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Last Updated : Mar 01, 2016 01:10 PM IST | Source:

Budget 2016: Financial services – FM could have done more

Union Budget 2016 revolved around the themes of ‘Make in India‘ and ‘Ease in doing business in India‘

Sameer Gupta

This year’s Union Budget comes against the backdrop of a volatile global economy characterised by declining commodity prices especially crude oil, turbulent financial markets and volatile exchange rates. On the domestic front, the Indian economy faces various challenges in the form of subdued performance of corporates as well as Scheduled Commercial Banks, sluggish demand for Indian exports and back-to-back weak monsoons.

However, amidst this gloomy landscape, the Indian economy is still being viewed as a beacon of stability on account of distinct improvements in various macroeconomic parameters such as inflation, fiscal deficit and current account balance.

Union Budget 2016 revolved around the themes of ‘Make in India’ and ‘Ease in doing business in India’. While agriculture, social welfare, manufacturing and infrastructure remained the FM’s focal point, the financial services sector also received meaningful attention – both in terms of structural changes, future trajectory as well as taxation.

Continuing the liberalisation of the FDI Policies, the FM announced increase in foreign investment in Insurance and pension sector to 49% under automatic route, 100% in Asset Reconstruction Companies (ARCs) under automatic route, permission to FPIs to invest upto 100% of each tranche of the ARC trust (subject to sectoral caps). Increase in the investment limit for foreign entities in Indian stock exchanges is proposed to be enhanced to 15% (at par with domestic institutions), increase in the list of specified activities in the NBFC sector (currently 18) for foreign investment.

Further, the FM announced development of new derivative products by SEBI in the Commodity Derivatives market, amendments in the Reserve Bank of India (RBI), Act, 1934 to provide statutory basis for a Monetary Policy framework, SARFAESI Act, 2002 to enable the sponsor of an ARC to hold upto 100% stake in the ARC and permit non-institutional investors to invest in Securitisation receipts.

Key tax amendments impacting financial services include providing a pass through status to trusts of ARC and securitisation trusts and abolishing the draconian dividend distribution tax (DDT); responding to a long standing demand for a deduction of 5% of NBFC’s income in respect of provisions for bad and doubtful debt; exemption on capital gains tax on appreciation of rupee against foreign currency at the time of redemption of rupee denominated bonds issued by Indian companies, modification of the fund management regime under section 9A of the Income-tax Act, 1961 to rationalise the regime to include funds registered in countries notified by the Central Government.

In order to promote the International Financial Centre (IFC) in India, the FM proposed exemptions from DDT for companies located in IFC, reduced Minimum Alternative tax (MAT) (9%) for units located in IFC, exemption from securities transaction tax and commodities transaction tax on certain transactions undertaken on recognised stock exchanges in the IFC.

This Budget also provided much needed certainty on the applicability of 10% concessional rate on Long-term capital gains on sale of shares of private limited companies , which is a very welcome move given the focus on start-ups and growth funding.

Rule 8D has seen several disputes on the quantum of expenditure to be disallowed in relation to earning of exempt income. The FM has proposed to rationalise the computation mechanism – the Rules are awaited in this regard.

While there is an unfinished agenda and one does feel that the FM could have done more – easier market entry norms for FPIs, further liberalisation of conditions to kickstart the fund manager regime, measures to increase retail participation in capital markets, tax clarity for the GDR scheme, further clarity on taxation of Alternate Investment Fund (AIFs) (characterisation of income and pass through for Category III AIFs); one cannot but appreciate that the Budget has focussed differentially on the financial services sector and strengthening it further while signalling a clear and decisive shift towards stability, consistency and clarity of tax policies.

Author is Tax Leader for Financial Services, EY India
Chaitrali Kamat, senior tax professional, EY contributed to the article.
(Views expressed are personal)

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First Published on Mar 1, 2016 01:10 pm
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