The worry of the investment community – both foreign and domestic – going into India’s Union Budget announcement for 2017-18 was related to taxation. Let’s see what India’s Finance Minister Arun Jaitley had in store for both sets of investors.
For foreign investors
As far as foreign investors are concerned, the announcement relates to those at the institutional level.
Foreign Portfolio Investors (or FPIs) can breathe a sigh of relief as they have been exempted from indirect transfer provisions. This supersedes an earlier circular which had intended to bring indirect transfers under the ambit of Indian taxation.
According to a CBDT (Central Board of Direct Taxes) circular released in December, if offshore assets sold by an FPI are over INR 10 crore (or $1.5 million), and if the value of Indian assets is over 50% of the total valuation, the transaction should be taxed in India. FPIs were reminded of the tax dispute between Vodafone Plc (VOD) and the Tax Department which did not bring fond memories to say the least.
In his budget speech, Jaitley informed that Category I and II FPIs, which include foreign central banks, sovereign wealth funds, government agencies and pension funds, will be exempt from this tax even though Category III FPIs like corporate bodies, trusts and family offices will be required to pay tax.
These investors would be pleased as the issue of double taxation being highlighted by them has been put to rest.
For domestic investors
Similar to FPIs, there was relief for domestic investors as well as the government did not impose a long-term capital gains tax. At present, equity securities held for over a year do not attract capital gains tax.
In December, Prime Minister Narendra Modi had expressed that investors in financial markets were not making a fair contribution in terms of taxes. This had sparked worries that the government may either introduce a long-term capital gains tax or increase the period of holding a security for investors to qualify for tax exemptions.
However, leaving the capital gains tax structure untouched and no hike in the securities transaction tax has left domestic equity investors quite pleased.
India’s financial markets were euphoric due to these announcements. Let’s look at their reaction in the next article.