The economic slowdown, as many are calling it, is only a mindset. Change the mindset and you can overcome the slowdown. Budget 2009 gives the finance minister an opportunity to influence the mindset of the overseas investing community favourably. This community is, without a doubt, the harbinger of economic growth and prosperity. Some of the suggestions here, if implemented, could help bring about that growth.
Large-scale trading: The Bombay Stock Exchange. A clarification on the characterization of income from derivatives would help investors. Ashesh Shah / Mint
Need for tax law clarity
Investors and investments go to countries where there is certainty and clarity. If the Indian tax authorities seek to challenge traditionally accepted interpretations of the tax law, the country as a whole will send a negative message to the overseas investing community. The tax department is attempting to use new arguments to introduce taxation of offshore transactions which were previously not taxed. This aggressive behaviour on its part will put off foreign investors.
Trading safe harbour
The government wants Mumbai to be an international financial hub. However, the current Indian laws tax the investors if their investment managers are based in India and actively make investment decisions for them. As a result, these investment managers set up investment advisory entities in India, which advise the investment manager on securities which can be bought and sold; the actual investment decisions are taken outside India.
Major jurisdictions around the world offer a “trading safe harbour” to investors. They do not tax the investors in that jurisdiction simply because the investment manager buys and sells securities for them through an office located there. The presence of investment managers in India can act as a catalyst to attract foreign investment, which can propel growth.
Ease of doing business
The World Bank Report 2009 ranks India 122 out of 181 economies on ease of doing business. A better ranking would help India attract foreign capital. This could, to some extent, be achieved by simplifying the existing registration process.
Differential tax treatment
Differential tax treatment exists for equities and derivatives. While short-term capital gains on the sale of securities on which securities transaction tax has been paid is subject to 15% tax, the tax rate is much higher (30%) on derivatives. There is no reason why only stocks should be given preferential treatment but derivatives with the same underlying stocks should be treated differently.
An earlier amendment to the Income-tax Act has clarified that income from stocks and index derivatives should no longer be considered as speculation income.
It need not necessarily follow that income from derivatives is business income. However, the tax authorities seem to be taking the view that all income from derivatives should be characterized as business income. Given the huge volume of trades on the Indian stock exchanges, a clarification on the characterization of income from derivatives would help the investing community.
The lack of access to credit for the poor is a major obstacle preventing the improvement of their economic conditions. However, conventional finance institutions rarely lend to low-income families and households headed by women. Microfinance institutions (MFI) have stepped in to bridge this gap. However, their growth and scalability is constrained by existing laws and policies. Most of the MFIs are organized as trusts or not-for-profit companies; international investors mainly look for profitable ventures, and hence, investing in these MFIs is not an attractive option. A liberal policy should be adopted to encourage investment in this sector.
Suresh Swamy is associate director, PricewaterhouseCoopers.
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