Finance in talks with FPIs to provide relief from surcharge

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In the Budget, the government had raised surcharge on income tax from 15 per cent to 25 per cent on taxable income between Rs 2 crore and Rs 5 crore, and from 15 per cent to 37 per cent for income above Rs 5 crore.

The government could move to review rules relating to Foreign Portfolio Investors (FPIs) impacted by the surcharge on income tax imposed on the super rich this Budget. Discussions with FPIs are currently underway and there are indications that investors impacted by the move could be extended some relief from the levy.

Sources said that since the surcharge imposed in the Budget is applicable only on FPIs registered as trusts and not as companies, one of the proposals under discussion entails their conversion into companies being made tax-neutral so that they do not attract the incidence of capital gains tax. Other options to dilute the impact of the levy, cited as the primary reason behind the outflow of funds from Indian financial markets since the Budget was presented on July 5, are also under discussion.

The government’s investor outreach is aimed at a revival of flagging investment sentiment. Any breakthrough on the surcharge could inject positive momentum in equity markets that have seen fund outflows since the Budget.

A final view on the surcharge issue will be taken after the Ministry of Finance wraps up consultations with the FPIs. Finance Minister Nirmala Sitharaman will meet financial market participants Friday to hear their views on the Budget proposals and on the economy. After this, Department of Economic Affairs Secretary Atanu Chakraborty will hold a separate discussion with FPIs.

In the Budget, the government had raised surcharge on income tax from 15 per cent to 25 per cent on taxable income between Rs 2 crore and Rs 5 crore, and from 15 per cent to 37 per cent for income above Rs 5 crore. It would also be applicable for FPIs operating as trusts or as association of persons.

This is being seen as the key reason for the outflow of funds. Equity markets have been under pressure and it has been led by FPI outflows. Rs 12,418 crore was pulled out in July following the Budget announcements, and another Rs 10,069 crore has so far been withdrawn in August, taking the net outflow until now to Rs 22,487 crore.

Since the Finance Act, 2019 containing the Budget provisions has already been cleared by Parliament, the government may need to bring an Ordinance to remove the surcharge on FPIs. While some relief is likely for the FPIs, the surcharge is unlikely to be lifted for other individuals.

“There are several options to provide relief to FPIs. One of the options could be to amend the Finance Act through insertion of a proviso in the section detailing the surcharge on income tax which could provide tax neutrality on one-time conversion into companies. Their (FPIs) view would be heard and then only a decision would be taken,” a senior government official said.

There is a tax cost associated with conversion of FPIs, registered as trusts, into companies as they may face capital gains tax levy on unrealised gains on the securities held on their books upon conversion. Queries sent to the Ministry of Finance by The Indian Express on this issue did not elicit any response.

In a post-Budget interview to The Indian Express last month, Sitharaman had said, “FPIs who were registered as trusts did have an impact (compared with those registered as companies). So, when this impact was brought to our notice, and a lot of people did speak about it — one of the options was to register as companies. And a lot of people then said shifting is not going to be easy and tax-neutral. I thought shifting would be an answer. But if you have issues, do talk to me. Without any commitment, I will hear them. Let me hear them first.”

Alongside this, the government, aiming to improve funding for NBFCs, plans to announce guidelines under which it will provide partial credit guarantee to public sector banks buying pooled assets of NBFCs. Banks will be able to purchase only those pooled assets that are rated investment grade and are backed by adequate collateral.

“We have almost finalised the guidelines in consultations with the Reserve Bank of India. This will open up a new window, enabling NBFCs to down sell assets worth Rs 1 lakh crore, thereby providing them significant liquidity support,” a senior government official said.

For the purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year, the government will provide a one-time six months’ partial credit guarantee to public sector banks for first loss of up to 10 per cent, according to the announcement made by Sitharaman in the Budget.