Nirmala Sitharaman rolls back tax hike on investors, outlines steps to boost sentiment; industry hails move

  • Sitharaman also outlined a raft of measures including some for the crisis-hit autos sector, small businesses, and the troubled shadow banking sector

  • “These measures are aimed at boosting growth, we are open to suggestions, we want to speed up growth,” Sitharaman said

  • Sitharaman said she was confident of meeting the fiscal deficit target of 3.3 percent of GDP considering the trend in revenue collections

Finance Minister Nirmala Sitharaman announced the rolling back of recent tax hikes on foreign and domestic equity investors and also the acceleration of a capital infusion of $10 billion into state-run banks, she said late on Friday, in an attempt to boost market sentiment and revive the slowing economy.

Echoing Prime Minister Narendra Modi's Independence Day speech talking of respect for wealth creators, she said this was the spirt of her budget for FY20.

The government also outlined a raft of measures including some for the crisis-hit autos sector, small businesses, and the troubled shadow banking sector to calm nerves of investors and lift consumer sentiment ahead of the Indian festive season that begins next month, Reuters said. “These measures are aimed at boosting growth, we are open to suggestions, we want to speed up growth,” said Finance Minister Nirmala Sitharaman, at a news briefing outlining the measures. Seeking to dispel doubts over the economy and government's growth agenda, Sitharaman said India's GDP continues to grow at a faster pace than the global economy and any other major economy.

 Nirmala Sitharaman rolls back tax hike on investors, outlines steps to boost sentiment; industry hails move

File image of Finance Minister Nirmala Sitharaman. PTI

Global GDP growth may be revised downwards from the current estimate of 3.2 percent, she said adding that globally the demand was going to be weak. But the Indian economy was growing faster than the global average and all other major economies, Sitharaman added. As a result of US-China trade war and currency devaluation, very volatile situation has developed in global trade, she said.

Sitharaman said the government hasn't lost its momentum with regard to reforms. Reform is on top of the government's agenda and the reform process will continue, she reiterated. The moves come after several business leaders and industries urged the government to take swift measures to boost demand and investments after economic growth slipped to near five-year lows in the January-March quarter.

Most analysts expect data due this month to show that growth in April-June faltered even further. The markets have sunk more than 10 percent since Sitharaman had outlined a higher surcharge on income of the super-rich including some foreign portfolio investors (FPIs), who have sold large positions since the surcharge was announced in the budget in early July.

On Friday, Sitharaman said she would exempt the investors, drop plans for a surcharge on long and short-term capital gains, and also provide additional 200 billion rupees ($2.8 billion) of liquidity to housing finance companies to help revive the real estate sector.

“Overall, the take home is that the government is listening, has listened, has identified solutions and have taken some quick and bold wide ranging decisions,” said Ashishkumar Chauhan, head of Bombay Stock Exchange (BSE), in a statement. “It should give confidence to everyone in business that this government is intent on solving all issues by discussions.” The new measures including the withdrawal of the hiked taxes on foreign investors would result in revenue losses of about $195 million, having only a limited impact on government revenue, the finance ministry said. Sitharaman said she was confident of meeting the fiscal deficit target of 3.3 percent of GDP considering the trend in revenue collections.

Industry hails steps

Investors said the measures outlined by Sitharaman are set to lift Indian markets on Monday and strengthen the rupee, which has been the worst performing Asian currency this month.

“This is a much-needed boost for local and global sentiments toward India ... Equity markets could see a rally of 2%-3% come Monday,” said a fund manager with a local mutual fund.

Any gains may be tempered by an escalation in the US-China trade war, however. China late on Friday unveiled retaliatory tariffs against about $75 billion worth of US goods, sending oil prices tumbling and Dow, S&P 500 and Nasdaq futures lower on Friday.

Sitharaman said the government was also working on ways to help the auto sector, including a plan to encourage scrapping of old vehicles to boost sales.

The move to infuse capital in housing finance companies that have been stung by a liquidity crunch following the collapse of Infrastructure Leasing and Financial Services (IL&FS)—a major player in the shadow banking sector—was also widely cheered.

“It is a very welcome move as banks have been reluctant to lend to HFCs and real estate companies which has led to stress in the sector. The amount is fairly large and it will definitely help the struggling industry,” said Deepak Parekh, chairman of HDFC. “Now it is to be seen how the National Housing Bank disburses the amount.”

In a statement, Rajnish Kumar, Chairman, SBI said the slew of announcements made by the Finance Minister will act as major enablers for continuing to support growth. "Bank recapitalisation at one go will provide a big impetus to credit growth. Also, honest decision-making will not be questioned, a major mojo for a cleaner and better economy. SBI has already started bench-marking its loans to repo and now other banks are likely to follow suit. This augurs well for domestic demand. The surcharge removal on FPIs and domestic investors will soothe the markets. Measures announced for relief to the auto sector will lift sentiments," he said.

Rohit Suri, the India head of Jaguar Land Rover, welcomed the decisions like the deferment of increased registration fees, but added that a reduction in the goods and services tax (GST) on vehicles that the industry has requested would have “been the real demand stimulant,” Reuters said.

