Budget Takeaways: How the Union Budget silently pushed equities to FPIs

One of the major areas of dispute for foreign portfolio investors (FPIs) was the minimum alternate tax (MAT). For starters, MAT is a minimum tax charged on book profits and is levied on Indian and foreign companies. In the run-up to the Union Budget, many FPIs had received notices from the Income Tax department as to why they should not be subjected to MAT on their book profits. So what does the budget say on this topic?

Budget says “No MAT”, or does it?

The Union Budget has clarified that MAT will not be levied on FPIs. So does that set the dispute to rest? Not at all; in fact it has added a few layers of complications. Firstly, the onus of proving that they are not liable to MAT will be on the FPIs in question. That can add to compliance complications substantially. Secondly, it has been clarified that exemption from MAT will only apply in case of capital gains arising from capital market transactions on which STT has already been paid. That leaves out the interest on debt from the purview of MAT exemption. This becomes all the more critical because during the calendar year 2014, close to 65% of the FII inflows came into debt and only the balance 35% came into equities. So for all the debt investors their interest incomes will still be subject to MAT.

A boost to equities, probably!

This confusion could reduce FPI interest in investing in debt. That may not be a major concern, as FPIs are already close to their overall limit as far as investing in government securities is concerned. But it could surely lead to a re-rating of equities as an asset class. FPIs can be rest assured that income from capital gains on equities will definitely be exempt from provisions of MAT. And that may direct a lot of FPI buying interest into equities. So, don’t be surprised if the equity ratio transforms to dominate in 2015. After all, with the FDI / FPI distinction scrapped, there is still sufficient leeway for FPIs to buy Indian equities.

So, the government may have inadvertently given a boost to foreign buying in equities. Year 2015 may see FPIs favouring equity as an asset class over debt. And the Sensex and Nifty will surely have a lot cheer about!

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