Conducive Taxation Framework Essential for Financial Markets: CII Suggests 6 Point Agenda for Union Budget

Conducive Taxation Framework is a vital cog in the wheels of the financial markets and has the potential to make or break the market, said Mr Chandrajit Banerjee, Director General, CII. He further added that, considering that the financial markets are the major provider of risk capital and debt capital, it is important to have conducive tax policies for enabling participation of all stakeholders in the markets.

In the detailed representation submitted to the Government for consideration in the upcoming Union Budget, CII has proposed to rationalise Dividend Distribution Tax (DDT) rate to 10%. Alternatively, to negate the multiple level taxation issues pertaining to Dividend Distributed, the dividend paying company should pay tax on its profits including distributed profits at corporate rates. Dividend should be taxed in the hands of the non-corporate (leveraged) shareholders as normal income, and expenses should be allowed against such dividend in full. CII also recommends that Section 80M which granted deduction of inter corporate dividend received by a domestic company to the extent of amount distributed by the recipient domestic company on or before the due date of filing return of income, should be reintroduced to pre-empt double taxation of inter corporate dividend.

 

The second proposal is regarding Alternative Investment Funds (AIFs). Considering that India is on the cusp of growth due to various reform measures introduced by the Government in the recent past, AIFs will play a major role in providing the much-needed capital and other avenues for achieving and sustaining growth. As a measure of rationalisation and simplification, CII suggests that complete pass through status should be accorded to all AIF categories (Category I, II & III) in line with Securitisation Trusts, with no differentiation between business income and income under other heads. Investors in AIFs should be taxed directly on their pro-rata share of AIF's as if the underlying investments were held directly by the Investors (beneficiaries) and bore the same income character.

Thirdly, section 56(2)(viib) of the Act currently provides specific exemption for companies where the consideration for issue of shares is received from Venture Capital Funds (VCFs) but not to AIF. CII recommends that the intended changes must be brought about in AIF regulations and the applicability of the said regulation should be restricted only to consideration received from investors who are neither Qualified Institutional Buyers under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, nor registered or licensed by the Reserve Bank of India (RBI) or Insurance Regulatory and Development Authority of India (IRDAI), and that too only where issue of shares is for equity stake not exceeding 1%.

The fourth proposal is regarding With-holding Tax (WHT) provision for Foreign Portfolio Investors. Currently, With-holding tax deduction at source on interest payments to FPIs stands at 5% on investments in rupee denominated domestic corporate bonds. This rate was reduced from 20% to 5% and is made available till June 2020. Further, interest rate cap is prescribed for applicability of reduced WHT. The current cap is SBI base rate plus 500 basis points (bps). To ensure tax certainty and higher participation from international investors, CII recommends that the reduced WHT should be made perpetual and not expire after June 2020. Further, this reduced WHT rate should apply for interest paid to the extent of SBI base rate plus 500 bps and 20% WHT must be applicable only on the excess interest paid over such rate. FPIs interest in participation in Indian economy is increasing due to the sound economic growth of the country and the bare minimum incentive they want is tax certainty in the long term.

Adding to the recommendation above, it may be worthwhile to grant exemption from WHT to FPI to incentivize their participation in municipal bonds. This may help in bringing in long term money from pension funds, said the CII release.

Fifth proposal is that the holding period for units of Debt Mutual Fund must be restored to 12 months from 36 months to qualify as Long-Term Capital Gains (LTCG) and bring it at par with equity market.

The sixth proposal is regarding Tax Deducted at Source (TDS) on borrowing charges paid to National Securities Clearing Corporation Ltd (NSCCL) under Securities and Lending Borrowing segment. NSCCL basically acts as an intermediary and guarantees fulfilment of both legs of trade. It collects the borrowing charges from the borrowers and pays the same to the lenders as lending charges. But, the borrowing charge collected by the NSCCL is treated as income and is subject to TDS as per ITA, 1961. CII recommends that the provisions of the Act, may be suitably amended to exempt the borrowing charges paid to NSCCL by the borrower on securities borrowed under the SLB scheme from provisions of TDS.

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