Eight changes for the markets in the budget

No MAT for FPIs, relief on GAAR, Sebi-FMC merger are a few of the sweeping changes

Finance Minister Arun Jaitley’s budget provided clarity on taxation, as well as laid the foundation of regulatory oversight for key sections of the capital market. Given below are eight of the key changes mentioned in his speech:

No MAT for FPIs
The Minimum Alternative Tax provisions were originally brought to ensure that large domestic corporate entities did not escape the tax net because of various incentive schemes. The tax department earlier in the month sent notices looking to impose the same provision on foreign portfolio investors who had structured themselves as corporates. This would have raised their long term tax rate from zero to around 20 per cent and would have affected foreign investors on a large scale. The Finance Minister clarified that the tax is not applicable.

Relief on GAAR

The implementation of the General Anti Avoidance Rule (GAAR) has been extended by two years. The Finance Minister has also clarified that this provision to widen the power of tax authorities will only be applied prospectively.

Clarity on PE
The government has also clarified that PE or Permanent Establishment provisions would not apply if a fund manager is located in India. This is expected to encourage more fund managers who are managing Indian assets to locate themselves within the country.

Sebi-FMC Merger
Commodities regulator the Forward Markets Commission will be merged with the stock market regulator the Securities and Exchange Board of India. The move is expected to be executed in phases, and strengthen regulatory oversight of the commodities segment.

GIFT SEZ
Regulations for a financial Special Economic Zone are likely to be announced next month according to the Finance Minister. The move is to create a place where international exchanges and foreign financial institutions are to enjoy tax benefits, and compete with other jurisdictions such as Dubai and Singapore.

FPI, FDI regimes to be consolidated
There was earlier a separate limit for Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) for foreign ownership in Indian companies. This has been consolidated into one foreign cap. This would mean FPIs can buy into companies where their limits have been exhausted by making use of any unutilized FDI limits. Those in the unlisted space would also benefit with the ability to attract more FDI investments since foreign owners can now hold higher stake.

Easier to merge MF schemes; higher taxes on dividends, advisors
The government has proposed to amend the Income Tax Act to allow for schemes to merge without adverse tax implications. This is seen as a positive. However, the withdrawal of service tax exemption for financial distributors is a negative. Also there is an increase in surcharge from 10 per cent to 12 per cent on distribution of income through buyback, dividends and distribution of income by mutual funds and securitization trusts.  

Pass through for AIFs, can attract foreign capital
Foreign investors can now invest in alternative investment funds. Hedge funds and private equity funds are expected to benefit. The move to give pass through status for AIFs, which would mean that the tax liability would be on the end-investor rather than the fund, is also seen as a boost for the industry.