The statement from the India Finance Minister about the Budget 2021 to be an exceptional one which India has not seen in past 100 years; has already raised the bar very high and created positive vibes in the capital market similar to the announcement made by the Indian government approving couple of vaccines to be used for combatting the deadly covid-19 virus.

Going by the optimistic approach, the stock markets are already showing signs of recovery by trading at highest trading volumes and foreign investors pumping in money thereby making the quantum of foreign fund inflows also at all-time high.

The foreign investors and non-residents are expecting from the FM to make certain announcements which would act the key driving factors for keep the market bullish and the momentum rising upwards. Few of such expectation are discussed below:

1. Reduction in long term capital gains tax rate

 The foreign investments in the Indian Capital market always provide much needed support by infusing funds in the Indian economy. The Foreign Portfolio Investor’s (FPIs) community have already started showing confidence in the revival of punctured Indian economy caused by the pandemic.

In order to provide an impetus to their investment and make the returns more lucrative, the Long Term Capital Gains Tax may be considered for reduction from the prevailing tax rate of 10% to 5%. Alternatively, the threshold of tax exempt long term capital gains of Rs. 1 lakh can be increased to Rs. 2 lakh.

This will not only improve the market sentiment thereby improve the return on investments ratio but also gear up the large investors or fund houses to shift their investment strategy from short term to long term.

2. Reducing the holding period of debt oriented mutual funds units

 Currently the holding period of debt oriented mutual funds in order to qualify as ‘long term capital asset’ is more than 36 months. The period of holding in case of equity oriented mutual fund is more than 12 months in order to qualify as ‘long term capital asset’.

In order to give momentum and boost the real estate sector, the investor community is expecting that the period of holding in case of debt oriented mutual fund units also be reduced to 12 months.

This will give impetus for investments in debt segment and also create a level playing field amongst equity and debt portfolio.

3. Returning to the former dividend tax regime

 Dividend Distribution Tax (DDT) which was earlier payable by the companies and exempt in the hands of the recipient shareholders was abolished and made directly taxable under the shareholders income by the Budget 2020.

Dividend received by an FPI investors is currently taxable @ 20% (plus surcharge and cess). The company paying dividend withholds tax at 20% (plus surcharge and cess) as per the rate provided in the Indian tax laws. The FPI may claim the lower rate of tax prescribed under the tax treaty subject to satisfaction of certain conditions. Since most of the FPIs come from the countries which have tax treaties with India and provide for concessional rate of tax on dividends. This leads to an increased compliance burden for the FPIs as they have to submit certain details and documents to be eligible to claim lower tax withholding.

The provisions prevailing prior to the budget of 2020 provided for DDT payable by the companies and not shareholders. This provision can be reinforced in light of view that the sluggish economy and negative growth during the past year which will result in lower dividend payout.

Lowering the tax will result in better returns and reduce the compliance burden for the foreign investors while remitting the dividend proceeds outside India.

The stock markets are currently trading at all-time high volumes and levels. The rally of fund inflows of Foreign Investors continue to make the market buoyant. A positive signal can be given by way of few of the measures discussed above can help further boost the foreign investor’s sentiments and help India coming back to shape faster.

Author: CA. Ritesh Podar, Partner at Trivedi Podar & Co, Mumbai, Maharashtra.       (The views expressed are personal.)

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May 2021