Passenger vehicle sales in July fell at the fastest pace in nearly two decades. The sales declines have triggered major job cuts in India’s auto sector, with many companies forced to shut down factories for days and axe shifts.

Sitharaman said the capital infusion into state-run banks however, would enable nearly 5 trillion rupees worth of lending to consumers and businesses, spurring demand. The government has also asked the banks to pass on benefits of rate cuts by the central bank, which has cut its benchmark repo rate by 110 basis points since February.

The Federation of Indian Chambers of Commerce and Industry, a broad cross-sector lobby group, also welcomed the decision to clear all pending GST refunds to small and medium enterprises within the next 30 days and ensure that all future GST refunds are cleared within 60 days, saying this “augurs well for industry.”

Shishir Baijal, Chairman & Managing Director, Knight Frank India said he welcomed the announcements from the Finance Minister that addresses the issues to some measures of many industries have been facing slowdown for the past few months. "We expect these measures to have impact on the stressed assets that are awaiting completion. For the real estate sector specifically, the alignment of the bank lending rates to the REPO rate will have significant impact. This has been a long standing demand for banks to pass on the benefits of lowering REPO rates. We are looking forward to the announcements that the Finance Minister shortly announcements directly impacting the real estate sector,” Baijal said.

Taking cognizance of the distressed position of NBFCs, today’s announcement and assurances by the Finance Minister is appreciated for bringing the transparency, said Rajesh Sharma, Managing Director, Capri Global Capital. “The measures which includes more liquidity of 20000 crore through NHB, pushing disbursement to NBFC under partial credit enhancement, and pushing banks to start co- origination which will solve the problem of requirement of credit lines by NBFC to a great extent. It is evident that the slew of measures adopted by the government time to time shows the approachable impetus to enhance the credit flow to NBFC. Additionally, assurance of repo rate benefits to reach customer sooner is a big relief on the borrower.”

Speeding up GST refunds and streamlining the MSME Act are welcome steps and should give some impetus to the MSME sector, said Pushkar Mukewar, Co-Founder and Co-CEO of Drip Capital, a US & India based trade finance firm. "Faster tax refunds have been a long-standing request from the sector, and we are glad the government is acting on it. To further spur demand, we would like to see increased government procurement from MSMEs," he said.

Ravi Saxena, MD, Wonderchef, was of the view that this was the right time for the Finance minister to step up and tackle the situation of an economic slowdown. “The announcements are definitely going to bring positive sentiments in the market. With the festive season knocking the door, this is an appropriate move by the govt to infuse funds in the market. The liquidity in the market will help the reeling economy to get some respite. Removal of angel tax will be a breather for the start-ups. GST glitches have been acknowledged and measures have been announced to address them”.

On the removal of higher surcharge on capital gains from equity, Daksha Baxi, Head-International Taxation Partner, Cyril Amarchand Mangaldas, said, “maintaining its position that reform is a continuous process, and witnessing significant downturn in the capital markets due to many FPIs withdrawing from their Indian investments, the FM has announced removal of higher surcharge on capital gains from equity and units for both domestic and foreign investors. This should help calm the nerves of the capital markets.”

Sathya Kalyanasundaram, India Country Head and Managing Director, Experian India-a global information services company said the announcements should provide a fillip to auto and real estate sectors that are facing a slowdown. Home loans disbursement count is 20 percent lower than Q4 FY18 and auto loans disbursement has witnessed a slowdown in latest quarter with a decline of 13 percent over last quarter, as per Experian data, he said.

Reforms in the policy are critical for the startup ecosystem to grow by leaps and bounds. Geetika Dayal, Executive Director, TiE Delhi-NCR said, “the removal of Sec56(2) and setting to the CBDT special cell for startups is a step in the right direction .we hope this helps in resolving the remaining and emergent challenges in the Indian start-up ecosystem. This initiative looks very promising and we are looking forward to its speedy and proper implementation.

Approving purchased for government departments and permitting additional depreciation will provide stress relief in certain phases, said Munira Loliwala, Business Head-EMPI, TeamLease Services. Additionally, further expectation for GST reforms will also help in minimizing the gap. The government has also extended registration for BS UV which will definitely boost purchase. The agenda of infrastructural development and industrial manufacturing will pave the pay for multiple job opportunities in the sector.

Dinesh Kanabar, CEO, Dhruva Advisors LLP said though the roll back of higher surcharge on capital gains is needed, it brings about a peculiar situation now where earned income faces higher surcharge and unearned income does not. Kanabar said the grant of additional depreciation on vehicles is a smart move. It accelerates the overall allowance without burdening the exchequer and should boost off take in the short run, he said.

The Finance Minister's presentation suggested amendment in respect of capital gains taxable under Sections 111A and 112A. FPIs are, however, taxable under a different section 115AD. Hope fine print makes amendment in correct section, said Bhavin Shah, Partner & Leader, FS Tax, PwC India. “The removal of higher surcharge on capital gains will not apply to AIFs which deal in derivative securities where the characterisation of income is business income.”

--With agency inputs

Updated Date: Aug 24, 2019 12:25:08 IST