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THE ECONOMIC TIMES | NEW DELHI

SUNDAY | 1 MARCH 2015

Budget 2015 Rebooting India

IMPACT ON MARKETS

DIVIDEND DISTRIBUTION TAX

BUDGET AT A GLANCE

Higher surcharge to be levied

on debt mutual funds

MERGING MF SCHEMES
Tax neutrality on merger
of similar mutual fund schemes

Debt funds currently pay dividend

distribution tax (DDT) of 25% + 10% surcharge
+ 3% Cess, which is equivalent to 28.325%.
The dividend distribution tax will now
increase to 28.84%, reducing returns for
investors opting for the dividend option.
Wealth managers said opting for the dividend
payout option will not be good for individuals
falling under tax bracket of 10% or 20%.

Whenever a scheme was merged with

another, it used to be treated as a
transfer, and capital gains tax was
imposed. The change will now help
industry consolidate as there will be no
tax demand on unit holders. Securities
And Exchange Board Of India (Sebi) has
been encouraging mutual funds to
consolidate different schemes with
similar features

PUSH FOR INFRASTRUCTURE

Introduction of tax-free infra
bonds for railways and roads

High-flying mutual fund industry may

struggle to acquire new customers as
distributor margins are set to shrink. The
budget has imposed 14% service tax on
distributors who are already struggling with
shrinking margins, higher costs of compliance
and a proposal by Association of Mutual
Funds of India (AMFI) to curb upfront
commissions to 1%. They may not be
aggressive in selling products.

Waiting For New Triggers

INDIA AMONG THE

BEST-PERFORMING
MARKETS IN 2014

Hes VVP in real, but for India he has always been VVIP. Vladimir Vladimirovich Putin is being roasted in the West, but India
remains a trusted ally. Even Barack Obama, as R-Day chief guest, saw with his admiring eyes Indias deep ties with Russia on
Rajpath. Russia is letting India make 400 choppers a year, a salute to Make in India. B.O. can come again for a look-see.

FORWARD PUSH Deferral of GAAR and prospective application, MAT waiver and new investment

% Returns
Brazil [IBOV]

-2.91

China [Shcomp]

52.87

Germany [DAX]

2.65

India [Sensex]

29.89

Indonesia [JCI]

22.29

Japan [Nikkei]

7.12

Korea [Kospi]

-4.76

Russia [RTSI]

-45.19

South Africa [Jalsh]

7.60

UK [FTSE]

-2.71

US [DOW]

7.52

US [Nasdaq]

13.40

avenue in alternative investment funds... foreign investors never had it so good

revenue collections at all costs. Several threatened to
pull out of India and the government set up a committee
IN FOCUS
which recommended deferment.
Sachin Dave & Nishanth Vasudevan

2015 HAS STARTED

ON A STRONG NOTE
% Return In 2015 So Far

6.78

BSE Small CAP 1.6

7.4

NIFTY

VLADIMIR PUTIN BROTHERS IN ARMS: A PARTNERSHIP IN DEFENCE

NIFTY Mid Cap 2.3

BUT FACES STRONG

RESISTANCE BECAUSE
OF HIGH VALUATIONS

oreign institutional investors, the biggest movers of Indian stocks, got what they wanted in
this Budget. Finance minister Arun Jaitley
postponed implementation of the widely-disliked general anti avoidance rules of taxation
(GAAR), and ruled that offshore investors dont have to
pay minimum alternate tax (MAT). FIIs have also been
allowed to invest in private equity funds, also called alternative investment funds (AIFs).
GAAR was introduced by the then finance minister
Pranab Mukherjee in his budget speech in March 2012.
But ambiguity surrounding some of its provisions
spooked foreign institutional investors who feared that
wide powers given to local taxmen to scrutinise returns
would increase harassment by some bent on increasing

NSE Nifty P/E Ratio

25

ITS A BULL
MARKET
ALL RIGHT

20

15

2011
Feb 28

2012

2013

2014

...& POOR THIRDQUARTER CORPORATE

RESULTS
NSE Nifty P/E Ratio
Q3, FY14

Sales
growth
Net prot

Q3, FY15

-0.2

6.5
2.5

Fund-starved railways and companies in

the road sector will be able to raise money
a lot more easily. But, investors may not
aggressively subscribe to such bonds if
interest rates fall further. Usually, such
bonds have a long tenure of 10-20 years.
Tax-free bonds issued in 2013 were popular
because equity markets had not picked up
and the coupon was as much as 9% every
year. Wealth managers said companies are
unlikely to offer such rates any time soon as
the market is abuzz with talks of a rate cut
of 50 basis points this year.

