India has emerged as an attractive investment destination and quantum of investment received by India in 2020 is among the highest by any other emerging markets. Most of the world’s emerging markets saw major outflows on their foreign investments.
India’s economy is still gradually revitalizing from a COVID-induced slowdown and all eyes are on the Finance Minister (“FM”), Nirmala Sitharaman, who will present the Union Budget 2021 on February 1. Keeping the fiscal deficit under control and meeting the expectations of the investors is not going to be an easy balancing act for the FM.
However, it is important that the sentiments of the foreign investors are considered. Continuing with our series of blogs covering key expectations from the budget relating to the Financial Sector, today we look at some of the key expectations of the FPIs from budget 2021:
Withholding of taxes on dividend income at beneficial treaty rates for FPIs
As per the current tax provisions, the Indian company paying the dividend income to FPIs investors withholds taxes at 20 per cent (plus applicable surcharge and cess). There is no relaxation to withhold taxes at beneficial tax treaty rate, if applicable in case of FPIs. This is not the situation with other categories of investors and the paying Indian company can withhold taxes at the rate of beneficial tax treaty.
The FPIs may claim the lower rate of tax prescribed under the tax treaty subject to fulfillment of certain conditions at the time of filing the tax return in India. However, this leads to an increased compliance burden for the FPIs and the Government should consider providing relaxation in this regard and allow companies to consider the beneficial treaty provisions while withholding taxes for FPIs.
Removing/ reducing taxability on Long Term Capital Gains (“LTCG”)
LTCG tax was introduced in 2018 at the rate of 10 percent (over INR 1 lakh on listed equity shares without the benefit of indexation). In the current scenario, in order to provide an impetus to the investment in the Indian securities the government should consider rolling back the tax on LTCG. Alternately, reduce the taxability of LTCG from 10 per cent to 5 per cent which will make the returns more lucrative. This will not only improve the return on investments ratio, it would be a great move to bring stability to the duration of investments in the securities markets specially by foreign investors. Alternatively, the FM may consider scrapping STT as it is a significant part of the cost of trading in Indian securities.
No levy of interest u/s 234C on account of under/ wrong estimation of dividend income
Section 234C of the tax law provides for levy of interest in case a taxpayer has the liability to pay the advance tax but he fails to pay/or has under paid the same. Since dividend income is now taxable in the hands of the investors (from 1 April 2020) and considering the uncertainty of its declaration by the Companies and its receipt by the taxpayers, the shareholders (including FPIs) should not be made liable to pay any interest on such dividend income as the shareholders may not be able to correctly determine such liability within the payment schedule. Accordingly, the interest under section 234C should not be levied if a shortfall in payment of advance tax is on account of under-estimation or failure in the estimation of dividend income.
The stock markets are currently trading at all-time high. The rally of fund inflows from FPIs continue to make the securities market attractive. To boost the sentiments of the foreign investors, the Indian government should give some positive signal by bringing in the measures discussed above.