Mar 03, 2016 09:29 AM IST | Source: Moneycontrol.com

COLUMN: Tax impact of Budget 2016 on capital markets

There were several expectations from the capital market sector,such as replacement of Dividend Distribution Tax (DDT) with tax withholding in the hands of shareholders and relaxation of disallowance of expenses in relation to the earning of exempt income.

COLUMN: Tax impact of Budget 2016 on capital markets

Sunil Gidwani and Snehal Mehta

The Budget does not contain any proposal to change the existing long term capital gains tax regime. To that extent there is sigh of relief for the capital market participants. A marginal increase in surcharge and Securities Transaction Tax (STT) on options has resulted in increase of the tax rates for certain Foreign Portfolio Investors (FPIs).

There were several expectations from the capital market sector,such as replacement of Dividend Distribution Tax (DDT) with tax withholding in the hands of shareholders and relaxation of disallowance of expenses in relation to the earning of exempt income.

Capital Market was also expecting a reference in section 43(5) to commodity derivative transactions effected on stock exchanges (instead of recognised associations) pursuant to merger of the Forward Market Commission with the Securities and Exchange Board of India.

However, these provisions unfortunately do not find a place in the Budget proposals. Though on quantification of disallowance of expenditure for earning of exempt income there is a reference in the Budget speech but it has to been seen how rule 8D would be modified to give effect to the Budget speech.

In order to promoteInternational Financial Services Centres (IFSC), it has been proposed to grant an exemption from capital gains tax to the income arising from transactions undertaken in a foreign currency on a recognised stock exchange located in an IFSC, even if no STT is paid on such transactions.

Additionally, an exemption from STThas been provided to securities transactions entered into by any person on a recognised stock exchange located in an IFSC where the consideration for such transaction is paid or payable in a foreign currency.Separately, incentives in the form of a reduced rate of Minimum Alternate Tax (MAT) @ 9 percent and non-applicability of DDT have been provided to a unit located in an IFSC and deriving its income solely in convertible foreign exchange.

In the case of rupee-denominated bonds, it has been provided that the capital gains arising on account of appreciation of the rupee between the date of issue and date of redemption against the foreign currency in which the investment is made shall be tax exempt. But no provision on either exemption from withholding tax or applicability of lower tax regime of 5 percent has currently been provided in section 194LC for certain other types of bonds or debts(as indicated earlier in apress release).

With regard to the applicability of MAT to foreign companies including FPIs, as anticipated, it has been clarified that the MAT provisions shall not apply to foreign companies with retrospective effect from 1 April 2001.

In the case of management of offshore funds from India, if the fund is a resident of a country or a specified territory with which a tax treatyis in place, fund management activities from India shall not result inthe creation of a taxable presence of the fund or business connection in India.

Now, it has been proposed to providea similar leeway for a fund incorporated or registered in a country or a specified territory notified by the Central Government, even if the fund is not a tax resident of such a country.

Although this is a major relaxation,it cannot give a sufficient boost to domestic fund management activity, because several other conditions continue to be quite onerous to comply with from a Fund’s perspective. Further, managers of offshore funds were expecting some more relaxation in compliance with certain conditions. However, these expectations did not see the light of day.

(Sunil Gidwani is Partner, PwC India and Snehal Mehta is Manager, PwC India)

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