India’s Budget 2020: 5 Takeaways for Foreign Investors

We review the key takeaways from India’s budget for FY 2020-21, that was presented on February 1.

On February 1, Finance Minister Nirmala Sitharaman presented the national budget for the upcoming financial year. The theme of this year’s budget was aspirational India, economic development for all, and a caring society.

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Some of the budget expectations of foreign investors that have been addressed are – the scrapping of the dividend distribution tax (DDT), increase in investment limit of foreign portfolio investors (FPI) in corporate bonds, tax exemption for sovereign wealth funds on their investments in certain sectors, and simplifying GST.

However, there was some disappointment that the long-terms capital gains tax (LTCG) was not abolished and that the foreign investment limit on the insurance sector was not increased.

Let’s look at key takeaways from the union budget that will benefit foreign investors in India.

1. Eliminating the dividend distribution tax

The union budget has proposed the abolition of the DDT, which will help companies and foreign investors pay reduced taxes.

Instead of being subjected to DDT on the dividend payouts, the dividend income will be added to the taxable income, and then taxed on the applicable rate.

Typically, multinational companies pay two types of taxes in India – corporate tax and DDT.

Earlier, multinationals were allowed to claim tax credit in their respective countries only for the corporate tax paid in India. However, now investors will be able to claim credit in their countries for all the taxes paid in India.

2. Increase in foreign portfolio investors limit

During the budget presentation, Sitharaman announced plans to increase the investment limit for FPI in corporate bonds to 15 percent from 9 percent.

She further added that certain government securities will be open for foreign investors.

Experts say that this relaxation in FPI norms is expected to boost investor confidence and can lead to increase in foreign investment in the country.

Also, the government has set the withholding tax rate at 5 percent for investment made by FPIs in the bond market, such as government securities, corporate bonds, and municipal bonds.

3. Tax exemption for sovereign wealth funds

In a bid to increase infra investments in India, the government will now give 100 percent exemptions for sovereign wealth funds for their investment in the infrastructure sector.

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In the budget speech, Sitharaman said, “In order to incentivize the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, I propose to grant 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure and other notified sectors before 31st March, 2024 and with a minimum lock-in period of 3 years.”

The National Investment and Infrastructure (NIIF) is India’s first sovereign wealth fund, and it was set up by the Indian government in 2015.

Global sovereign wealth funds like Singapore based GIC, Temasek Holdings, and Abu Dhabi Investment Authority have already made large infrastructure investments in India.

Further, tax exemptions will be provided for sovereign wealth fund that is wholly owned and controlled, either directly or indirectly, by the government of a foreign country. Also, it should have been set up and regulated under the laws of the foreign country.

4. New individual income tax regime

Around 70 of more than 100 income tax deductions and exemptions have been removed in order to simplify the tax system.

Under the new proposed tax regime, the taxpayers will be allotted a new income tax slab, but it allows no exemptions or deductions.

However, the taxpayers will have an option to continue with the existing tax regime and will be allowed to avail existing tax exemptions and deductions.

Meanwhile, non-resident Indians (NRIs) working in income tax-free countries like the United Arab Emirates (UAE) will have to pay tax on their income generated in India.

Further, it was proposed that to claim the NRI status, the period of stay should be reduced from 182 days to 120 days, and that Section 6 of the Income Tax Act, 1961 should be amended.

5. Amendment to Companies Act, 2013

In a move that can improve ease doing business in India, the government announced that it will seek amendments to the Companies Act, 2013 in order to decriminalize various offences.

During the budget presentation, Sitharaman said, “There has been a debate about building into statutes, criminal liability for acts that are civil in nature. Hence, for Companies Act, certain amendments are proposed to be made that will correct this. Similarly, other laws would also be examined, where such provisions exist, and attempts would be made to correct them.”

This announcement comes after the Company Law Committee in November last year recommended decriminalizing more than half of the existing offences under the Companies Act.

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