How to make FPIs invest more in Indian market

How to make FPIs invest more in Indian market

India’s economy is still gradually revitalizing from a Covid-induced crash and all eyes are on the Finance Minister Nirmala Sitharaman, who will be going to present the Union Budget 2021 on February 1. Keeping the fiscal deficit under control and meeting the expectations of the investors simultaneously is not an easy job for the FM.

In 2020, the Indian Government announced multiple stimulus packages to revive the economy impacted by the Covid-19 pandemic. India has emerged as an attractive investment destination and the quantum of investment received by India in 2020 is among the highest by any other emerging markets. Most of the world’s emerging markets saw major outflows on their foreign investments. India’s low number of Covid-19 cases compared to other countries could be a big reason for this increase in foreign investments flowing into India.

As India looks to recover from the effects of Covid-19, below are some of the key expectations from Foreign Portfolio Investors (FPIs) from Budget 2021:

Withholding of taxes on dividend income at beneficial treaty rates for FPIs

As per the current tax provisions, the Indian company paying the dividend income to FPIs investors withholds taxes at 20 per cent (plus applicable surcharge and cess). There is no relaxation to withhold taxes at beneficial tax treaty rate, if applicable in case of FPIs. This is not the situation with other categories of investors and the paying Indian company can withhold taxes at the rate of beneficial tax treaty.

The FPIs may claim the lower rate of tax prescribed under the tax treaty subject to fulfillment of certain conditions at the time of filing the tax return in India. However, this leads to an increased compliance burden for the FPIs and the Government should consider providing relaxation in this regard.

No levy of interest u/s 234C on account of under/ wrong estimation of dividend income

Section 234C of the tax law provides for levy of interest in case a taxpayer has the liability to pay the advance tax but he fails to pay/or has under paid the same. Since, dividend income is now taxable in the hands of the investors, and considering its uncertain nature of declaration and receipt, taxpayer should not be liable to pay any interest on such dividend income as he may not be able to correctly determine such liability within the payment schedule. Accordingly, the interest under section 234C should not be levied if a shortfall in payment of advance tax is on account of under-estimation or failure in the estimation of dividend income.

Removing/ reducing taxability on Long Term Capital Gains (LTCG)

LTCG tax was introduced in 2018 at the rate of 10 percent (over INR 1 lakh on listed equity shares without the benefit of indexation). In the current scenario, in order to provide an impetus to the investment in the Indian securities the government should consider rolling back the tax on LTCG. Alternately, reduce the taxability of LTCG from 10 per cent to 5 per cent which will make the returns more lucrative. This will not only improve the return on investments ratio, it would be a great move to bring stability to the duration of investments in the securities markets specially by foreign investors.

Scrapping the concept of Securities Transaction Tax (STT)

Trading in Indian securities market involves a lot of costs like STT, brokerage, GST, Stamp Duty, SEBI turnover fees and exchange transaction fees, etc. STT is the significant part of the cost of trading in Indian securities and STT was initially introduced in 2004 to exempt LTCG on equities and lower the tax rate of short-term capital gains. In year 2018, the LTCG tax was reintroduced without any corresponding relief in STT and the FM should consider scrapping STT, or removing/reducing the taxability for LTCG.

The stock markets are currently trading at all-time high. The fund inflows from FPIs continue to make the securities market attractive. To boost the sentiments of the foreign investors, the Indian government should give some positive signal by bringing in the measures discussed above.

By Sunil Badala, Partner and Head, Financial Services, Tax, KPMG in India. Tarul Jain, Chartered Accountant contributed to the piece.

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