Budget 2020 seems to have opted to be cautious and play a more defensive game for the FS sector, rather than have given bigger ticket push to deal with the issues to have the sector better deal with the strong headwinds.
A lot of expectations had been cast on the FM’s second budget on the basis of the bold moves taken mid-year to boost an economy in the midst of a credit crisis, creeping unemployment rates and lowering consumption. In dealing with this, one would have been happy to accept short-term fiscal slippages in the wake of reforms necessary to the economy back on track towards the $5 trillion target. However, after a marathon budget speech and several half measures for the financial services sector, one is hopeful that the unfinished agenda will be dealt with soon.
On the policy front, the three themes of ‘Aspirational India’, ‘Economic Development’ and ‘Caring Society’ were largely directed towards expected sectors of agriculture, rural development and welfare schemes; for financial services, the increased deposit insurance cover at Rs 5 lakh is a big confidence-building measure even though it means banks will have to dole out higher insurance premiums.
Coming to the tax proposals, while Budget 2020 provides relief to branches of foreign banks from falling within the scope of the interest capping provisions introduced a couple of years ago, it has failed to address the plight of other financial players like NBFCs that have been riddled with similar issues and would be restricted from accessing cheaper foreign capital to expand their business objectives.
In the insurance sector, which is taxed under special regime, the long-standing ask from general insurance companies to be allowed a deduction of certain expenses (like bonus) on a payment basis (akin to other businesses) was finally addressed. However, similar other issues that could have been dealt with under the same breath such as allowance of expenses pursuant to the delayed deposit of TDS, etc. still remain a concern. While the jury is still out on whether the reduced slab rates introduced for individual taxpayers not claiming any deduction would be adopted at large, given that this seems to be the stated intent of the FM going forward, the attractiveness of life insurance products falling within the ambit of section 80C of the Act would appear to loose somewhat of its sheen – a far cry from the industry demand for a separate limit for such products.
Many big misses
The capital markets didn’t see their demand for the rollback of the long-term capital gains tax met but small investors and foreign investors would welcome the move to abolish the Dividend Distribution Tax and restoration of the classical system of taxing dividend in the hands of the investor at their applicable rates. Small investors would benefit from being taxed at their respective slab rates while eligible foreign investors could claim lower rates under the respective tax treaties as well as foreign tax credits on taxes withheld in India. The Budget proposal to extend the exemption from indirect transfer tax provisions only to Category I FPIs under the SEBI (FPI) 2019 Regulations would be a cause of concern for several FPIs who do not qualify/have not yet exercised their option to register as such.
In what appeared to be a real chance to free the onshore management scheme of its shackles, Budget 2020 seems to be satisfied with only selective tinkering of the provisions under section 9A; for instance, by making a good move to allow domestic fund managers to seed initial funding of an offshore fund but missing out on more significant relaxations to the conditions prescribed for resident Indian participation, etc.
Although the Budget has proposed other amendments on expected lines such as the extension of lower tax on interest to foreign portfolio investors from June 1, 2020, an additional 3 years as well as on monies borrowed from outside India, a very welcome move is the granting of a special exemption on all income earned by sovereign funds investing in specified infrastructure facilities before March 31, 2024 and held for 3 years.
However, a clear miss this time was the failure to address the issue of taxation of Category III AIFs who will now have to deal with another year of ambiguity on the tax regime applicable to them in the hope that the next Budget would address their concerns.
On an overall basis, Budget 2020 seems to have opted to be cautious and play a more defensive game for the FS sector, rather than have given bigger ticket push to deal with the issues to have the sector better deal with the strong headwinds.
Sameer Gupta and Brenden Saldanha are Tax Partners at EY India.