FM cuts costs for India Inc
The government on Friday announced a series of measures aimed at boosting investor sentiment, even as it removed taxes on non-subsidised LPG cylinders to soften the blow from last week’s decision to ration subsidised cylinders.
In what yet again demonstrated the government’s steely resolve to persist with the reform agenda despite its largest ally Trinamool Congress formally deserting it on the day, the finance ministry also cut the withholding tax on interest paid on overseas borrowings from 20% to 5% for specified infrastructure companies and firms selling low-cost housing units. This would lower the cost of overseas loans for these firms by 50-80 bps at a time of high domestic interest rates.
Further, the finance ministry released the guidelines for the new tax-saving scheme, which is meant to lure first-time retail investors into the stock market.
Withdrawal of the 5% basic customs duty, 8% additional customs duty and 8% basic excise on non-subsidised LPG is likely to bring relief of close to R125 a cylinder to the consumer. The six cylinders in a year which they get at subsided rates ? nine in Congress-ruled states ? is anyway not taxed. As a result of the new gesture, consumers will get non-subsidised LPG cylinders at about R768. Subsidised LPG now comes at about R399 a cylinder. Fuel retailers did not immediately announce the actual price revisions they would implement.
Finance minister P Chidambaram said: ?The Centre is paying a huge subsidy on fuel. Therefore, it is not unreasonable to expect that some part of the burden is borne by the state governments too.?
Corporates and analysts welcomed the move to cut overseas borrowing costs. ?Capital-incentive sectors like railways, aviation, roads and ports will benefit the most. Lower tax on long-term infrastructure bonds will make such instruments more attractive,? said Samir Kanabar, tax partner, infrastructure, Ernst & Young.
The lower rate of taxation will apply to borrowings either under a loan agreement or by way of long-term infrastructure bonds. The reduction in withholding tax rate on interest paid on foreign loans and infrastructure bonds sold to foreign investors will also help increase FII inflows, said Sandeep Parekh, founder of Finsec Law Advisors and former head of legal affairs at Sebi. The scheme is available for three years up to 2015.
According to Nikhil Rohera, executive director (direct tax), PwC India, the move will improve the foreign exchange position in the country and find favour with foreign lenders, as generally, tax treaties prescribe a higher rate of tax on interest income.
The move to cut taxes on LPG was prompted by strong protests from political parties to the rationing of cooking fuel and the price increase in diesel announced last week.
The ministry allowed investments into exchange traded funds (ETFs) and mutual funds under the Rajiv Gandhi Equity Savings Scheme (RGESS) scheme announced in Budget 2012-13. Experts said this will enable retail investors to benefit from professional advice. ?Moreover, individual investors can diversify their portfolio with MFs and ETFs,? said Prithvi Haldea, chairman, Prime Database. According to the ministry, ? the scheme not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an equity culture in the country.?
Under the guidelines set by the ministry, investors with a taxable income of Rs 10 lakh or less a year could invest Rs 50,000 a year as per the norms and get a deduction of half of this amount from his or her taxable income for that year. The investment could be made in installments as well. There will be a lock-in period of three years for the scheme but investors could trade in the securities in the last two years. Investors, however, will have to maintain the investments in these two years at the amount for which they have claimed the income tax benefit.
?In case the investor fails to meet the conditions stipulated, the tax benefit will be withdrawn,? the ministry said. The Central Board of Direct Taxes will notify the scheme and capital market regulator Sebi will operationalise the scheme in two weeks.
