India’s economy is still reviving gradually from a Covid-induced crash and all eyes are now on Finance Minister Nirmala Sitharaman, who will present the Union Budget 2021 on February 1. Keeping the fiscal deficit under control and meeting the expectations of investors simultaneously is going to quite a tightrope walk for the FM.
In 2020, the government announced multiple stimulus packages to revive the economy from the Covid impact. India has emerged as an attractive investment destination and the quantum of investment received by India in 2020 has been among the highest among the emerging markets. Most of the world’s emerging markets saw major outflows of foreign investments.
India’s low number of Covid-19 cases compared with other countries could be a reason for this increase in foreign investment flow to the country.
As India now appears to be on a stronger footing to recover from the effects of Covid-19, here are some of the key expectations from foreign portfolio investors (FPIs) from Union Budget 2021:
· Withholding of taxes on dividend income at beneficial treaty rates for FPIs
As per the current tax provisions, Indian companies paying the dividend income to FPIs withhold taxes at 20 per cent (plus applicable surcharge and cess). There is no relaxation to withhold taxes at beneficial tax treaty rate, if applicable in case of FPIs. This is not the situation with other investors categories and the dividend-paying Indian company can withhold taxes at the rate of beneficial tax treaty.
FPIs may claim the lower rate of tax prescribed under the tax treaty subject to the fulfillment of certain conditions at the time of filing the tax return in India. However, this leads to an increased compliance burden on FPIs and the government should consider relaxation in this regard.
· No levy of interest u/s 234C on account of under/ wrong estimation of dividend income
Section 234C of the tax laws provides for levying of interest in case a taxpayer has the liability to pay advance tax, but fails to pay/or has underpaid the same. Since, dividend income is now taxable in the hands of investors, and considering the uncertain nature of declaration and receipt, the taxpayer should not be liable to pay any interest on such dividend income, as s/he may not be able to correctly determine such liability within the payment schedule. Accordingly, the interest under Section 234C should not be levied, if a shortfall in payment of advance tax is on account of under-estimation or failure in the estimation of dividend income.
· Removal/ reduction of taxability on long-term capital gains (LTCG)
The LTCG tax was introduced in 2018 at 10 per cent (on over Rs 1 lakh gain on listed equity shares without the benefit of indexation). In the current scenario, in order to provide an impetus to the investment in the Indian securities, the government should consider rolling back the tax on LTCG. Alternately, the government can consider reducing the taxability of LTCG from 10 per cent to 5 per cent, which will make the returns more lucrative. This will not only improve the return on investment ratio, but would also bring stability to the duration of investments in the securities markets, especially those made by foreign investors.
· Scrapping the concept of securities transaction tax (STT)
Trading in Indian securities market involves a lot of costs, such as STT, brokerage, GST, stamp duty, Sebi’s turnover fees and exchange transaction fees. STT is the significant part of the cost of trading in Indian securities. It was initially introduced in 2004 to exempt LTCG on equities and lower the tax rate of short-term capital gains. In 2018, the LTCG tax was reintroduced without any corresponding relief on STT. The FM should consider scrapping STT, or removing/reducing the taxability on LTCG.
The stock market is currently trading at all-time high. The surge in fund inflows from FPIs continues to make the market attractive. To boost the sentiment of foreign investors, the government can send out some positive signals by bringing in the measures discussed above.
(Sunil Badala is Partner and Head of Financial Services, Tax at KPMG in India. Tarul Jain, Chartered Accountant, also contributed to the piece. Views are their own)