Buckling under pressure from overseas investors, the government on Friday rolled back the enhanced surcharge imposed on foreign portfolio and domestic investors in Budget 2019-20 as it announced a slew of measures to boost sagging economic growth.
"In order to encourage investment in the capital market, it has been decided to withdraw the enhanced surcharge levied by Finance (No.2) Act, 2019 on long/short term capital gains arising from the transfer of equity shares/units," Finance Minister Nirmala Sitharaman said.
The move will dent government revenues by Rs 1,400 crore. Sitharaman, in her maiden Budget, hiked the surcharge on income tax paid by super-rich individuals.
The surcharge, levied on top of the applicable income tax rate, was hiked from 15 per cent to 25 per cent for those with taxable income of Rs 2-5 crore, and to 37 per cent for those earning more than Rs 5 crore. This increased the effective tax rate for these two groups by 3.12 per cent and 7 per cent to 39 per cent and 42.74 per cent, respectively.
Some 40 per cent of foreign portfolio investors (FPIs) automatically came under the higher tax rate as they have been investing as a non-corporate entity such as trust or association of persons (AOPs), which in the Income Tax law are classified as an individual for the purpose of taxation.
"The enhanced surcharge on FPI goes, in simple words," Sitharaman said. "In other words, the pre-Budget position is restored."
The super-rich tax on FPIs, along with lack of measures to boost the economy in the July 5 Budget, was largely blamed for foreign investors withdrawing more than USD 3 billion from the stock markets, putting pressure on indices and the rupee.
Sitharaman also announced exempting startups from the so-called angel tax.
"To mitigate genuine difficulties of startups and their investors, it has been decided that section 56(2)((viib) of the Income Tax Act shall not be applicable to a startup registered with DPIIT," she said.
Also, a dedicated cell will be set up under a member of CBDT for addressing the problems of startups.
"A startup having any income tax issue can approach the cell for quick resolution of the same," she said.
The surcharge in the Budget was increased on all income, be it from salary, savings, interest, mutual funds, stock market or trade in futures and options (F&O) segment, long-term and short-term capital gains, or other means and was applicable to all individuals and those who chose to be counted as an individual, be it funds, AOPs or trusts.
Asked when the withdrawal of the tax will become effective, Revenue Secretary Ajay Bhushan Pandey said the surcharge has been withdrawn for the entire fiscal year. On the issue of how the withdrawal will be implemented, since the surcharge originally was part of the Budget and the accompanying Finance Bill which was passed by Parliament, he said necessary orders or notifications will be issued.
He, however, did not specify if this would be in the form of an ordinance to amend the Finance Bill, which will have to be later approved by Parliament. Commenting on the move, Deloitte India partner Rajesh Gandhi said it was a "very positive" development which would give a fillip to the capital markets.
"Tax rates for FPIs will come down by 4 per cent to 7 per cent," he said. "This announcement also benefits domestic investors like individuals and AIFs because it seems that the relaxation has been announced for all capital gains earned on listed investments."
Rohington Sidhwa, partner, Deloitte said exempting startups from the application of the angel tax is a good development.
"Previously the government had provided this exemption only for investment below a threshold and where only accredited investors were involved. It appears now that the exemption would be cast wider and will cover all registered startups," he said.
When the super-rich surcharge was levied last month, it faced strong resistance from foreign investors but the government had bravely defended the move, saying FPIs have the option to come into the country as a non-corporate entity such as trust or Association of Persons, or as a corporate company.
They could convert themselves into corporate entities to escape the tax. Surcharge on capital gain for companies is lesser. In the Budget, for an individual earning total income of more than Rs 5 crore, the long-term capital gains tax rate was hiked from 12 per cent to 14.25 per cent, while short-term capital gains rate was increased from 17.9 per cent to 21.4 per cent.
For companies, the surcharge rate has not been changed.