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Production-linked incentives, deduction in corporate tax rates boost India's competitiveness

H. P. Ranina/Dubai
Filed on September 6, 2020
Licence approvals in India are being expedited and investors are given advice on location assessment and strategic partner research. - Reuters

Special emphasis is given by the Indian government to labour intensive industries.

The manufacturing sector is in the doldrums for the past six months, making millions of jobs redundant.  Is there any ray of hope for a turnaround at least from the next calendar year?  While the global economy is flushed with liquidity, what steps are being taken to attract foreign direct investment?

As part of the plan to kickstart manufacturing and boost investments, the Indian Government is reaching out to key global companies to understand their requirements and concerns. A digital platform has been set up which will provide assistance to investors who wish to set up manufacturing facilities in India. Industrial clusters are being created with plug-and-play model for investors. Licence approvals are being expedited and investors are given advice on location assessment and strategic partner research.

Global companies want to shorten their supply chains which are currently spread over many locations. Special emphasis is given by the Indian government to labour intensive industries like textiles, garments and leather, apart from giving special incentives for consumer electronics and auto components. Production-linked incentives, coupled with deduction in corporate tax rates, have enhanced the country's competitiveness.

I have been trading on the stock market.  This required me to transfer my shares to my broker's account, the value of which he kept as margin money.  In the past, brokers have sold such shares pledged with them and misused the funds.  Are any steps being taken to prevent such abuse?

New guidelines have been issued which have come into effect from 1st September, 2020 pertaining to the margin pledge and repledge (MPR) process. Those who wish to trade in the shares, for which they have to provide margin money, will now be required to pledge the shares in favour of the brokers with either the Central Depository Services Ltd. or the National Securities Depository Ltd.

Under this new process, the securities will continue to remain in the trader's own demat account so that they can continue to enjoy the benefits pertaining to their own shareholding.  This process will need the trader's confirmation for creation of margin pledge through a One Time Password on the link provided by CDSL or NSDL. Once this is done, the shares will be pledged in favour of the broker and they will be available for repledge to clearing members.

For this purpose, the trader will have to select the shares which he wants to pledge and the quantity.  Brokers will send the pledge request to the depository for confirmation, which will then send an SMS to the registered mobile number and e-mail address of the trader.  Once the pledge is approved, collateral margins will be provided against the pledged stock.  Hence, the trader will have complete security in respect of his shares and there will be no possibility of any misuse by the broker.

Investment advisers are suggesting placement of surplus funds either in sovereign gold bonds or in gold exchange traded funds.  I do not know which is a safer bet, as I am not familiar with these instruments.  Can you provide some factual information to enable me to take a decision?

Most financial planners suggest investment ranging from 5 per cent to 15 per cent in gold related assets. Sovereign gold bonds are preferred compared to gold ETFs and physical gold.  The bonds are issued and backed by the Government and give interest at the rate of 2.5 per cent per year paid on half-yearly basis.  Further, there is no capital gains tax chargeable on maturity of the bonds.  The bonds provide sufficient liquidity as they can be traded on the stock exchange and there is a buy-back option offered by the Government after the fifth year. The bonds are issued in physical form through a certificate or can be credited to a demat account.

In case of gold ETFs, brokerage is payable at the time of purchase or sale.  The asset management company levies a fund management charge.  If this instrument is sold within three years, short-term capital gains tax will be payable. After three years, there will be a long-term capital gains tax.  Hence, a tax return would need to be filed computing the short-term or long-term capital gain and advance tax would have to be paid during the financial year in which the capital gains are realised.

H. P. Ranina is a practicing lawyer, specialising in tax and exchange management laws of India.

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