Government Withdraws Higher Surcharge On Equity Gains For Both FPIs, Domestic Investors

Highlights:

Foreign investors had pulled out Rs 9000 crore on a net basis from capital markets in the 1st half of the month of August, continuing their selling spree in the Indian market amid the uncertainty over FPI tax as well as global trade concerns.

Relief for FPIs as the government withdraws enhanced surcharge

Nirmala Sitharaman, the Finance minister had recently said that the government’s decision for scraping the increase in surcharge on the income tax outgo for both domestic as well as foreign investors that came into effect as part of the 2nd full-year budget of 2019.

Finance Minister Sitharaman also stated that with the intention of encouraging investment in the capital market, it was decided to withdraw the enhanced surcharge imposed through Finance (no. 2) Act, 2019 on long as well as short term capital gains arising from the transfer of equity shares/units referred in section 111A and 112A.  Also, FM Sitharaman stated that the surcharge increase is removed for both domestic and foreign investors as well as that the pre-budget position is restored.

The same goes for domestic institutional investments as well.

The announcement had come as a relief as foreign investors had pulled out over Rs 9,000 crore on a net basis from capital markets in the 1st half of August, continuing their selling spree in the Indian market in uncertainty over FPI tax as well as global trade concerns. FPIs, though, invested a net Rs 2,096.38 crore in the debt securities amid the period, as per the depository data.

In July, FPIs had withdrawn a net amount of Rs 2,985.88 crore from the Indian capital markets (both equity as well as debt).

Union Finance Minister Nirmala Sitharaman held a press conference during the concerns over the on-going economic slowdown in the nation. This development approached soon after Moody's Investors Service cut India's GDP growth prediction for 2019 calendar year to 6.2% from the previous estimation of 6.8%. For the year 2020, it dropped the estimation by means of a similar measure to 6.7%.

There were concerns around the falling GDP growth which is a sign of concern for the government. The GDP growth has fallen from a peak of 8.2% in 2016-17 to 5.8% in the 4th quarter of 2018-19. The 1st quarter of 2019-20 is expected to drop further to 5.6%.

This was major move of relief for investors, which includes foreign portfolio investors. Sitharaman also held that startups registered with the commerce ministry would be totally exempted from an anti-evasion provision in the Income Tax Act for taxation of share premium known as the ‘angel tax’.  Also, Section 56 (2) (viib) of the Income Tax Act would not be applicable to startups registered with the commerce ministry.

FPIs which are incorporated as trusts were affected through an unintended effect of the increase in a surcharge that the government introduced towards raising tax revenue in the full budget for Financial Year 20 announced during July. The surcharge increase was on the income tax outgo of individuals with earnings above Rs 2 crore, in two slabs.

The foreign portfolio investors (FPIs) set up as trusts were saying that they might be assessable by means of tax officials as associations of individuals and are therefore affected through the surcharge increase. Sitharaman had met representatives of the financial sector which includes FPIs earlier this month to understand their complaint.

The surcharge has been raised from 15% to 25% where the income is between Rs 2-5 crore and from 15% to 37% for those earning above. In effect, an individual earning in the range of Rs 2-5 crore would pay 39% tax (called the highest marginal tax rate for that individual) on the income above Rs 2 crore, and an individual earning above Rs 5 crore shall pay 42.74% on the income exceeding Rs 5 crore.

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Author:

eStartIndia Team