Holi Comes Early for FIIs

THE
CONTEXT

BSE Sensex

Imaging: Arindam

SERVICE TAX
Mutual fund distributors
will pay service tax

-28.3

Net prot
7
margin

SOURCE: CARE Ratings, based on

results of 2,934 companies

MILIND BARVE

Managing Director, HDFC

Asset Management Co

The Budget is
focussed on
reviving
economic
growth with
an emphasis on the
infrastructure and
manufacturing sectors.

JIM ONEILL

Former Chairman,
Goldman Sachs

I dont see
anything that
makes me go
wow, maybe
theres a little
disappointment that
theres no eye-catching
thing. There appeared to
be a lot of small good
things from the biz perspective. Id like to see
bolder initiatives on education, FDI, health...

Breaking Free
Currently, the overall
foreign investment
limit of 74%, of which
FIIs can invest up to
the sectoral limits
BANKS

FII

Proposed: Composite
overall foreign investment
limit of 74% and no intergroup investment limit
within that
OTHERS

TOTAL

HDFC

54.31

DR/FDI
18.89

0.29

73.49

AXIS

48.52

3.71

0.29

52.52

INDUSIND

40.59

12.24

16.31

69.14

ICICI

41.83

29.08

0.24

71.15

YES BANK

46.32

0.00

0.54

46.86

FEDERAL

38.94

2.00

2.69

43.63

KOTAK MAHINDRA

35.26

0.00

8.10

Stake in %

43.36
Source: MOSL

This is a huge boost for investments coming from

Singapore and Mauritius as FIIs would continue
to benefit from double tax avoidance treaty, said
Dinesh Kanabar, tax expert and CEO of tax advisory
firm Dhruva.
On Saturday, the government also clarified that foreign
portfolio investors would not pay minimum alternate
tax and relaxed rules allowing FIIs to set up shop in the
country. The Budget is a big positive for foreign institutional investors. It has cleared a lot of uncertainties,
said Sanjay Sanghvi, partner at
law firm Khaitan & Co.
Tax practitioners and lawyers
said the MAT exemption is the
biggest takeaway. The tax department had issued notices to
Minimum Alternate several foreign portfolio invesTax levy on Foreign tors (FPIs) earlier this year on
Portfolio Investors MAT causing frantic investors
to knock on the doors of the government and tax consultants and complain about arbitrariness. The levy would have resulted in FPIs paying
20% tax making the capital gains tax regime irrelevant.
India taxes short-term capital gains at 15% and there
is no long-term capital gains tax on investment beyond
one year.
The announcement would remove the uncertainty
and anxiety created due to the recent tax notices to FPIs
asking them to pay MAT, said Rajesh H Gandhi, partner
(tax), Deloitte Haskins & Sells. The IT department had
issued notices to about 400 FPIs in the last few months.
The government has also made it easier for foreign
fund managers to set up base in India by tweaking the
permanent establishment (PE) norms. PE refers to a situation where a non-resident entity becomes liable to pay
taxes just by having an office or a fund manager in that
jurisdiction. Jaitley said PE would not apply to foreign
institutions whose fund managers are located in India.
Earlier, funds would have a contrived arrangement
with their India managers to operate as otherwise their
gains would be treated as profits and taxed accordingly.
With the new arrangement, the FPIs returns would be
treated as capital gains, said Kanabar.
The Finance Bill states that the proposed new Section
9A seeks to provide that in the case of an eligible investment fund, any fund management activity carried
through an eligible fund manager acting on behalf of
such a fund shall not constitute business connection in
India of the said fund.
Sub-Section 2 of the new section provides that an eligible fund shall not be treated as resident just because an
eligible fund manager is doing fund management activities on behalf of the fund in India.
Concern over taxation of such entities had prompted many fund managers, who manage India-centric
portfolios, to handle operations from Singapore and
Hong Kong.

Five Themes Light Up the

Path for Tomorrows India
by Invite

20%

UDAY KOTAK
VICE-CHAIRMAN & MD,
KOTAK MAHINDRA BANK

Proposals provide a
long-term vision for
creating a New India
This Budget puts forth finance
minister Arun Jaitley as a strategic architect to Prime Minister
Narendra Modis economic vision
for a glorious India. From the
point of view of the economy and
capital markets, five key themes
emerge - first, a significant push to
drive investments, particularly in
the infrastructure sector. This
Budget has made a significant ef-

fort to increase investments in infrastructure, and also makes way

for public sector undertakings
(PSUs) to allocate more resources
for such investments.
Second, the Budget is a big plus
for the financial sector. Increasing
focus on monetisation of gold
through the financial sector, setting up of a holding company for
PSU banks, significant benefits for
real estate investment trusts
(REITs) through alternative investment platforms are some of
the announcements in this Budget
that will channelise savings and
aid capital formation. Merging the
Forward Markets Commission
(FMC) with the Securities and
Exchange Board of India (Sebi) effectively brings commodities and
capital markets under one umbrella, which is a big positive for
the markets.
Third, the Budget discourages
cash transactions. Focus on the
importance of debit and credit
cards as transactions of the future is not only a move towards a
cashless society but will also ensure monetary transparency and
curtail black money.
Fourth, simplifying the tax regime. There are no major changes,

