Tax Breaks To Buoy Capital Market

The minister said while replying to the budget debate in the Lok Sabha that the norms for foreign institutional investors have been further liberalised to permit them to raise their investments in corporate debt instruments from 30 to 100 per cent. However, this has been restricted to dedicated debt funds.

The minister also promised to make out a case with UTI and LIC to step up their stock-market "activity" to ensure that FIIs alone do not emerge as the driving force in the markets.

Chidambaram announced that the India Development Bonds would be redeemed in full as the foreign exchange reserves position had improved significantly after the United Front government took over.

 

The minister has also kindled hopes regarding changes in MAT with the decision to defer pronouncements relating to the Finance Bill till September 10-11, when it will be taken up for voting.

"The markets have been sluggish in the last few weeks and I have looked into it. Now I have decided to announce some measures. I hope this improves the buoyancy in the capital markets and instills confidence in the small investor," Chidambaram told reporters outside Parliament.

The minister was emphatic in his address that the revival in the capital markets will be presaged on the return of the small investor. "My review of 1993-94 shows that due to a large number of poor quality issues the small investor was driven away from the market," he said.

The package for small investors entails bringing investments in mutual funds under the purview of 54 EA of the Income Tax Act. In the budget, the minister had proposed that capital gains exemption would be given for three-year investments in bonds and debentures notified by the CBDT.

Similarly, investments in debentures and units of all mutual funds have been brought under section 54 EB of the Income Tax Act -- wherein capital gains are to be exempted from tax if the gains are invested in specified assets.

The minister also raised the exemption limit under 80L of Income Tax Act from Rs 13,000 to Rs 15,000 in respect of income by way of dividend and interest from specified investments. The ministry will now revert back to the old two-part arrangement wherein Rs 3,000 will be exclusively reserved for income from investment in shares and mutual funds.

To provide individual investors with greater liquidity, the finance minister announced that the bank advances against security of shares and debentures will be raised from Rs 5 lakh to Rs 10 lakh.

(Meanwhile, the RBI announced in Mumbai that it was accordingly fixing the new stock lending limit for individuals at Rs 10 lakh.)

As part of the efforts to instill confidence in the small investor, the finance minister has sought to strengthen the corpus of investor protection funds from income tax. However, he added the caveat that this would be made available only if the net income generated by the fund was ploughed back.

The minister has also made partnerships eligible for the reduced capital gains rate of 20 per cent. In the Union budget for 1996-97, this had been restricted to individuals, Indian and foreign firms.

In what is considered a big sop for the big players, the minister further relaxed the norms for foreign institutional investors. Chidambaram has raised the ceiling on debt investments from 30 to 100 per cent. The minister, however, clarified that this would be made available only to dedicated funds and the instruments would not include government debt.

To ensure a "greater degree" of corporatisation of the domestic broker community, the minister said, "It is in the national interest to have more corporates as brokers and to encourage more brokers to become corporates. Such corporate brokers will be subject to the discipline of the company law."

The minister said he proposed to invite leading brokers, both individuals and firms, to a discussion to consider a scheme to facilitate the conversion of brokers into a public limited company.

Highlights

* FIIs operating dedicated debt funds

allowed to raise investments in debt

from 30 to 100 per cent; government

debt excluded

* Mutual funds investments eligible for

capital gains exemption under:

54 EA of IT Act

54 EB of IT Act

* Full redemption of India Development

Bonds

* Exemption limit under 80L of IT Act raised from Rs 13,000 to Rs 15,000; revert to two-tiered system

* Capital gains tax reduced from 30 to 20 per cent for partnerships;

* Stock lending limits raised from Rs 5 lakh to Rs 10 lakh;

* FIs including UTI to be asked to step up stock market activity;

* Investor protection funds exempt from income tax.