Come February 1, the spotlight will be on Union Finance Minister Nirmala Sitharaman, as she unveils the Budget for the coming fiscal year after she announced a number of path-breaking policy measures last year over a series of press conferences. While the global economy is battling strong headwinds - industry, entrepreneurs and capital market stakeholders are riding high on hopes for a favourable tax and policy measures.

Topping the list of expectations is the restoration of tax-free long-term capital gains on equities, units of equity-oriented mutual funds and units of business trusts. This will attract investors to hold such securities for a longer period due to a higher income tax differential between long-term and short-term capital gains.

Any loss in revenue due to restoration of exemption on long term capital gains is likely to be balanced by an increase in securities transaction tax (STT). From a revenue perspective, STT is easy and simple to administer. However, from an overall cost of trading perspective, it will make India more expensive.

Removal of dividend distribution tax

Deepening the debt market in India has been the focus of the current government and regulators. Extending the tax regime of 5 percent on the interest income from government bonds and certain corporate bonds for three more years will act as a catalyst to debt investors – with the Voluntary Retention Route (VRR) picking up steam.

Removal of the dividend distribution tax (DDT) and introduction of dividend taxation in the hands of the investors has been an industry ask – although dividend is exempt in the hands of the shareholders, an Indian company declaring dividend pays DDT. The rate of DDT suffered by Indian companies is significant. If the ask is accepted, foreign portfolio investors will be able to claim credit for taxes withheld on dividend and thereby reduce their overall tax burden. This will be seen as a positive move, at least by some sections of the investor community.

Clarity should be brought in the tax treatment of physical settlement of stock derivative contracts, securities lending and borrowing and income from Overnight Index swaps, a newly opened investment avenue, to give certainty to the investor and reduce litigation.

To fire up the investment management activity of offshore funds from India - safe harbour provisions –conditions should be further relaxed significantly. This will be a green signal to investment managers operating abroad to relocate to India.

Against the backdrop of the global slowdown, fiscal deficit escalation, GDP degrowth, this ‘weekend’ budget yearns for a booster dose of bold steps and set the economic ball rolling.

Suresh V. Swamy is Partner and Tushar Patel is Director, Financial Services Tax at PwC India. Bhoomi Shah also contributed to this article. The views expressed are personal.

First Published:Jan 28, 2020 2:55 PM IST