Saturday , 24 August 2019
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Finance ministry may consult Law ministry on FPI surcharge

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NEW DELHI: The finance ministry may soon consult the law ministry on how best to provide relief to foreign portfolio investors (FPIs) from the super-rich surcharge that was announced in the July 5 budget.

The government is exploring various options and the one considered most effective and legally feasible will be taken up, said people with knowledge of the matter. The surcharge has taken effect after presidential assent to the Finance Bill.

Among the options on the table are relief via a circular, an announcement to be followed up with an amendment later, or an ordinance to immediately amend the Finance Act.

“These would have to be taken to the law ministry for examination to assess effectiveness and doability,” said a government source.

In the past, the government has issued beneficial circulars to provide relief to taxpayers that have been upheld by the Supreme Court.

Precedents for Exemptions
But whether a circular under Section 119 can be stretched to imposing an embargo on tax rates or surcharges needs to be examined. This section empowers the Central Board of Direct Taxes to issue such circulars.

With regard to an announcement and subsequent amendment in the winter session of Parliament, officials need to weigh the effectiveness of this as tax rates for the financial year will be levied from April 1. Amending the Finance Act via ordinance is seen as a likelier method.

Some tax experts said the best legal option for the government would be to consider an amendment to exempt all FPIs and alternate investment funds (AIFs) registered with the Securities and Exchange Board of India (Sebi) from the enhanced surcharge.

“For now, the government should bring an ordinance to this effect or at least a definitive announcement — which will give a great deal of comfort to investors and capital markets — followed by a formal amendment proposal before Parliament,” said Sudhir Kapadia, national tax leader, EY.

Kapadia pointed out that there are precedents for allowing exemptions — such as that of minimum alternate tax (MAT) on foreign institutional investors (FIIs) and the applicability of the lower rate of withholding tax of 5% on masala bonds. Definitive announcements were made first, followed by amendments in the law.

“If the intention is to reduce the surcharge for the current year itself, then my view is that it might not be possible to do this simply by way of issuing a circular or notification since the change in surcharge will require an amendment in law and would not be a mere clarification of law,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells LLP. “The government might have to issue an ordinance duly promulgated by the President to change the rates effective April 2019. The amendment will then have to be approved in the next session of Parliament.”

Finance minister Nirmala Sitharaman held a meeting with market participants, including FPIs, on Friday to take stock of the issues they face. FPIs pitched for rollback of the increased surcharge and removal of long-term capital gains tax on equities to perk up market sentiment.

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LOSING STREAK
The Indian stock markets have lost nearly 5% since the presentation of the budget, with FPIs pulling out as much as $1.8 billion. On Tuesday, the Sensex fell 1.7% to close at 36,958.16 points.

The finance minister had in the budget increased the surcharge levied on top of the applicable income tax rate to 25% from 15% for those with taxable incomes between Rs 2 crore and up to Rs 5 crore, and to 37% for those earning Rs 5 crore and more, taking the effective tax rate on them to 39% and 42.74%, respectively. This increased surcharge impacts individuals, Hindu Undivided Families (HUFs), trusts and associations of persons.

FPIs, sovereign wealth funds and AIFs structured as trusts or AoPs are covered by this. As many as 40% of FPIs are said to have been impacted by the increased tax.

Sitharaman had subsequently told ET that the surcharge was not aimed at FPIs.

“No, to be honest, I don’t think it was an intent; we didn’t aim to touch the FPIs,” she had said in an interview published on July 29.

“The intent was more to look at putting in a surcharge from the point of view of incomes above Rs 2 crore and Rs 5 crore and within them, make sure we calibrated,” she had said. “But of course, it has touched those FPIs that are registered as trusts. Although I don’t want to be tempted to repeat the dialogue, it is possible, and we are, as a government, willing to even help out if FPIs registered as trusts want to come over to being companies.”

[“source=economictimes”]