India’s FY 2015-16 Budget: Meaning and Implications for Foreign Investment

By Chris Devonshire-Ellis, Tarun Manik and Nishant Dixit
Dezan Shira & Associates

Although lacking the “big bang” that was speculated before its release, India’s budget for FY 2015-16 creates important opportunities for foreign investors through small but meaningful reforms. The budget was announced on 28^th February, 2015, by India’s Finance Minister Arun Jaitley. It proposes a number of foreign investment and tax reforms with important consequences for investors including lower compliance costs, increased certainty in the tax regime, and an improved business environment.

The budget proposals seek to improve India’s business and investment environments by improving ease of doing business in the country. In February, the government launched an e-biz portal which integrates 14 regulatory permissions at one source. The finance minister said in the budget speech that he intends to appoint an expert committee to prepare a draft legislation which will expedite regulatory permissions.

Changes in Direct and Indirect Taxes

Under its “Make in India” vision, the government is calling on foreign business to manufacture in India. In his budget speech, the finance minister proposed a number of tax reductions to encourage foreign investment. On the direct tax side, the finance minister has proposed to lower the corporate tax rate from 30 percent to 25 percent (the same as China) over the next four years. However, the corporate tax burden will be higher in 2015-16 due to a 2 percent surcharge for companies with income over 10 crore (100 million) Rupees.

Despite low operating costs, India currently has one of the highest corporate tax rates in Asia that make its domestic industry uncompetitive. In order to encourage manufacturing and technology transfers, the budget proposes a reduction in taxes on royalty and fees for technical services from 25 percent to 10 percent. This is to encourage foreign companies/individuals to provide their expertise in the Indian market. It also makes for a highly viable pre-profit structure to enable foreign investors to use pertinent Double Tax Treaties for remittance of royalties back to the parent instead of waiting for the higher annual profits tax figure to kick in. Details of India’s DTAs may be found here.  

Indirect tax related provisions include reductions on customs duty on certain inputs, components, and raw materials including parts and components used in the manufacture of certain consumer electronic goods. Excise duties on a range of goods have also been reduced. The list of all indirect tax changes is included in the annexure to part B of the budget speech.

The finance minister said in his speech that the GST regime will be introduced by April 1, 2016, as part of the government’s efforts to integrate the national market for goods and services. The government had tabled a bill in parliament on December 19, 2014 to change India’s burdensome indirect tax regime by introducing a Goods and Services Tax (GST). Although a comprehensive roadmap to GST was not provided in the budget speech, it did contain important new changes in digital tax filing procedures contained within the proposed GST. The budget states that online registration for both central excise duty and service taxes will be provided in two working days. Additionally, in order to cut down on red tape and paperwork, businesses will be able to issue digitally signed invoices and maintain electronic records.

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Tax Benefits for Foreign Investors

Investors should take advantage of new opportunities in alternative investment funds as a result of reforms proposed in the budget. The finance minister said India would allow foreign investment into alternative funds which include Private Equity and Hedge Funds. Jaitley also proposed “pass through” status for category I and category II alternative investment funds, under which tax will be levied on the investors in the funds and not on the funds.

The budget proposes amending Permanent Establishment (PE) norms to allow foreign fund managers to relocate to India from offshore financial centers like Singapore and Mauritius. This will encourage fund managers and other professional staff to be based in India without triggering tax burdens, and will also impact upon a widening permissible scope for liaison and branch offices. The 2015 Finance Bill amends the Income Tax Act to provide that foreign funds shall not be considered resident in India, even if a foreign fund manager is present in India and is undertaking management activities on its behalf. This amendment will apply from April 1, 2016. The government hopes this new regulation will provide incentives for fund managers who left the country to manage offshore funds to return to India.

The budget postpones the implementation of General Anti-Avoidance Rules (GAAR) to April 2017. GAAR – a tax avoidance mitigation regulation which applies to tax treaty benefits valued at above USD 0.51 million – had previously been scheduled to apply starting in April 2015. The finance minister has also stated that GAAR will not apply to investment made up to March 31, 2017. Additionally, minimum alternate tax (MAT) will not apply to FFI income from capital gains on transactions in securities which are liable to a lower tax rate. Jaitley told the newspaper Mint in November, 2014, that India needed to ensure the flow of foreign investments and this outweighed the need for GAAR.

The 2015 Finance Bill amends certain government bond related provisions in the Income Tax Act. Under the new amendments, which will take effect from June 1, 2015, the concessional tax rate of five percent on interest income earned by foreign investors on government securities and rupee denominated corporate bonds has been extended to July 1, 2017.

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Stringent Regulations Against “Black Money”

While the budget provides a number of tax benefits to investors, it also proposes stringent regulations against aggressive tax evasion and “black money” or income and assets hidden in foreign bank accounts. The finance minister has proposed to introduce a bill on black money in the current session of Parliament. Other proposals include a penalty of 300 percent of tax on concealed income and assets, and a levy of the maximum margin rate on undisclosed income and assets.

The economic survey released before the budget announcement declared that India has reached an economic “sweet spot” which could be launched into a double digit growth trajectory. The reforms announced in the budget will lead to an improved business climate and allow investors to take full advantages of the opportunities that India offers.

FDI Incentives, Visa Changes and GDP Growth

Mumbai-Delhi Industrial Corridor

Other important reforms include:

The allocation of US$34 million (in Gujarat) & Aurangabad (in Maharashtra) for basic infrastructure. Foreign investors may apply to be involved in these projects. Profits tax incentives may also apply.

IT Infrastructure

The Government to reimburse expenditures relating to laying of Fibre Optic Networks in order to boost investment in the IT sector.

Investment Distinctions Scrapped

Differences in tax treatments between direct and portfolio investors are to be scrapped, thereby encouraging foreign investors to take stakes in Indian businesses

Visa on Arrival

The VoA scheme’s initial success will see it expanded to tourists of 150 nations (up from 43)

GDP Growth Projections

The Finance Minister announced that India is expected to grow at a rate of 8 to 8.50% in the coming financial year.

Summary

According to Adam Pitman, Manager for International Business Advisory services at Dezan Shira & Associates in New Delhi, India, “This budget does not provide the big bang that many foreign observers wanted. However, diligent analysts will note that this budget marks a continuation of a theme for the government: improving India’s competitiveness through small, but meaningful, reforms. This budget has created some important opportunities for the private sector across key industries.”

Chris Devonshire-Ellis, Founding Partner of Dezan Shira & Associates, also noted that the budget goes a long way towards pushing India to the forefront of foreign investment destinations: “While the impact upon certain sectors still has to be assessed, there is no doubt that the budget creates a far more level playing field than was previously the case”, he said. “Special incentives, which include profits tax breaks, may be found in much of the infrastructure projects that India is embarking on, while GST reforms shifts the burden of fiscal revenue generation away from the production sector and onto a wider tax base.

Overall, India’s tax revenues are expected to increase as a result of this and additionally stimulate investment into the Indian based manufacturing sector. Coupled with a reduction in profits tax rates, this budget may be considered a long overdue structural change that marks a shift in India’s position and development as a foreign investment friendly destination.”   

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