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Budget 2019: NBFCs, MSMEs to benefit from lower corporate tax rates; 5 key takeaways for NRI investors

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  • By Aravind Srivatsan and Lakshmi Sankar

  • Budget 2019: The finance bill 2019 is now tabled in parliament and the tax proposals show a clear consistent approach followed by the Govt. where measures to promote automation, comprehensive profiling of tax payer information, digitization & deepening quality of Indian capital markets (offshore and onshore) have been given focus. The Government has stuck to its guns in so far as personal tax slabs are concerned with no changes in slabs applicable to individual tax payers. The Government has been prudent in choosing to impose an increased surcharge for mega rich over imposing a new tax in the form of inheritance tax which would require significant bandwidth to administer and create other challenges to the next generation.

     Balancing revenue compulsions, the Govt. has admirably extended the twenty-five percent corporate tax rate to all companies with turnover of up to Rs 400 crores during FY 2017-18 and thereby provided a fill up to 99 percent of corporate tax payers.  This relief should help several NBFC, payment banks, small finance banks and insurance intermediaries, to benefit from the lower tax rate and allow potential transmission of tax rate benefits to borrowers. The proposal to limit taxation of NPA interest income on sticky loans on cash basis (on par with banks) only to certain classes of NBFC should be re-considered and made available to all NBFC including especially MFI. This proposal should release NBFC from existing litigation and reduce their tax burden.

    Also read: Budget 2019: Agriculture, MSME, NBFC take priority; manufacturing gets low attention, says Motilal Oswal

     The impetus on infrastructure comes consistent to the tone of past budgets with a mention of creating a development financing bank or vehicle which will have to deal with the ground realities of financing infrastructure estimated upwards of 100 lac crore over the NDA 2 term until 2024, to attract and raise sustainable long term capital. Also discussed was an important proposal to broaden the retail participation in treasury bills & G-secs through creating a mechanism for interoperability of exchanges between RBI & SEBI, which will channelize private savings into government projects and create new window to the government. 

    Public sector banks have been provided with growth capital outlay of Rs 70,000 crore and financially sound NBFC have also been provided a window to securitize their pool of assets with the government providing a first loss credit guarantee on stipulated terms. The proposals for FDI relaxation of up to 100 percent for insurance intermediaries (as against 49 percent at present which include web aggregators, brokers, TPA) would attract growth capital, apply better technology and customer interface as well as expand offerings pan India and allow new players to enter the Indian market and deepen insurance penetration. The on tap license for home finance company or ‘HFC’ which was earlier available through national housing bank route would now have to be routed through RBI given some stress signals and it is expected that there would be more scrutiny before issuance of fresh licenses.

     With diminishing savings rate as pointed out in the survey the Govt. has significantly focused on making India more attractive for Non-resident investors through sweeping tax proposals including inter-alia proposal to:

  • exempt interest income earned by a non-resident from subscribing to the much preferred rupee bond route (sometimes referred to as masala bonds);
  • Permitting offshore funds to buy debt securities issued by NBFC as also invest in debt papers issued by REIT, InvIT;
  • Enabling offshore business such as ECB lending by banks to seriously explore migrating to GIFT city, which at present is the only tax exempt zone, taking into account the proposal of offering a ten-year tax holiday (though MAT applicable), exempt applicability of withholding taxes on interest payments to non-residents;
  • Galvanize the GIFT platform as a major fund raising exchange for Indian corporates, where nonresident participation in bond trading would not be subject to tax and Indian investors can plan their bond raise and listing in GIFT as against preferred destinations such as Singapore/Luxembourg;
  • Stipulate a higher public threshold of thirty-five percent public ownership in Indian securities as a standard norm which will aid divestment, accelerate allocations for offshore funds into the Indian markets.

  •  The startup community have reasons to sigh relief since registered startups now have a clarity that their share capital infusions would not be subject to examination by revenue and loss protection would be available. The proposal to permit downstream investors of tier 1 and tier 2 subsidiaries in Companies subject to insolvency proceedings to avail loss protection arising from their acquisition augurs well as also the proposal to alter the computation basis under MAT on an aggregate of business loss and unabsorbed depreciation. Alternate investors as a fund class also have reason to be happy since their voice has been heard and they have been permitted to have loss pass through (other than business income) and angel tax would not be levied on investment by cat II funds into venture capital undertakings.

     As corporate India braces for growth, reliance for external sources of capital especially offshore capital from pooled funds is now a reality which cannot be overlooked.  Further, as regulators seek to gain sweeping powers to inspect, penalize or even ban players, the financial services players would have to carefully rework their fund raise strategy, assess additional governance requirements as they brace to compete for capital and meet globally accepted standards of governance and transparency. Several amendments have been proposed in the fine print to the tax proposals, including in the RBI Act & SEBI Act which need to be carefully considered before they are shortly signed into law.

    (The authors are Aravind Srivatsan, Partner and Lakshmi Sankar, Associate Director, Nangia Advisors (Andersen Global). The views expressed are author's own)