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FPIs exempted from super-rich tax

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India has quickly rolled back an additional levy on foreign funds and announced several measures to boost economic growth. The Finance Minister, Nirmala Sitharaman had proposed increasing the effective tax rate on individuals with taxable annual income of above 20 million rupees by about 3%, and for those earning above 50 million rupees by 7%. The tax proposal of higher surcharge on FPIs, along with a lack of measure to boost the economy in the July budget, led to foreigners withdrawing more than $3 billion from Indian shares, putting pressure on stocks and the rupee. Indian markets went down about 10% from their June highs post the announcement.

Giving a major relief to market participants, the Finance Minister had proposed a decision to roll back enhanced surcharge on long-term and short-term capital gains that will be applicable to income from derivatives as well. Also, the announcement includes removing the surcharge on income arising from the transfer of equity shares, units of equity oriented-mutual funds and units of business trusts.

The announcement also includes the income tax surcharge on individuals, trusts and association of persons at 25% for incomes in the range of INR 2 crore to INR 5 crore and at 37% for incomes exceeding INR 5 crore. Market regulator, SEBI eased the regulatory and compliance framework for FPI by broad basing their classification and simplifying their registration, entry and know-your-customer (KYC) norms in a bid to boost investments. While gains from trading in futures and options (F&O) segment are usually treated as business income, for foreign portfolio investors, they are considered capital gains because derivative exposure taken by these investors are considered as capital assets. The announcement states tax payable on gains arising from the transfer of these instruments will also be exempted from the levy of the enhanced surcharge. It is decided that the tax payable on gains arising from the transfer of derivatives (future and options) by FPIs, which are liable to a special rate of tax under Section 115AD, shall also be exempted from the levy of the enhanced surcharge.

These announcements had raised hopes of stimulus measures for FPIs. A fresh wave of foreign capital outflow engulfed the market after the Budget. As per data available with NSDL (National Securities Depository Limited), FPIs offloaded INR 12,419 crore in equities in July and INR 12,105 crore in August. In order to encourage investment in capital market, it is decided to withdraw enhance surcharge on FPIs. The approximate revenue implication for the FPIs and domestic investors will be around INR 1,400 crore. The announcement did not go down well with FPIs, who sold over INR 23,000 crore worth of domestic equities. Withdrawal of enhanced surcharge on FPI is a big advantage for the Indian market, as it could reverse outflows post-Budget. It should also help rupee appreciation. Overall, it is a good booster for Indian economy. However, surcharge will still be applicable on capital gains from debt instruments.

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