Affirming that the Indian economy has held its ground in spite of global headwinds, finance minister Arun Jaitley unveiled the Budget 2017, which merges, for the first time ever, the Railways Budget with itself.
Affirming that the Indian economy has held its ground in spite of global headwinds, finance minister Arun Jaitley unveiled the Budget 2017, which merges, for the first time ever, the Railways Budget with itself. Aspects like no extension in holding period for an asset to qualify as long-term capital asset, no tweaking of the tax rates applicable to capital gains and the clarification on some tax rules for FPIs all signal relief, against the backdrop of prime minister Narendra Modi’s address in December 2016 that persons making profits through capital markets must contribute more to nation-building. This speech had fuelled quite a few speculations that the government may impose long-term capital gains tax on listed equity shares.
Having said that, there were significant expectations in the form of tax rationalisation measures as far as the capital markets were concerned. It was hoped that securities transaction tax (STT) on equity market transactions shall be reduced or a deduction allowed in computing capital gains, to ease investment via the FDI route.
Some of the pre-Budget expectations made their way into the Budget, and key proposals are summarised here.
Operational flexibility for FPIs: A common application form for registration, opening of bank and demat accounts, and issue of PAN is proposed to be introduced for FPIs. Necessary systems and procedures are to be put in place by Sebi, RBI and the CBDT for this purpose.
Foreign Investment Promotion Board (FIPB) to be phased out: In order to encourage greater fund flows into the economy, FIPB is to be phased out (so far the only platform in India which admitted application for FDI approval). Further liberalisation in the FDI regime has been announced with the assurance that the road map for phasing out FIPB will be made available in due course.
FPIs exempt from overseas transfer provisions: In 2012, transactions related to transfer of shares or interest in a foreign entity deriving its value substantially from Indian assets were brought under the tax net. Generally, transfer of shares by FPIs at India level is taxable is followed by an overseas transfer by way of redemption of units/shares of the concerned FPI.
Category I and Category II FPIs are granted exemption from overseas transfer provisions, Category III FPIs would be subject to these provisions.However, the clarification that overseas transfer provisions shall not apply in case of redemption of shares or interests outside India as a result of redemption or sale of investments in India, taxable in the country.
Extending the end-date for the low tax-rate for FPIs on interest on specific securities: At present, FPIs are subject to a low tax rate of 5% on interest on G-Secs and rupee-denominated bonds of Indian company. The end-date for the low tax-rate has been pushed to June 30, 2020.
Extension of the time-line for tax on interest on external commercial borrowings and tax clarity on interest on offshore rupee-denominated bonds (masala bonds): A lower tax rate of 5% was charged on interest income paid by Indian companies in respect of monies borrowed overseas. The time-line for low tax rate is extended to June 30, 2020.
The applicability of the low tax-rate on offshore rupee-denominated bonds, popularly known as masala bonds, has also been allowed till June 30, 2020. It has also been clarified that the transfer of offshore rupee-denominated bonds between two non-residents will be exempt from tax.
Taxability of conversion of preference shares into equity shares and amendment in definition of short-term capital asset: Conversion of preference shares into equity shares to be tax neutral. The period of holding of preference shares will also be included while computing capital gains on transfer of equity shares
Applicability of exemption on long-term capital gains: With a view to prevent the potential abuse of the unaccounted income declaration scheme, by declaring the same as exempt long-term capital gains by entering into sham transactions, it has been proposed to restrict exemption of tax on long-term capital gains arising on sale of shares or unit of an equity-oriented fund or a unit of a business trust subject to STT only to cases where STT is applicable in the acquisition of shares or in notified cases.
Listing of security receipts: Listing and trading of security receipts issued by a securitisation company or an asset reconstruction company under Sarfaesi Act on Sebi-registered stock exchanges has been permitted.
The Budget proposals have brought cheer to the market. Hopefully, the growth-oriented and pro-market proposals will get implemented in their true spirit, and India will emerge as the brightest spot in the world!
With contributions from Shahin Badsha, director (financial services tax), PwC
The author is partner (financial services tax), PwC. Views are personal