Indian economy has been amongst the fastest to get back on the path of recovery and growth, however, the rising cases of COVID-19 variant have again raised concerns and posed an uncertainty. In the backdrop of the current situation and its potential impact in the near future, similar to the last year’s Budget, one may expect the main focus of the government to be on health and infrastructure development. To achieve the desired outcome India would require enormous capital to strengthen its infrastructure that can support long-term sustainable growth. Foreign Portfolio Investors (FPIs) can help provide the required liquidity which can accelerate economic growth of the country and some of the expectations of FPIs from Budget 2022-23 would be on following lines:
Common platform and standardised forms for seeking tax treaty claims on dividend income
One of the most significant changes in the recent past has been taxation of dividend income in the hands of the investors. Indian companies while paying dividend income to FPIs are permitted to withhold taxes at lower rates under the tax treaty. While applying lower tax rate, information is sought by the Indian company via the local custodian from FPIs including declaration/ undertaking with respect to eligibility for claiming tax treaty benefits.
Generally, FPIs hold a wide portfolio of shares of Indian companies and are facing various administrative challenges in providing such documents. A standardized format should be provided so as to reduce the compliance burden on the FPI investors. A declaration once provided for a given financial year should hold good for all Indian companies, so long as facts remain unchanged. Further, a common platform should be made available to FPIs / custodians who can access the database for storing/ retrieval of documentation. The registrar and transfer agents can reach out to the custodians who can then share the documentation when requested for.
Removing/ reducing tax 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, 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 and also bring stability to the duration of investments in the securities.
Interest received from units of business trust to be taxed at the rate of 5 per cent
Until 31 March 2021 the definition of securities did not include units of business trust and accordingly interest from such units received by FPIs was taxable at 5 percent. Pursuant to the amendment brought about by Finance Act, 2021 in definition of securities, there seems to be an unintended consequence for the FPIs i.e. interest from business trust units being taxed at the rate of 20 percent.
It will be prudent to clarify that interest income from business trust units will be taxable in hands of FPIs at 5 percent. This clarification is imperative since investment made by other non-resident investors continues to enjoy 5 percent tax rate.
The stock market is currently trading at all-time high. The surge in fund inflows from FPIs continues to make the market attractive. To boost the sentiment of foreign investors, the government can send out some positive signals by bringing in some of these changes.