India’s Budget 2020: 5 Expectations on Foreign Investors’ Bucket List

We look at India budget 2020 expectations ahead of its presentation tomorrow, February 1.

India’s Finance Minister Nirmala Sitharaman is all set to present the national budget for the upcoming financial year on February 1, 2020.

The country is currently facing multiple economic challenges – the IMF cut India’s growth forecast to just 4.8 percent for FY 2020, the unemployment rate is at a 45-year high, and a fall in the consumption demand has been recorded, among others.

Meanwhile, Prime Minister Modi’s government is still ambitious about making India a US$5 trillion economy by 2024.

Here we look at the top five issues that foreign investors want to see addressed in the upcoming national budget.

1. Scrapping certain tax rules

Foreign companies and investors have been lobbying for scrapping the long-term capital gains tax (LTCG) tax on investment in equity or equity-oriented funds or extending the holding period from one year to two years with no tax liability.

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Currently, India levies 15 percent short-term capital gains tax (STCG) if equity shares are sold within one year. If it’s sold after a year, then a 10 percent LTCG tax is levied.

The industry also demands an amendment to the dividend distribution tax (DDT) rules. Currently, Indian companies are subject to around 20 percent DDT on declared dividends and investors pay another 10 percent tax if they receive more than INR 1 million (US$14,006) in dividend payouts in a financial year.

Since these tax rules do not allow foreign investors to claim tax credit in their countries, foreign investment can be affected by these rules. Also, small investors are forced to shell out higher taxes because of LTCG and DDT rules.

Scrapping or amending these rules would help increase capital flows to the Indian market and reduce the cost of doing business in the country.

2. FDI norms and liberalization

Despite the slow growth projections, India was among the top 10 recipients of FDI in 2019, attracting US$49 billion in inflows.

Around 30 sector-based reforms – in infrastructure, single brand retail trading, and construction and development – have been undertaken by the government in the last five years.

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Last year, the government opened coal and single brand retail up to 100 percent FDI under the automatic route and approved 26 percent foreign investment in digital media.

Favorable policies and reforms for foreign investment are thus expected to be announced during the budget.

Recently, the finance ministry suggested that the FDI limit on insurance and pension companies should be increased to 74 percent, and 100 percent FDI should be allowed in railway operations, education, and rental housing management companies. Investors should look out for a formal announcement during the budget presentation.

3. FDI protection provision

The government is currently mulling over a new investment protection law. The bill, which is yet to be introduced in parliament, will safeguard foreign investments from future changes in the policy.

Resolving disputes and contract enforcement will be an important part of the bill. It is expected that the bill might get a mention in Sitharaman’s budget presentation, with the aim to get it passed during the budget session itself.

4. Changes in the special economic zone (SEZ) policy

The Trade Promotion Council of India (TPCI) wants the government to revamp its SEZ policy to boost exports and revitalize the agriculture sector.

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TPCI has said, “India has huge potential in the food exports and global investors are looking at SEZ as one destination for investing. Due to lack of incentives for value added F&B manufacturing and exports is inhibiting them to come to India.”

The trade organization has also requested that foreign investors should be allowed to import raw materials at zero duty and avail duty rebate proportionate to value addition.

For example, when the overall export growth from India slowed down to 2 percent in April-June 2019, growth rate from SEZs was at 15 percent during the same period.

Since SEZs have shown robust export-oriented growth, it is expected that the government announce incentives for the sector.

5. FDI in joint ventures and wholly owned subsidiaries

Currently, the Foreign Exchange Management Act (FEMA) does not permit FDI by an overseas joint venture (JV) or a wholly owned subsidiary (WOS) of an Indian party without prior approval from the Reserve Bank of India (RBI).

Further, restrictions are placed on Indian entities to undertake overseas direct investment (ODI) in a foreign entity which already has existing FDI investment in India.

Foreign investors and companies want the FDI and ODI regulations eased, so that these investments can be conducted without the approval of the RBI.

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