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Nirmala Sitharaman’s budget wipes $30 billion off Indian stocks as doubts on tax linger

A higher surcharge on the super rich has spooked non-resident and overseas funds as it also applies to trusts used by foreign funds to invest.

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Mumbai: It’s an old saw of India’s budget documents — the devil lies in details of the fine print.

A higher surcharge on wealthy Indians in the budget has spooked non-resident and overseas funds enough to erase 2.3 trillion rupees ($30 billion) in market value from companies in the S&P BSE Sensex over the past three sessions.

The reason: the realization that the new tax rate applies not just to the super rich but also to trusts — a structure of choice for a large number of foreign funds that invest in the nation.

The proposal “seems to have inadvertently” dragged foreign portfolio investors into the tax net and must be clarified by the government, said K.R. Sekar, a partner at Deloitte Touche Tohmatsu India LLP.

Finance Minister Nirmala Sitharaman in her budget speech Friday proposed to increase the surcharge from 15% to 25% for those with taxable incomes of between 20 million rupees and 50 million rupees, and to 37% for those earning more than 50 million rupees. This takes the effective tax rate for those two groups to 39% and 42.74%, respectively.

Global and non-resident investors participate in India via non-corporate trusts and the so-called association of persons or AOPs. Problem is, the structures are treated on par with individuals for tax purposes. That has stoked concerns about the levy being applicable to foreigners at a time when the nation has emerged as Asia’s biggest destination for equity money in 2019.

“An investment vehicle — such as a category III alternative investment or an FPI — taxed at a fund level is likely to get affected as the income may easily exceed 50 million rupees,” said Vaibhav Sanghavi, co-chief executive officer at Avendus Capital PBC Markets Alternate Strategies LLP in Mumbai. Alternative investments, such as hedge funds, which use complex trading strategies, are classified as category III by the markets regulator.

The head of the nation’s direct-tax department Monday said the government would clarify on the applicability of the higher levy on global investors. But a few hours later, Sitharaman ruled out an immediate clarification.

The government on Tuesday said it is not specifically targeting overseas investors, who have an option to convert their trust structure into a corporate entity to avail of a lower tax rate available to such category, the Mint newspaper reported, citing a senior government official it didn’t name.

The levy has been raised for the wealthy on all their sources of incomes, and is applicable to individuals and entities who choose to be counted as an individual by investing in domestic assets through structures like the AOPs or trusts, the report said. – Bloomberg


Also read: Modi govt’s tax on stock buybacks puts brakes on a great year of share repurchases


 

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1 COMMENT

  1. All shareholding families feel the pain. That includes the government itself, in the form of its ownership of PSUs, apart from institutions like LIC which have large portfolios. Saw some of the mandarins being interviewed after the Budget. They are not instinctively reformers or market oriented. Just interested in disinvestment proceeds to shore up the fisc.

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