Economy: Dividend Tax Distribution, Long Term Capital Gain Tax (LTCG), Surcharge on FPIs

Headline : Market participants seek rollback of surcharge on FPIs, lower LTCG tax

Details :

The News:
  • In a meeting with Finance Minister, foreign portfolio investors (FPIs) and finance industry players presented a series of proposals to revive investment sentiment.
Important Terminologies:
About: Dividend Tax Distribution
  • A dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year.
  • Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax.
  • However, the income tax laws in India provide for an exemption of the dividend income received from Indian companies by the investors by levying a tax called the Dividend Distribution Tax (DDT) on the company paying the dividend.
  • Therefore, Dividend distribution tax is the tax imposed by the government on Indian companies according to the dividend paid to a company’s investors.
  • Any domestic company which is declaring/distributing dividend is required to pay DDT on the gross amount of dividend.
About: Long Term Capital Gain Tax (LTCG)
  • Profits or gains arising from transfer of a capital asset are called Capital Gains and are charged to tax under the head Capital Gains.
  • A capital asset is officially defined as any kind of property held by an assessee, excluding goods held as stock-in-trade, agricultural land and personal effects.
  • Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.
    • Short Term Capital Gains: If an asset is held for less than 36 months, any gain arising from selling it is treated as a short-term capital gain (STCG).
    • Long Term Capital Gains: If the asset is held for 36 months or more , any gain arising from selling it is treated as a ‘long-term’ capital gain (LTCG).
  •  Shares and equity mutual funds alone enjoy a special dispensation on capital gains tax. In their case, a holding period of 12 months or more qualifies as ‘long-term’.
Background: Surcharge on FPIs:
  • In the recent Budget, the government had raised surcharge on income tax from 15 per cent to 25 per cent on taxable income between Rs 2 crore and Rs 5 crore, and from 15 per cent to 37 per cent for income above Rs 5 crore.
  • It would also be applicable for FPIs operating as trusts or as association of persons.
  • Most of these funds would have an income of more than Rs 2 crore and Rs 5 crore and their tax burden would go up.
  • This is being seen as the key reason for the outflow of funds.
  • The tax surcharge could discourage FPIs from participating in the divestment offerings in the coming months and hence need to be urgently reviewed
News Summary:
  • The private equity players, FPIs registered as trusts and companies presented their inputs and suggestions to the government on what is required on reviving investment sentiment.
  • Key Suggestions given include:
    • Rollback of surcharge on FPIs
    • Review of dividend distribution tax
    • Abolition or lowering of long term capital gains (LTCG) tax on equities
    • Easier Know Your Customer (KYC) norms for retail and institutional investors
    • Increasing Employees’ provident fund and pension funds exposure in the stock market, which in turn would improve liquidity.
    • Liquidity injection in NBFCs: More liquidity injection into the Non-banking financial companies that would help them boost lending activity.
  • The government has taken the suggestions ‘positively’ and has hinted that it would take all possible steps to revive overseas investor interest in the Indian capital markets.
Section : Economics