FPIs may be spared super-rich surcharge imposed in budget

The Narendra Modi government is consulting experts and stakeholders to address the concerns of FPIs, one official said on condition of anonymity.

Foreign portfolio investors (FPIs) may be spared an increased surcharge slapped by finance minister Nirmala Sitharaman’s inaugural budget on so-called super-rich taxpayers, as the government seeks to boost investor confidence and arrest a slide in the stock market, officials with direct knowledge of the matter said.

The Narendra Modi government is consulting experts and stakeholders to address the concerns of FPIs, one official said on condition of anonymity.

Sitharaman, who announced the higher surcharge in her July 5 budget for fiscal 2019-20, has been talking to representatives of specific sectors of the economy daily since Monday on ways to boost sagging economic growth, which sank to a five-year low of 5.8% in the quarter ended March.

On Friday, she will hold talks with financial market stakeholders and the matter of the surcharge on super-rich taxpayers is likely to figure at the meeting, the officials added.

Rattled foreign investors took out a net $1.8 billion from the stock market in July, and the BSE Sensex, India’s most closely watched stock market barometer, has declined in excess of 5% over the past month.

India’s top marginal income tax rate touched 42.7%, the highest since 1992 when taxes were lowered as part of the first wave of economic reforms, after Sitharaman slapped the income tax surcharge on people earning more than ~2 crore in a move expected to result in incremental tax revenue of about Rs 12,000 crore.

With the surcharges and 4% cess (which is not new), the effective tax rate became 39% for someone earning between Rs 2 crore and Rs 5 crore, and 42.7% for those earning above Rs 5 crore. In absolute terms, it meant an increase of Rs 7.5 lakh a year in tax for someone earning Rs 2.5 crore.

To be sure, only FPIs operating as trusts were hit by the increase because for income-tax purposes, they are treated as an individuals. Yet, around 40% of FPIs route their investments into India through trusts, a fact that roiled market sentiment .

The news that India is likely to exempt FPIs from the increase in taxes was also reported by Reuters, triggering a rally in the stock market on Thursday. The Sensex added 636.86 points, or 1.74%, to rise to 37,327.36 points.

In an interview with Hindustan Times on July 12, Sitharaman said that ideally, the peak income-tax rate should come down over time, adding: “We will have to see when the timing is proper” to bring it down. The minister said the tax on the super-rich was driven by the need to part-raise resources for important and essential government expenditure.

Sitharaman said that there was always an option for FPIs to route their investments through a company (the corporate tax rate is 25% for companies with annual revenue less than Rs 400 crore) but added that she was also aware that this conversion is “painful”. Responding to a question on whether she would do something about this, the finance minister said that she was merely laying out the issue and that she has “not taken a call on it”. Sitharaman did clarify that FPIs “were not the target” of the tax.

“Top bureaucrats have been entrusted the task to look into the matter and find a suitable solution,” the first official said.

Separately, the government has exempted non-resident investors from filing income-tax returns for their earnings from specified investment funds located in an International Financial Services Centre (IFSC) such as the Gujarat International Finance Tec-City (GIFT), officials said. The exemption is a move in the direction of increasing the ease of doing business.

Sameer Gupta, tax partner – financial services, EY India, said the Central Board of Direct Taxes had responded favourably to the fund industry’s demand by exempting non-resident investors from burdensome tax compliances.

“It seems at present the government is mulling over several options to douse the FPI concerns. A complete relief would be the most optimal solution {on the issue of tax surcharge} as any difference in rates simply based on the form of the structure fosters unnecessary arbitrage,” Gupta said.

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