India may exempt foreigners from 'super-rich' tax

Foreign investors pulled $3bn from India when a new tax plan was first floated.

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    India's finance ministry is concerned by capital flight after foreign investors were spooked by new tax plans [Anindito Mukherjee/Bloomberg]
    India's finance ministry is concerned by capital flight after foreign investors were spooked by new tax plans [Anindito Mukherjee/Bloomberg]

    India may soon roll back an additional levy on foreign funds and announce other measures to boost economic growth, a government official said in comments that helped the stock and currency markets reverse losses.

    Prime Minister Narendra Modi's administration is finalizing a package to reverse the economic slowdown, the official told reporters, asking not to be identified as a decision is yet to be announced. Key among them is a likely exemption to foreign portfolio investors from a tax on super rich announced in the budget. The steps may be announced as early 5 p.m. today when Finance Minister Nirmala Sitharaman is scheduled to speak to the media.

    The finance ministry had proposed increasing the effective tax rate on individuals with taxable annual income of above 20 million rupees ($283,000) by about 3%, and for those earning above 50 million rupees by 7%. Plans to exempt Foreign Portfolio Investors, who became an unintended target of the move, was first reported earlier this month.

    The tax proposal, along with a lack of measures to boost the economy in the July 5 budget, led to foreigners withdrawing more than $3 billion from Indian shares, putting pressure on stocks and the rupee.

    Financial markets cheered the comments about measures to spur the economy, which came a day after a top economic adviser to Modi suggested that a government stimulus for the private sector creates a moral hazard. The S&P BSE Sensex and NSE Nifty 50, India’s key equity indexes, erased declines and rose as much as 0.5% before paring gains. Rupee reversed losses to advance as much as 0.1%.

    Data due next week will probably show India's gross domestic product expanded 5.6% in the quarter ended June, slower than the 5.8% pace seen in the previous three months. That's well below the potential 7%-8% pace Bloomberg Economics estimates for the economy.

    Weakening growth numbers won't come as a surprise. Consumer spending on everything from hair oil to cookies have waned as concerns about job losses grow, amid automobile makers shuttering factories temporarily to manage piling inventories. A shadow-banking crisis has also weighed on private consumption, which accounts for almost 60% of the gross domestic product.

    Sitharaman had said earlier that FPIs registered as trusts may consider the option of registering as companies to escape the higher tax. However, the conversion would have required several changes to the tax law.

    SOURCE: Bloomberg