FM provides fillip to FDI; amends tax rate on deals

Apart from his proposals on diluting GAAR, the Finance Minister also announced proposals to provide a level playing field for investors coming into India through the FDI route, report CNBC-TV18’s Sajeet Manghat and Animesh Das.

Pranabda wants to entice more foreign investors into India, and for this he has moved amendments to the Finance Bill. These amendments will bring down the tax rate on deals by foreign investors. The most important of these is to reduce the 20% long-term capital gains tax paid by investors using the foreign direct investment route to the 10% paid by foreign institutional investors. “In order to give parity to such investors, I propose to reduce the rate in their case from 20% to 10% on the same lines as applicable to FIIs,” said the FM while addressing the Lok Sabha. It's a move aimed especially at private equity players who invest in unlisted securities, but is this enough? Siddharth Shah of Nishith Desai Associates believes so because it gives parity to PE investors. “However, it doesn’t mean that investors will essentially go under the domestic law; they have an option to go under a treaty,” he said. Therefore, Shah says a lot of treaty related issues need to be sorted. The Finance Minister has also provided tax exemption for exits made by private equity players through IPOs. “I propose to extend the benefit of tax exemption on long term capital gains to the sale of unlisted securities in an initial public offer. For this purpose, I propose to provide the levy of securities transaction tax at the rate of 0.2 % on such sale of unlisted securities,” he said in his statement. Commenting on the same, Shah says that if proposed provisions bring in STT on offer for sale shares, then it is possible that long term capital gains tax may be 0%. But the FM has not stopped there. He has withdrawn the 1% tax deducted at source requirement on all transactions involving immovable property. He has also decided to exempt from tax consideration received by closely-held companies in excess of fair market value for a special category of investors, like Angel Investors. He hopes this will bring in more seed capital for start-ups. Watch the accompanying video for more details..