Surcharge on super-rich: Fear grips retail traders as FPIs pull-out over Rs 20,500 crore

The government appears to be determined to go ahead with Union Budget 2019-20 proposals to implement the taxation surcharge on the super-rich category, despite the flight of over Rs 20,500 crore worth of foreign funds from the country`s stock market since July 5. Notably, the Budget had proposed a levy of an additional surcharge on individuals and trusts earning more than Rs 2 crore and Rs 5 crore respectively. 

Finance Minister Nirmala Sitharaman in Parliament has made it clear that the super-rich tax is here to stay, advising the Foreign Portfolio Investors (FPIs) to register as companies to be out of the ambit of the surcharge. On July 18, while ruling out tweaking the FPI surcharge, she said trusts should register as companies to be out of the ambit of the surcharge. 

In reply to the Finance Bill, 2019 in Parliament, the Finance Minister said, "Some FPIs are registered as trusts. Therefore as an individual entity he comes under the taxation. Such FPIs who have registered themselves as trusts may consider the option of wanting to move to register as company." 

The rationale behind such an increase in surcharge is reportedly to levy a higher surcharge only on high net worth individuals (HNIs) to garner more revenues in tax falling scenario, but it has sent jitters among FPIs, and partially triggered the subsequent crash in the stock market. 

Recently, the Central Board of Direct Taxes (CBDT) Chairman P.K. Modi had offered a solution to such FPIs that restructure themselves as corporate entities. As of August 2, however, FPIs have been net seller of over Rs 20,500 crore worth of stocks on the BSE, NSE and MSEI in the capital market segment, since July 1. Consequently, the S&P BSE Sensex has shed around 2,700 points since the announcement on July 5. 

Notwithstanding, the FPIs continue to be on a selling spree ever since the budget was announced. Retail traders grouse that over Rs 12 lakh crore in market cap has been eroded and that FPIs have over 50 countries apart from India to put in their investments. 

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Stock markets participants fear that once implemented, this move may adversely impact FPIs which are set up as non-corporate vehicles. Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions.