The Indian Finance Minister, Arun Jaitley on Saturday, 28 February 2015 announced a budget envisioning a higher growth rate and seeking to boost inbound and outbound investment. The Budget aims at making Indian states equal partners in economic growth and accents need for fiscal discipline. It effectively addresses the critical issues concerning measures to curb the cash economy; job creation through revival of growth and investment and promotion of domestic manufacturing and ‘Make in India’; minimum government and maximum governance to improve the ease of doing business in India; improving the quality of life and public health; and stand-alone proposals to maximize benefits to the economy.
The key highlights of the budget, which may interest foreign and non-resident individuals,entities and investors are, briefly, discussed below.
The corporate tax is to be reduced from the current 30% to 25% over four years, with a view to boosting spending and job creation. The prevalent corporate tax with various surcharges over the base rate, was considered not only higher globally but also uncompetitive. The reduced corporate tax liabilities will also assist companies in expansions and new startups.
The permanent establishment standard and norms shall undergo positive liberalized reforms to ensure the mere presence of an offshore fund manager in India would not constitute a permanent establishment resulting in adverse tax consequences.
Rationalised capital gain tax measures are to be introduced for the sponsors of Real Estate Investment Trusts (REITs) and Infrastructure Investments Trusts (INViTs). These trusts, which can receive both domestic and foreign investments, are eligible to be listed on stock exchanges with investments into real estate and infrastructure projects in the country. The rationalisation of the capital gains regime for the sponsors will enable them to exit at the time of listing of the units of REITs and INViTs, subject to payment of Securities Transaction Tax (STT).
The rental income of REITs from their own assets will have pass through facility with tax to be paid by the unit holders of the REIT. This reform brings about tax clarity in REITs to ensure the launch of this trust for commercial assets and brings a new investment possibility in India on the lines similar to the developed markets like the US, UK, Japan, Hong Kong and Singapore.
The basic customs duty on raw materials, excise duty on leather footwear is reduced substantially while excise duty on cigarettes increased. Excise duty on variety of electronics and hardware goods has also been reduced. This includes wafers of manufacture of IC for smart cards, mobile phones and inputs for use of LED drivers and LED lights.
Focus on introducing direct tax regime that is, internationally competitive on rates without exemptions to reduce tax disputes and improve administration. As, the provision relating to indirect transfers in the Income tax Act contains several ambiguities, these are being appositely amended. Additionally, concerns regarding applicability of indirect transfer provisions to dividends paid by foreign companies to their shareholders will be addressed soon by the Central Board of Direct Taxes (CBDT). These changes would eradicate the possibility for discretionary exercise of power and provide a hassle free structure to taxpayers.
It is proposed that indirect transfer provisions shall not apply where the transferor of share or interest in a foreign entity along with associated enterprises, holds neither the right of control, management nor voting power or share capital or interest exceeding 5% of total voting power or share capital in the foreign company, directly or indirectly, holding Indian assets.
Capital gains shall be exempt in respect of transfer of share of a foreign company deriving its value, directly or indirectly, substantially from the shares of an Indian company, under a scheme of amalgamation or demerger.
The period of applicability of reduced rate of tax at 5% in respect of income of foreign investors (FIIs and QFIs) from corporate bonds and government securities has been extended until 2017.
The government shall work towards stable taxation policy and a non-adversarial tax administration. Fight against the scourge of cash economy shall be taken forward.
Endeavor to implement the introduction of General Sales Tax (GST) from next year.
Fiscal Restructuring Reforms
As substantial part of the working capital requirement of the Micro, Small and Medium Enterprises (MSME) arise due to long receivables realisation cycles, the progression of establishing an electronic Trade Receivables Discounting System (TReDS) financing of trade receivables of MSMEs, from corporate and other buyers, through multiple financiers has commenced. This will mend the liquidity in the MSME sector meaningfully.
It is determined that bankruptcy law reforms are a priority for improving the ease of doing business to bring about legal certainty and swiftness. SICA (Sick Industrial Companies Act) and BIFR (Bureau for Industrial and Financial Reconstruction) having failed in achieving these objectives will be brought to an end. A comprehensive Bankruptcy Code in 2015-16, that will meet international standards and provide essential judicial capability will be brought into existence.
