Government proposes measures to energise capital markets

To energise capital markets, the government today proposed a slew of measures, including tax benefits and easier regulations for foreign investors and corporate bonds besides creating a new instrument Bharat Depository Receipts, helping BSE benchmark Sensex to jump 434 points.

Finance Minister Arun Jaitely in his maiden budget also annouced incenvtive for real estate and investment trust (REIT).

The government has proposed introducing uniform KYC (Know Your Customer) norms with inter-usability of the KYC records across the entire financial sector and a single demat account so that consumers can access and transact all financial assets through this one account.

In his budget presentation for 2014-15 in Parliament, Finance Minister Arun Jaitley announced introducing a much more liberal and ambitious Bharat Depository Receipt (BhDR).

He also allowed international settlement of Indian debt securities and completely revamped the Indian Depository Receipt (IDR) scheme.

Jaitley proposed liberalising the ADR (American Depository Receipt)/GDR (Global Depository Receipt) regime to allow issuance of depository receipts on all permissible securities.

He proposed that financial sector regulators to take early steps for a vibrant, deep and liquid corporate bond market and deepen the currency derivatives market by eliminating unnecessary restrictions.

The Minister proposed extending a liberalised facility of five per cent withholding tax to all bonds issued by Indian corporate abroad, extending validity of the scheme to June 30, 2017. (At present, the tax rate varies across bonds and could be higher as well).

Regarding Real Estate Investment Trusts (REITS), the Minister said that he intend to provide necessary incentives for REITS.

“In innovation, a modified REITS type structure for infrastructure projects is also being announced as Infrastructure Investment Trusts (InvITs), which would have a similar tax efficient pass through status, for PPP and other infrastructure projects,” Jaitley said.

These structures would reduce the pressure on the banking system while also making available fresh equity. These instruments would attract long term finance from foreign and domestic sources including the non resident Indians (NRIs).

The Finance Minister said that he will expeditiously complete the ongoing process of consultations with all the stakeholders on the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC). He said suggestions of the FSLRC is necessary for better governance and accountability.

Addressing the tax concerns of Foreign Portfolio Investors (FPIs), Jaitley proposed to provide that income arising to this class of investors from transaction in securities will be treated as capital gain.

FPI encompasses all foreign institutional investors (FIIs), their sub-accounts and qualified foreign investors (QFI) under a new regime which has been effective from June 1.

According to the minister, FPIs that have invested more than Rs 8 lakh crore (about USD 130 billion) in India are concerned over uncertainty in taxation on account of characterisation of their income.

Moreover, the fund managers of these foreign investors remain outside India under the apprehension that their presence in India may have adverse tax consequences.

“With a view to put an end to this uncertainty and to encourage these fund managers to shift to India, I propose to provide that income arising to foreign portfolio investors from transaction in securities will be treated as capital gains,” Jaitley said.

To resolve a long-standing problem, the minister also proposed to clarify the tax treatment on income of foreign fund whose fund managers are located in India.

Jaitley noted that FIIs have reposed confidence in the Indian market despite global uncertainties. In the past financial year, overseas investors have invested a net amount of Rs 55,814 crore in the Indian equities.

To remove tax arbitrage, the minister said that rate of tax on long term capital gains has been increased from 10 percent to 20 percent on transfer of units of mutual funds, other than equity oriented funds.

He also proposed to raise the period of holding in respect of such units from 12 months to 36 months for this purpose.

Currently, the capital gains arising on transfer of mutual units held for more than a year is taxed at a concessional rate of 10 per cent whereas direct investments in banks and other debt instruments attract a higher rate of tax.