/TDS provision on transaction in unlisted securities as the same has been exempted for listed securities.
(Sunil Gidwani is Partner and Naitik Doshi is Associate Director at Nangia Andersen LLP)