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Government waives the levy for all categories of investors; surcharge not applicable on FPIs on sale of securities in the derivatives segment

Almost a month after announcing the first set of incentives for foreign portfolio investors (FPIs) by waiving the surcharge introduced in the Union Budget – but which failed to stem the outflows in any manner – the government has announced fresh incentives while also extending the benefit to all categories of investors.

On Friday, Finance Minister Nirmala Sitharaman said that the tax surcharge would be waived for all categories of investors, including individuals and those operating under structures like Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI) and Artificial Juridical Person (AJP).

A statement from the government clarified that the surcharge would not be applicable on the “capital gains arising on sale of equity shares in a company or a unit of an equity-oriented fund or a unit of a business trust liable for securities transaction tax.”

Further, the government has also clarified that the surcharge would not be applicable on FPIs on sale of securities in the derivatives segment as well.

Simply put, any gains arising from the sale of securities in the cash or derivatives segment or units of equity mutual funds on which securities transaction tax (STT) has been levied will not be subjected to the surcharge, that had further fuelled the flight of foreign money from the Indian capital markets.

Interestingly, after the government announced the initial rollback of the surcharge on August 23, FPIs have till date sold shares worth almost ₹6,300 crore.

Market participants, however, are optimistic that the latest set of measures would have a longer term impact on the markets in terms of a positive impact on earnings and fund flows.

“This will help improve the sentiments and have a positive impact on earnings thereby leading to an overall re-rating of the markets,” according to Mihir Kothari, head, institutional sales, Motilal Oswal Financial Services.

No buy-back tax

Meanwhile, after announcing a buy-back tax in the Union Budget, the government has now decided to exempt firms that announced a buy-back before the proposal was announced on July 5.

“In order to provide relief to listed companies which have already made a public announcement of buy-back before July 5, 2019, it is provided that tax on buy back of shares in case of such companies shall not be charged,” stated the government in the release.

The exemption would benefit companies like Sasken Technologies, Greaves Cotton, Welspun Corp, Indowind Energy, Star Cement and Eris Lifesciences among others, as per data from Prime Database, which pegs the cumulative size of buy-back offers that would benefit from Friday’s relief at approximately ₹1,100 crore.

 

Sensex zooms 5.3%, banks lead charge

On Friday, equity benchmark indices posted their biggest single-day gain in over a decade after the government announced a slew of measures, including slashing corporate tax rates and providing fresh incentives for capital market investors.

Even as the global markets remained largely flat, the benchmark Sensex gained a whopping 2,284 points during intra day trades, before closing at 38,014.62, up 1,921.15 points or 5.32% — the second-highest single-day gain ever after May 18, 2009, when it rose 2,110.79 points.

The broader Nifty also registered its second-highest gain while closing at 11,274.20, up 569.40 points or 5.32%. The Nifty Bank index gained a massive 2,224 points while those representing fast moving consumer goods and private banks also gained over 1,000 points each.

Earlier in the day, Finance Minister Nirmala Sitharaman slashed corporate tax rates, while providing incentives to new domestic manufacturing companies. She also announced that the tax surcharge announced in the Budget would be waived off for all categories of investors and also the buy back tax would not be applicable on firms that announced their buy back prior to July 5.

Vijay Chandok, MD & CEO, ICICI Securities, likened the tax cuts to those announced by the U.S. President Donald Trump in 2017, which gave a fillip to the U.S. economy.

Interestingly, provisional numbers showed that foreign portfolio investors (FPIs) were net buyers at only ₹36 crore on Friday. Though a paltry number, it would come as relief to market players who have been witnessing selling by FPIs almost on a daily basis. Domestic institutional investors, who have been acting as a strong counterforce to the selling by FPIs, were net buyers at over ₹3,000 crore.

Fiscal deficit to climb, steps useful only if demand actually surges, say economists

While corporate India is cheering the cut in tax rates, announced by the government, economists are saying mere reduction in levies will not result in increased private sector investments and the move will definitely result in fiscal deficit slippage.

The overall view is that since the corporate tax cuts do not address the subdued demand conditions in the economy, private sector firms will wait for demand to revive before they start investing.

“Companies will still wait for demand to pick up,” said Madan Sabnavis, chief economist, Care Ratings. “The cuts have to encourage manufacturing companies, that have not been investing, to start investing.Only if demand actually increases, will the tax cut help in bringing about higher investment, not otherwise.”

“At the end of the day, if you don’t have the assurance that your output is going to be bought, then you are not going to make profit,” Pronab Sen, former Chief Statistician of India, added.

“A tax on profit kicks in only if you are making profit. It has already given a huge boost to so-called investor sentiment, but these are all secondary market reactions.”

