It’s an early Deepavali: FPI surcharge goes, Rs 5 lakh crore more loans, more repo-linked loans

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Published: August 24, 2019 2:21:21 AM

The finance minister said all tax notices, summons and orders would now need to be authorised centrally and would carry a document identification number. This system would come into effect from October 1 while all the older notices would be decided by then.

More than a third of FPI came under the higher tax rate as they have been investing as a non-corporate entity such as trust or association of persons.

With the economic slowdown appearing precipitous and prompting even senior policymakers to show concern publicly and stock markets to slide, the government on Friday unveiled a slew of steps to boost the confidence of investors and consumers and promised to follow them up with two more sets of announcements shortly.

Finance minister Nirmala Sitharaman gave a waiver to FPIs and domestic investors in capital markets from the much-decried extra surcharge on the super-rich introduced in the recent Budget, made it amply clear that the so-called angel tax won’t apply to government-recognised start-ups and their investors, and asserted, while cutting the room for excesses by individual tax officers in issuing orders, notices and summons, that “no overreach by the tax authorities will happen.”

She also vowed to release upfront the `70,000 crore capital support for public sector banks (PSBs) for FY20, a move that could facilitate additional lending/liquidity to the tune of `5 lakh crore, and provide additional liquidity support of `20,000 crore to non-banking finance companies (NBFCs) over and above `10,000 crore announced earlier.

In a step aimed at giving a fillip to the sagging consumption by making loans cheaper, the minister said a commitment has been secured from banks to their lending rates with the repo rates. However, this could put additional pressure on banks’ profitability unless the rates for small savers also are reduced in tandem. If the banks indeed keep the promise, they will pass on recent months’ cuts in repo rates (the RBI has cut the benchmark lending rate by 110 basis points since February but banks have transmitted only a fraction of that) to the retail borrowers, including home-buyers. Hitherto, only some state-run banks such as the SBI had announced linking their home loan rates with the repo rate, while most others had shied away from doing so.

The minister sought to extend a helping hand to MSMEs, believed to have borne the brunt of GST and demonetisation the most in spite of being big job providers, by announcing that all their pending refunds of GST will be cleared in 30 days and new claims in 60 days.
As the auto industry is reeling under an unforeseen demand slump, the minister rolled out relief measures including deferring one-time registration fee, lifting ban on purchase of petrol/diesel vehicles by government departments and allowing higher depreciation.

The extra surcharge on the super-rich, which by default or design, got extended to FPIs has been big dampener for the markets. FPIs, who invested around $3.1 billion in Indian markets in April-June, pulled out nearly $1.93 in July and $1.76 billion so far this month.
With the Budget decision, the surcharge on long-term capital gains tax of over `5 crore on FPIs using the trust structure rose to 14.25% from 12%, while such short-term gains rose to 21.4% from 17.9%. These will now be restored to the pre-Budget level, in a move with revenue impact on the government of `1,400 crore.

While the minister said enhanced surcharge on long-term/ short-term capital gains arising on transfer of equity shares and units (which have been subject to STT) stood withdrawn, some tax experts sought clarity on whether the relief would be available to gains on debt securities and derivatives and non-cap items like interest income.

More than a third of FPI came under the higher tax rate as they have been investing as a non-corporate entity such as trust or association of persons. In fact, despite a crescendo of demands, Sitharaman had refused to remove the extra impost on FPIs even while replying to the discussions on the Finance Bill in Parliament on July 9. Instead, she advised FPIs using the trust structure to convert to the corporate form.

Identifying delayed payments by government undertakings and CPSEs as a major problem constraining the cash flows of companies in assorted sectors, the government also set up a Cabinet Secretariat-driven monitoring mechanism to fast-track these payments.
Sitharaman also averred that corporate social responsibility (CSR) lapses would be treated as civil rather than criminal offences, allaying India Inc’s fears over penal provisions for non-compliance with CDR requirements in the amended Companies Act. She also unveiled measures to bolster capital flows to the bond markets and Corporate India’s access to global markets through the ADR/GDR routes. To enhance the market access for domestic retail investors, Aadhaar-based KYC would be allowed to open demat account and making investments in mutual funds.

Friday’s steps are nevertheless not very burdensome on the fisc; the fiscally stressed government seems to expect that its inability to provide a big-bang fiscal stimulus to the economy would be offset by enhanced flows of cheaper credit to the key industrial players, MSMEs, retail consumers.

The minister highlighted that respect for wealth creators were one of its principal themes. She added that the government’s efforts were towards a “continuing push to decriminalisation and reduction in harassment.”
The finance minister said all tax notices, summons and orders would now need to be authorised centrally and would carry a document identification number. This system would come into effect from October 1 while all the older notices would be decided by then.

India’s real GDP growth fell to a five-year low of 5.8% in the March quarter mainly due to an overall demand compression which could not be salvaged by the government as much in earlier quarters due to subdued government expenditure on account of elections. The economic growth in the first quarter of this fiscal is widely expected to be even lower.

Moody’s Investors Service on Friday trimmed India’s GDP growth projection for the calender year 2019 by as much as 60 basis points from its earlier forecast to just 6.2%, citing a combination of factors such as weak hiring, distress among rural households and stress in the shadow-banking sector. For 2020, too, it has cut the forecast by 60 basis points to 6.7%.

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