Cabinet may relax FDI in retail, okay ordinance to roll back FPI surcharge

The Union cabinet in its meeting on Wednesday would take up proposals to relax foreign direct investment (FDI) in various sectors, including single brand retail and digital media, as announced by Finance Minister Nirmala Sitharaman in her maiden Budget last month.

The liberal FDI regime is expected to attract foreign players to invest in the country which is facing a slowdown.

Seeking to make India more attractive FDI destination globally, Sitharaman had said that government would examine suggestions of further opening up of FDI in aviation, media (animation) and insurance sectors in consultation with all stakeholders.

The cabinet chaired by Prime Minister Narendra Modi may also consider approving an ordinance to roll back surcharge on foreign portfolio investors (FPIs). Sources said it had been decided to take ordinance route to scrap the higher surcharge.

In a sort of mini Budget which included a flurry of measures to boost economy, Finance Minister had last Friday announced rolling back the enhanced surcharge from long-term and short-term capital gains on FPIs thus returning to pre-Budget status.

The Budget proposal subsequently approved by Parliament raised surcharges on super-rich having annual taxable income more than Rs 2 crore. The surcharge of 25 per cent was levied on those having taxable income between Rs 2 crore and 5 crore, and 39 per cent on those with taxable income over Rs 5 crore.

While raising the levy, the government included all the individuals and association of persons (AOPs) under the purview of the enhanced surcharge. Since many foreign portfolio investors (FPIs) are structured as association of persons (AOPs), limited liability partnerships and trusts, the higher surcharge applied on them.

Hit by the additional tax burden, the FPIs started pulling out money from the markets creating a negative sentiment. With massive capital outflow triggered by the levy, the government came under pressure and held a meeting with FPIs and domestic institutional investors to understand their concerns. Following the consultation, it decided to scrap the tax move.

Markets have responded positively to the surcharge roll-back with both BSE Sensex and NSE Nifty 50 indexes surging more than 2% on Monday, the first working day after the much-awaited announcement.