Union Budget 2023-24: Strong Policy & Governance Measures Can Help Financial Services Sector Flourish

The Indian economy has been resilient and continues on its growth trajectory despite the uncertainty currently gripping global economy and the overall growth outlook. In the wake of such uncertainties, India’s financial services industry finds itself at a pivotal point with the huge opportunity to augment capital towards innovation and adopt the way to a sustainable future. Strong policy and governance measures can help reallocate capital toward economic activities that have net positive outcomes. 

Tax incentives can serve as a cost-efficient tool to boost investment with relatively low impact on public finances. They can also reduce financing costs for borrowers. World over, governments use different tax incentives to boost sectors of their economies. The financial services industry thus expects relaxations and fiscal incentives to further grow the Indian economy, which could help achieve the government’s vision of a US$ 5 trillion economy by 2025.

Boost to capital markets
The Indian capital markets are highly vibrant owing to the positive India outlook and also volatile due to global uncertainties and the tightening of monetary policies worldwide. The predictability and certainty of the capital gains tax regime are central to strategic and/or financial investors' (including portfolio investors') decisions to invest in any country. 

Over the years, India’s capital gains tax regime has been perceived as a complex with (i) multiple rates of taxes applicable to different types of financial securities, (ii) differentiated outcomes linked to holding periods for different financial securities (i.e., short term vs long term), (iii) a complicated surcharge regime that has become a permanent tax levy, (iv) sometimes different taxing outcomes for different types of investors relating to their investments in the same financial assets (e.g. FPI investors, FDI investors, domestic AIFs, etc.). 

Therefore, a simplified structure for taxing capital gains realised on equity, debt, hybrid, and all other types of financial securities is warranted. In this regard, some points for consideration by the Indian government are listed below, which if implemented, should be applicable prospectively: 

• Firstly, reduce total number of rates of tax applicable to all capital gains realised on transfer of financial securities (whether Indian or foreign) to a maximum of two.
• Secondly, long-term capital gains tax treatment should be afforded to all financial securities (whether Indian or foreign) that are held for more than 24 months.
• Thirdly, either abolish the levy of surcharge or simplify the surcharge regime so as to ensure that all types of taxpayers that earned income from similar sources pay the same rate of surcharge.   Additionally, restrict the number of surcharge rates to a maximum of two.
• Fourthly, allow fungibility of short-term capital losses and long-term capital losses.
• Fifth, provide for simpler income-tax return Forms for taxpayers who earn only capital gains income.

Incentivise investment in green bonds 

The Indian government has taken several measures to promote renewable energy in India and has always shown its willingness in leadership to fight climate change. The government has also committed to achieve Net Zero Emissions by 2070. In addition, India also aims to attain short-term targets such as increasing renewables capacity to 500 GW by 2030, meeting 50 per cent of energy requirements from renewables, reducing cumulative emissions by one billion tonnes by 2030, and reducing the emissions intensity of India’s gross domestic product (GDP) by 45 per cent, by 2030.

In Union Budget 2022, the government announced its intention to issue Sovereign Green Bonds for mobilising resources for green infrastructure as part of its overall market borrowings. To this effect, RBI is set to auction INR 160 billion (approx. US$ 2 billion) of sovereign green bonds in two tranches. The success of such green bonds would depend upon its demand and a willing investor base, which in turn, will attract participation by private sector players.

Thus, to attract investments in green bonds, the following fiscal incentives could be considered by the government:

• Provide for either full income-tax exemption or a lower rate of tax (say not exceeding 5 per cent) on all income streams emanating from investments in green bonds (i.e., interest, capital gains, business income).
• Provide for income-tax concessions to issuers of green bonds by way of accelerated depreciation or weighted tax deductions on deployment of the funds raised.
• Grant income-tax credits to investors in such government related green bond issuance programmes, instead of making interest payouts to such investors, as is done in countries such as the US, in respect of Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs) Programme.

These measures are likely to give a boost to the Indian economy.

Author: Russell Gaitonde is a Partner with Deloitte India, and Tejas Mehta is a Director with Deloitte India. Views expressed are personal.

Russell Gaitonde

Guest Author The author is a Partner with Deloitte India

Tejas Mehta

Guest Author Director with Deloitte India