Additionally, several other measures announced by the finance minister would also effectively help remove several pain points in the economy, which could help revive the sentiments.
By Chirag Madia & Anwesha Ganguly
The equity markets are expected to rally smartly on Monday morning with investors — foreign portfolio investors (FPI) as well as domestic investors — cheering finance minister Nirmala Sitharaman’s decision to withdraw the enhanced surcharge on capital gains, long-term and short-term, made from transfer of equity shares and units. Moreover, the slew of measures aimed at kick-starting growth are expected to boost the sentiment.
The enhanced surcharge — levied by the Finance (2) Act, 2019 — was announced in the Budget for 2019-20. The budget proposed to hike the surcharge on income of more than `2 crore to 25% from 15%. For income above `5 crore, surcharge was raised to 37% from 15% before. This raised the tax rate for income up to `2 crore to 39% from 35.9%, and for income above `5 crore, it had gone up to 47.7%.
Tax consultants were not sure whether the higher surcharge on capital gains has been withdrawn for AIFs, whi-ch deal in derivative securities where the characterisation of income is business income.
However, revenue secretary Ajay Bhushan Pandey said AIFs too would be exempt from the enhanced surcharge.
Bhavin Shah, partner and leader, Tax at PWC India, pointed out the FM’s presentation suggested amendments in respect of capital gains taxable under Section 111A and 112A. “FPIs are however, taxable under a different Section 115AD. Hope the fine print makes amendment in correct section,” Shah observed.
A. Balasubramanian, CEO, Aditya Birla Sun Life AMC, said the sentiment would surely improve after the sops announced for the markets and the economy. “The withdrawal of the enhanced surcharge for FPIs will certainly change the mood in the short term,” Balasubramanian said.
Foreign investors have been taking risk off the table in recent months partly because corporate earnings have been disappointing and also because of the higher surcharge imposed on them in the Union Budget. They have sold equities worth $3.2 billion since July 5. Daksha Baxi, international taxation head, Cyril Amarchange Mangaldas, said the removal of higher surcharge on capital gains from equity and units for both domestic and foreign investors should help calm the nerves of investors.
Among other measure that should cheer the markets are the additional capital of Rs 70,000 crore for banks that could allow them to lend an additional Rs 5 lakh crore as also sops for Motown.
Additionally, several other measures announced by the finance minister would also effectively help remove several pain points in the economy, which could help revive the sentiments. Over the last few days, the government has spent time engaging with industry leaders and come up with a multitude of solutions for auto sector, infrastructure and real estate.
While the tax measures will have a direct impact on FPIs, a slew of other positive measures could also lead to a cascading impact on overall market sentiment, said Vikas Vasal, Partner & National Leader – Tax, Grant Thornton India LLP. He said the release of Rs 70,000 crore in the banking system would lead to huge liquidity in the system. Further sops are are not ruled out at the next two meetings next week.