New Delhi: The central government seems to be adamant on implementing the latest taxation surcharge on the super-rich category which has driven-out foreign fund worth over Rs 15,000 crore in the last one month.
Proposed in the Union Budget on July 5, the higher tax surcharge on the super-rich will affect over 40 to 50 per cent of the Foreign Institutional Investors (FPIs).
The Budget had proposed a levy of an additional surcharge on individuals and trusts earning more than Rs 2 crore and Rs 5 crore, respectively.
However, Finance Minister Nirmala Sitharaman in the Parliament made it clear that the super-rich tax is here to stay, she also gave a solution to the FPIs by advising them to register as companies to be out of the ambit of the surcharge.
Notwithstanding, the FPIs continue to be on a selling spree ever since the budget was announced.
Stock markets participants fear that once implemented, this move may adversely impact FPIs which are set up as non-corporate vehicles. Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions.
The definition of a partnership firm under Indian tax law refers to the Indian Partnership Act, which does not recognise foreign partnerships or limited partnerships.
While the rationale behind such an increase in surcharge is to levy a higher surcharge only on high net worth individuals (HNIs) to garner more revenues in tax falling scenario, it has sent jitters among FPIs, and partially triggered the subsequent crash in the stock market.
Taking this into account, recently, the Central Board of Direct Taxes (CBDT) chairman P.K. Modi had offered a solution to such FPIs that restructure themselves as corporate entities.
Nonetheless, as of July 30, an outflow of over Rs 15,300 crore has taken place in the month of July, which is the highest this year.
Consequently, the S&P BSE Sensex has shed over 2,000 points since the announcement on July 5.
On July 18, while ruling out tweaking the FPI surcharge, Sitharaman said trusts should register as companies to be out of the ambit of the surcharge.
"Some FPIs are registered as trusts. Therefore as an individual entity he comes under the taxation. Such FPIs who have registered themselves as trusts may consider the option of wanting to move to register as company," she said in reply to Finance Bill, 2019 in the Parliament.
Highest FPI outflow
There has been only four occasions since 2002, when the FPI outflow had surpassed the Rs 11,743-crore-mark witnessed in July so far, all at a time of tight financial circumstances.
According to the NSDL data, the highest ever outflow came in the month of October, last year when foreign investors pulled out Rs 28,921 crore from India's equity markets.
India's July outflow is also the highest in the emerging markets followed by Brazil. This indicates that the investors have started to shift to other economies which could yield higher returns.
On the contrary, Kotak Institutional Equities showed that, South Korea, Thailand, Indonesia received healthy inflow of foreign funds in July.
The year when the 2008 global financial crises hit global financial markets, FPIs in the month of January had pulled out Rs 13,035.6 crore from the equity segments of the markets.
A toxic mix of factors like weak macro situation of our country, US Fed's rate hike, high oil prices, weak dollar rupee equation and ongoing US-China trade tension caused the heavy outflow in October, 2018.
The foreign fund exodus in July, this month comes at a time of a marked slowdown in economic activity and a controversial tax surcharge on super-rich, adversely impacting FPIs.
"Domestic economy hit a soft patch in the last quarter of 2018-19 as private consumption, the key driver of GDP, turned weak. This along with subdued new investment pipeline and a widening current account deficit have exerted pressure on the fiscal front. This has implications for the government's market borrowing programme and market interest rates," RBI's Systemic Risk report said.
