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    Stimulus steps: How the FPI surcharge rollback affects investors

    Stimulus steps: How the FPI surcharge rollback affects investors

    Stimulus steps: How the FPI surcharge rollback affects investors
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    By Girish Vanvari   IST (Published)

    Mini

    The government has withdrawn the increased surcharge on long/short term capital gains arising from the transfer of equity shares / equity-oriented mutual funds referred to in section 111A and 112A of the Income Tax Act.

    The government has recognised the imminent slowdown in growth of the economy and has announced a series of measures to boost the sentiments of market and industry participants.
    Finance Minister Nirmala Sitharaman has provided a comprehensive package that proposes to address the select FPI tax issues, enhance the credit flow in the economy and provide aid to the auto and NBFC sectors. The FM has also promised a slew of measures to be announced early next week to revive the housing sector.
    Amongst the above, the one announcement that has garnered high investor attention is the withdrawal of the enhanced surcharge that was introduced in the Budget presented on July 6, 2019 with respect to the income arising on account of capital gains.
    The finance minister had then hiked the surcharge from 15 percent to 25 percent for those with taxable income of Rs 2-5 crore, and to 37 percent for those earning more than Rs 5 crore. This increased the effective tax rate for these two groups to 39 percent and 42.74 percent, respectively.
    As a consequence, many FPI’s who have been investing in India as a non-corporate entity such as a Trusts or Association of Persons were also subject to the aforesaid higher rate of surcharge.
    The tax change – Investor perspective
    The government has withdrawn the increased surcharge on long/short term capital gains arising from the transfer of equity shares / equity-oriented mutual funds referred to in section 111A and 112A of the Income Tax Act.
    This means that the pre-budget position has been restored for both domestic investors as well as FPIs and they would not be subject to the enhanced surcharge on capital gains arising from the transaction involving the aforesaid instruments.
    However, it appears that the foreign and domestic investors shall continue to be liable to pay the increased surcharge in respect of other income, i.e., interest, dividend, etc.
    Further, considering that derivative instruments (i.e capital gains arising from future and options instruments) are not specifically included in the aforementioned sections, the finance ministry has clarified that necessary changes would be bought about in section 115 AD (governing taxation of FPI’s) to exclude the same as well.
    What is not included?
    However, it would be pertinent to note that any off-market deals, capital gains arising from the sale of unlisted companies, would still continue to attract higher surcharge.
    Also Cat-III Alternative Investment Funds (AIFs) investing through non-corporate entities and those engaged in arbitrage/trading activities whose income is characterized as ‘business income’ and not ‘capital gains’ would attract the higher surcharge.
    Conclusion
    The government has attempted to retain the investment attractiveness by bringing about the aforesaid changes and the key would be to quickly translate the same into effective execution.
    It is also expected that the economic issues would continue to be addressed on a dynamic basis to navigate the economy on a path of sustained growth.
    Girish Vanvari is the founder of Transaction Square.
    Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
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