However, there is also the view that corporate tax rate cuts will make Indian companies more competitive globally, and will encourage foreign companies to invest in India, which could boost private sector investments.

Corporate savings to rise

“It will increase corporate savings and therefore, also investment and make Indian firms more competitive,” said D.K. Srivastava, chief policy advisor, EY India.

“They will also encourage investment from abroad into Indian companies because we will be on par with comparable economies with regard to tax incidence.

The impact on the fiscal deficit, however, is under debate.

The combination of the ₹1.45 lakh crore revenue foregone due to the cuts announced on Friday, the fiscal impact of the various export and housing incentives announced recently and lower-than-budgeted GST revenue is expected to total anywhere between 0.5-1% of GDP.

“In the Budget as presented, they had taken account of ₹90,000 crore from the RBI,” Dr. Sen explained. “What they got was ₹1.76 lakh crore. So, the net gain was only ₹86,000 crore. The net loss here [due to the corporate tax rate cut] is ₹1.45 lakh crore, so there is still a ₹59,000 crore hole because the impact of these cuts was not budgeted.”

“Let’s assume GST collections come in according to plan,” Mr. Sabnavis said. “This corporate rate cut plus the incentives for exports and housing they announced will together come to 0.5% of GDP. The fiscal deficit will definitely go from 3.3% to 3.7-3.8%. That is the range we are looking at.”

Move may spur economy; auto sector buying sentiment likely to improve

Sajjan Jindal

India Inc. welcomed the Centre’s decision to reduce the corporate tax rate and the Minimum Alternate Tax

N. Chandrasekaran, chairman, Tata Sons, said, “The reduction of MAT will enable companies optimise their cash flows leading to increased investments.”

Sajjan Jindal, chairman, JSW Group, said, “The massive amount of savings in corporate tax, aggregating to ₹1.45 lakh crore, is a timely stimulus for the revival of our economy.” Pawan Goenka, MD of M&M tweeted, “Looks like Diwali has come early.” Gautam Adani, chairman, Adani Group, also tweeted, saying, “Amid challenging times, the reduction in corporate tax and MAT addresses the core challenge of liquidity reinstating India as an attractive investment destination.” Ashish Chauhan, MD and CEO, BSE said Indian corporate tax rates are now among the lowest in the world, especially for the new manufacturing companies.

According to Mercedes-Benz India MD and CEO Martin Schwenk, lower tax will promote investment, help improve buying sentiment, and spur the auto sector in the long term.

Gopichand P. Hinduja, co-chairman, Hinduja Group, said Friday’s move was needed for economic revival and for the manufacturing sector. Boman Irani, CMD, Rustamjee Group, said, “I would request the Finance Minister to provide the same type of benefits to the housing and real estate sector,” he said.

However, Gopal Srinivasan, founder-CMD, TVS Capital Funds, felt the Centre had ignored providers of risk capital. Profits of venture capital and private equity funds are taxed at full surcharge. “Today, the tax difference between long-term capital gains on listed markets and private markets are as high as 18 percentage (absolute) points,” he said.

T.T. Srinivasaraghavan, MD, Sundram Finance. said the Centre had taken a ‘real bold’ step.

Interest rate cut will depend on incoming data, says RBI Governor

Shaktikanta Das

The reduction in corporate tax rate announced by Finance Minister Nirmala Sitharaman was a bold move and augurs well for the economy, Reserve Bank of India Governor Shaktikanta Das said.

“These are definitely bold and welcome measures. It will augur extremely well and will be highly positive for the economy,” Mr. Das said at an event organised by the India Today group.

One of the major drawbacks that the country had was high corporate tax rates and Friday’s cut would take the country closer to the rates prevailing in emerging economies such as Thailand, and the Philippines, he said.

Exchequer hit

The revenue foregone on reduction in corporate tax and other relief measures will be ₹1.45 lakh crore annually.

On Thursday, the RBI Governor had said there was little scope for fiscal expansion.

‘Not comparable’

On Friday, Mr. Das said that future rate cuts would depend on the incoming data but cautioned that India could not afford to have lower interest rates as in advanced economies.

“How much more can we go down (with the rate cuts)? We cannot go down to the levels of advanced economies. But how much we can go down will depend on the incoming data and other developments,” the RBI Governor said.

He said most of the advanced economies were having near-zero inflation and therefore, their rates were also low.

“But our inflation target is 4%, and therefore, that should be the guiding force.”

On Thursday, he, however had said, the central bank had room for rate cuts as inflation was projected to be less than 4% over the next 12 months.

The Reserve Bank has reduced the interest rate, the repo rate, by 110 bps during February and August to boost economic growth. The GDP growth for the first quarter of the current financial year dropped to a 25-quarter low of 5%.

(With inputs from PTI)

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