Budget 2019 wish list: FPIs pin hopes on tax exemptions, regulatory tweaks

Foreign investors in Indian capital markets have high expectations from the new government’s maiden budget, slated to be presented on July 5 against the backdrop of a strong election mandate. With dwindling consumer demand and the shadow banking system looming over the Indian economy, coupled with mounting global uncertainties and a slowdown, it would be a difficult task for the incumbent Finance Minister Nirmala Sitharaman to generate liquidity and demand in the economy while capitalising on the 3Ds -- democracy, demography and demand; at the same time, keeping sight of New India vision set for 2022 by Prime Minister Narendra Modi.

Last year’s budget took away the exemptions on long-term capital gains on equities, equity-oriented mutual fund and business trust units. Tax exemption is essential for India to remain competitive in the global market and attract capital inflows. It should be reinstated. Alternatively, long-term loss should be allowed to be offset against short-term gains. Similarly, securities transaction tax levied on a stock exchange transaction should be withdrawn to lower the cost of trading in India.

Category-III SEBI-registered foreign portfolio investors (FPIs) are still covered within the ambit of overseas transfer provisions. Essentially, an overseas transfer of shares or interest in a foreign company or entity is taxable in India if, among other conditions, it derives more than 50 percent of its value from assets located in India. Considering that most FPIs are paying taxes on capital gains and with the tax treaties with Singapore, Mauritius and Cyprus no longer providing capital gains exemption subsequent to renegotiation, this exclusion should be extended to Category III FPIs also.

The safe harbour rules introduced in 2015 in domestic tax laws to promote management of offshore funds from India contain onerous conditions. The SEBI-registered FPIs should be exempted from complying with conditions, which will lead to leaner structures for fund managers. This will also promote the management of India-focussed offshore funds from India itself.

While the amalgamation/ merger/ demerger of two foreign companies is tax neutral subject to conditions, the merger of non-corporate entities is not so. In the fund industry, such amalgamation/ merger/ demerger of non-corporate entities is common, and more often than not, the underlying investors end up bearing the tax burden.

With both the government and the RBI keen to attract debt inflows into the country, the beneficial rate of 5 percent tax on interest on government bonds and corporate bonds should be extended beyond the current deadline of July 1, 2020. In addition, deduction of tax at source should be waived on rupee-denominated bonds/ masala bonds issued by Indian entities, when it is held by an FPI, to address the issue for claiming credit of tax so deducted being faced by them. Furthermore, investment into debt through the Voluntary Retention Route channel does not seem to have garnered interest amongst FPIs due to the strings attached. A policy decision to reduce some conditions would be welcome.

Transactions in derivatives, bonds and GDRs, if treated as capital assets, carried out on a stock exchange located in an IFSC (GIFT city in Gujarat) are exempt from tax. However, eligible foreign investors (EFI) transacting in these securities may have to pay tax if the income is characterised as business income. Clarity on this aspect will encourage EFI investors to trade on the stock exchange in the IFSC, increasing volumes and liquidity.

While everyone will watch the budget speech anxiously and dissect the Finance Bill within hours, stock market indices may have one reason to cheer – Thank God it is Friday!