With the Centre cancelling the
operation of constitutional Article 370 on Jammu and Kashmir, the
government will shift focus to addressing some of the immediate concerns
of the economy, according to official sources.
First on the
agenda is to restore normalcy in the markets by restructuring the budget
proposal of a super rich tax surcharge on foreign portfolio investors
Official sources said that the Prime Minister's Office
(PMO) has asked the Finance Ministry to quickly review the tax proposal
on FPIs and come out with a solution that reduces the impact of new
taxation on these institutional investors.
A proposal to
'grandfather' all income generated by FPIs till the presentation of the
Union Budget on July 5 is being considered that will reduce the impact
of the new taxation by almost a third. This is considered a more
acceptable solution as the Finance Ministry has continued to maintain a
strong stand over its tax proposals that impact FPIs.
said that the ministry may announce the changes this week after the
monetary policy review by Reserve Bank of India (RBI) on August 7. On
its part, the RBI is expected by experts to reduce the policy rates by
25 basis points to improve liquidity in the market and kickstart the
investment cycle by the private sector.
The government proposed
raising surcharge on the super rich in Budget presented by Finance
Minister Nirmala Sitharaman. However, this surcharge also increased the
tax burden on FPIs as most are organised as non-corporate entities such
as trusts and association where taxation is similar as for individuals.
carnage at the indices began since the budget proposals were announced
in Parliament on July 5. The average market capitalisation of the
BSE-listed companies has fallen from Rs 151.35 lakh crore on budget day,
to Rs 138.37 lakh crore on August 5, wiping out Rs 12.98 lakh crore.
large part of the selling can be attributed to foreign institutional
investors (FIIs). The FPIs have also been net sellers of over Rs 20,000
crore worth of stocks in the capital market segment on the BSE, NSE and
MSEI since July 1.
The proposal on grandfathering would help FPIs
avoid paying higher tax for the period between April 1 and July 5. As
the tax proposal was made on the budget day, FPIS could get relief on
income generated prior to July 5 in the current financial year when the
surcharge on super rich income tax was not applicable.
sources said that the government is looking at whether provisions of
Sections 119 of the Income tax Act can be applied in the case of FPIs to
provide them partial relief from the super rich tax. Section 119
empowers the Central Board of Taxes (CBDT) to direct income tax
authorities to allow any claim for exemption, deduction, refund and any
other relief under the income tax act even after the expiry of the time
limit to make such claims.
This section may be used to allow FPIs
deductions on the total tax paid during 2019-20. The deductions would
be limited to a three-month period when income was generated without
knowledge that tax changes are coming.
The grandfathering clause
will allow such changes to provide partial relief to FPIs till the time
an alternate strategy is worked by the government to provide complete
relief to overseas investors. With current Parliament session ending in
few days, government will have limited option to correct FPI surcharge
and the only option left would be to make changes through an ordinance.