To bring uniformity in regulation of Non-Banking Financial To bring uniformity in regulation of Non-Banking Financial Companies (NBFCs) with other financial institutions in matters relating to recovery, NBFCs registered with the Reserve Bank of India and having asset size of approximately US$ 85 billion and above will be considered for being declared a ‘Financial Institution’ in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).
In order to bridge a wide gap between infrastructure and growth ambitions, an imperative requirement was felt to increase public investment. Accordingly, increased outlays have been sanctioned on both the roads and gross budgetary support to the railways, by approximately US$ 250 billion and US$ 15billion respectively.
A National Investment and Infrastructure Fund (NIIF) to be established to ensure an annual flow of approximately US$ 330 billion. This will enable the Trust to raise debt, and in turn, invest as equity, in infrastructure finance companies. In addition, tax free infrastructure bonds for projects in rail, road and irrigation sectors to be introduced. The PPP mode of infrastructure development shall be reformed and revitalised. For the first time, the government acknowledges the key concern involved in infrastructure projects is rebalancing of risk. The government will be prepared to bear major part of risk in infrastructure projects, India has a reliable world-class IT industry with revenues of about US$ 150 billion, over US$ 100 billion of exports, employing nearly 4 million people directly. There is a growing interest in start-ups.
Experimenting in cutting edge technologies, creating value out of ideas and initiatives and converting them into scalable enterprises and businesses is at the core of the new strategy. To walk the path of prioritisation of more liberal system of raising global capital, incubation facilities in the centers of excellence, funding for seed capital and growth, and ease of doing business.
Ports in the public sector to invite private investment as well as leverage from huge land resources lying unused with them. The public sector will be encouraged, to corporatise, and become companies under the Companies Act.
As investors spend large amount of time and resources on obtaining multiple permits, the government aims to ease red tape around doing business in India. An e-Biz Portal launched earlier integrates 14 regulatory permits at one source. An Expert Committee established to examine the possibility an prepare draft legislation where there is a need for multiple permits that can be replaced with a pre-existing regulatory mechanism.
Financial & Capital Markets
The Indian Bond market will be brought at par with world class Indian Equity market. Accordingly, a Public Debt Management Agency (PDMA) will bring India’s external borrowings and domestic debt under one roof will be established.
The Forwards Markets Commission to be merged with Securities Exchange Board of India (SEBI) to strengthen regulation of commodity forward markets and reduce wild speculation. Legislation to be passed for amending the Government Securities Act and the RBI Act.
It is acknowledged that Capital Account Control is a policy rather than a regulatory matter. Therefore proposal to amend the Foreign Exchange Management Act (FEMA) to clearly provide that control on capital flow as equity will be exercised by the Government, in consultation with the Reserve Bank of India. Earlier only RBI was regulating on this matter.
A suitably operational capital market also needs apt consumer shield hence it is proposed to create a Task Force to establish a sector-neutral Financial Redressal Agency that will resolve the grievances against all financial service providers.
Foreign Investment is proposed to be permitted in the Alternate Investment Funds under the Alternate Investment Funds Regulations notified by SEBI earlier only for domestic investors. To further streamline the procedures for Indian Companies to invite foreign investments, the distinctions between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, are done away with, and substituted with composite sectoral caps. The sectors already on 100% automatic route will not be affected
The government will increase foreign direct investment (FDI) caps in Defence, Insurance and Railway Infrastructure; and will rationalise conditions for FDI in construction and medical devices sectors.
The Government is taking immediate steps to upgrade 9 out of 25 Cultural World Heritage Sites as these facilities are deficient and require restoration, including landscape restoration; signage and interpretation centres; parking; access for the differently abled; visitors’ amenities, including securities and toilets; illumination and plans for benefiting communities around them.
It is proposed to introduce procurement law and an institutional structure consistent with the UNCITRAL model to contain malfeasance in public procurement. The Government proposes to set up an autonomous Bank Board Bureau in order to improve Governance of Public Sector banks.
Visas on arrival presently available to citizens of 43 countries and this will increase to 150 countries.
Foreign inflow since April 2014 is US$ 55 billion and the Rupee has become stronger by 6.4%. The objective is to keep inflation below 6%.