CNBC Awaaz

Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman are planning a series of tax alignments for equities in the coming weeks in a bid to further boost investor sentiment and bring in much-needed foreign exchange into the government’s coffers, sources in the Finance Ministry and NITI Aayog told CNBC Awaaz.

Existing structure of Long Term Capital Gains (LTCG) tax, the Securities Transaction Tax (STT) and Dividend Distribution Tax (DTT) are being reviewed by the Prime Minister’s Office in consultation with the Finance Ministry’s Revenue Department and NITI Aayog, a source said.

“These steps are likely to be announced before or in the Budget,’’ another source said. Sitharaman, already on a tear when it comes to announcing steps to boost slowing economic growth, is likely to present the Annual Budget for FY21 on February 3. “Now a group of officials are preparing the groundwork which is likely to finalised by November-end,” the source added.

The Prime Minister’s Office and the Finance Ministry did not respond to CNBC Awaaz’s queries.

Sitharaman has been taking a series of bold steps in the past three months to kick-start growth in Asia’s second largest economy, which is witnessing a slowdown. The Finance Minister has slashed corporate tax rates drastically to 15 percent for new units from 30 percent earlier; aggressively mounted a campaign to sell loss-making public sector companies; forced government departments to start spending budgeted allocations; pushed for quicker payments to outstanding government bills; nudged public sector banks to lend aggressively to small and medium sized enterprises and has also merged 12 public sector lenders to create four large banks in a bid to stem non-performing assets, give greater autonomy to government lenders and make them locally competitive to their private peers.

As a consequence, Indian corporate tax structure is now the lowest in southeast Asia.

These steps have boosted stock prices and investor sentiment during the festival season. Foreign investor inflows have improved sharply and major indices are less than three percent away from record highs. The Nifty rose 43 points, or 0.5 percent, to 11,627 points on October 29. The 50-share index hit a record high of 12,103 points earlier this year.

Now, more firepower is being added to make local tax rates in line with global peers, sources said. Comparative studies are being done to lay down the groundwork for longer term money from sovereign wealth funds, pension funds and insurance monies to flow into local equities.

“Tax rates are being reviewed for equity, debt and commodities markets. Differential tax structure for equities market may be rationalised to almost a single tax structure,” the source said. Initial discussions point to DDT being brought down substantially. There is a belief in vast sections of decision makers that DDT is a major obstacle in bringing in long term overseas pension money into Indian equities. A task force set up on pruning direct taxes, too, has recommended abolition of DDT.

In case an investor makes a profit on sale on equities, he is liable to pay capital gains tax. For gains made on equities held more than one year, LTCG is applicable at the rate of 10 percent from this fiscal. However, LTCG applies only on profits exceeding Rs 1 lakh. In case the shares are sold within one year, a flat Short Term Capital Gains (STCG) tax is applicable at the rate of 15 percent.

Companies are subject to DDT at the rate of 15 percent of the dividend paid, along with 12 percent surcharge and a three percent education cess. A domestic company will be liable to pay an additional tax at the rate of 15 percent on any amount declared, distributed or paid in the form of dividends to its shareholders. This amounts to double taxation on already meagre earnings.

Both LTCG and DDT have been long standing sore points with long-term investors.

“The Finance Ministry wants to announce it in the coming Budget. But once the proposals are finalised, the PMO may push for an early announcement even before the Budget,’’ the source said.

One estimate pegs Sitharaman’s tax cuts may result in the government's FY20 revenues falling short by at least Rs 1.5 lakh crore ($21.1 billion). These gaps have to be filled via aggressive sales of PSU assets, better tax revenues and sensible government expenditure, economists said.