Budget 2020: BJP Recommends Changes In Equity Taxes To Attract Foreign Investment

The Bharatiya Janata Party (BJP) has recommended adjustments to be made to taxing of equity market returns in the upcoming Union Budget 2020-21 to attract capital inflows into Indian stock markets, a senior party member told Reuters.

In pre-budget consultations with the finance minister and the prime minister's office, BJP leaders have urged the government to consider industry demands and listed measures to revive investments, said Gopal Krishna Agarwal, economic affairs spokesman of BJP to Reuters in an interview.

"There is a concern on LTCG and DDT...as a lot of financial transactions are moving out of the country to Singapore, Hong Kong and London," Agarwal said.

In 2018, former finance minister Arun Jaitley re-introduced long-term capital gain (LTCG) tax at 10 percent on sale of equity shares after a gap of 14 years. At present, gains from equity shares attracts tax at 15 percent when sold within a year (short-term gains) and at 10 percent when sold after a year (on gains above Rs 1 lakh).

The re-introduction of LTCG brought much disappointment to market participants and foreign investors have been reaching out for its removal on equity or equity-oriented funds and/or extending the holding period from the current one year to two years to qualify for the nil tax.

The tax makes large investments a tough sell as most developed nations that India competes with for capital have tax free LTCG on equities.

There is also a demand to tweak dividend distribution tax (DDT) rules. Currently, Indian companies are required to pay over 15 percent DDT on declared dividends and investors pay another 10 percent tax on receiving more than one million rupees ($14,070) dividend in a financial year.

Experts say that these rules do not allow foreign investors to claim tax credit in their countries and small investors are forced to pay higher tax. Suggestions have been made to make them DDT applicable at the receiver's end as part of income earned instead of deducting as tax-at-source by the issuer of the dividend.

Agarwal said there was a need to reduce the cost of financial transactions in the country.

"These are doable and without putting much financial burden on the government".

All eyes are set on Finance Minister Nirmala Sitharaman as she prepares to present the annual budget on 1 February and expectations are high on announcing measures to aid economic growth.