They didnt forget us, the aam admi!

but a path to a lower corporate tax

over the next four years has been
laid which gives policy clarity to
investors. Removing the wealth
tax and imposing a 2% additional
surcharge on incomes above
`1 crore increases revenues almost
five fold, and simplifies life for the
Central Board of Direct Taxes
(CBDT) as well as for the tax payer.
Interests of the middle class remain fully protected. Additional
breaks for investment in social security is a step in the right direction as that has been a huge gap in
this country.
Fifth, fiscal deficit for FY16,
which was earlier anticipated to be
3.6%, may be higher at 3.9%. This
is not a big factor, but will have
some implications on the fact that
RBI may drop interest rates a little
slower than what was anticipated
earlier. However, from the point of
view of financial savings, this is
not necessarily a bad thing because savers will continue to get
better returns. I am rather happy
with a slightly higher deficit at a
time like this, if more money can
go into investments.
In addition to these themes, the
Budgets focus on education is evident in the way institutions are being planned across the length and
breadth of the country. I am very
happy that the Modi government
has recognised education as the
key to Indias future. And it is
about time that teachers got their
due respect.
All-in-all, I think the Budget has a
long-term vision; something that
is aimed at strengthening the foundations of the economy. This is not
a hit and run budget, but one by an
architect who is working with the
PM to transform our country into
a new India. I am extremely excited about the future of India over
the next five or ten years.

Permanent Establishment Googly for PEs to Make Buyouts Cumbersome

Arijit Barman & Sneha Shah

Mumbai: For private equity fund managers, this years Budget is at best a mixed
bag. On one hand, the finance minister has
helped fund-raising and structuring by
simplifying certain rules to allow funds to
tap a wider pool of global capital, and also
cleared the ambiguity regarding tax passthrough, but at the same time, fund managers who want to manage offshore funds and
also seek exemption from permanent establishment clause will find it difficult to
do buyouts or even write larger cheques.
Experts believe doing away with permanent establishment clause will provide a
far bigger relief to portfolio investors as
compared to strategic capital or even PE

funds, which are planning to take big bets

on India. Currently, even if a fund raises
capital and incorporates the entity offshore, the funds income could potentially
be taxed in India at 40% just because the
manager or the advisory team worked out
of Indian shores. This has been a long
standing irritant for foreign institutional
investors and even PE funds.
But the Finance Bills fine print states
that if a fund has to avail of these benefits,
it cannot control or manage-directly or indirectly-any business in India, or from
India. Similarly, more than 20% of a funds
corpus cannot be invested in a single entity.
Experts argue that for buyout funds like
KKR, Carlyle or Blackstone, it doesnt
make sense to base their senior decision
makers in India under the new rules since

the conditions are onerous and impractical to carry out buyouts or write large
cheques. This can affect PE funds that are
looking to take larger bets on a business in
India, said Punit Shah, co-head - tax,
KPMG India.
Experts believe
On the other hand, for
doing away
domestic fund managers
with permanent such as Multiples or
establishment
ICICI Venture or IL&FS,
clause will
life would have been easiprovide a far
er to manage offshore
bigger relief
funds out of India withto portfolio
out being worried about
investors as
their funds creating a
compared to
business connection or
strategic capital per manent establishor even PE
ment in India by virtue
funds
of their presence.

There is also a mandatory broad-basing

of investor pool. Each fund should have a
minimum of 25 members (limited partners, or LPs) who are not connected to each
other. This would mean that a fund cannot
raise money only from a dozen deep pocket
investors. The provisions may make fundraising more challenging in future.
However, opening up alternative investment funds - a category of pooled-in investment vehicles for real estate, private equity
and hedge funds - to foreign investments
could also open up a significant source of
capital from NRIs and foreign investors.
Fund-raising in India has been muted in
the past few years and we now hope to see a
spurt in the activity, said Nupur Garg, regional lead - PE funds, South Asia, IFC. IFC
is a large LP (read investor) of Indian funds.