What does Indian Union Budget 2017 mean for foreign investors?

India’s Union Budget, 2017 was presented today by the Finance Minister. What we saw was a balanced approach with a focus towards strengthening the core of the country. A lesser amount of promises and some real strong amendments were proposed. The global economy is ablaze recently. Courtesy – Trump’s policy making in US, Brexit in UK and India’s own controversial tax treaties with Singapore & Mauritius. Considering the same, what does Indian Union Budget 2017 have in store for foreign investors?

foreign investor

1.Abolition of Foreign Investment Promotion Board (FIPB)

This perhaps is one of the most pronounced updates that came out of the Budget. In India, Foreign Direct Investment (FDI) is allowed through two routes:

                    (i) Automatic Route
                    (ii) Prior Approval Route

FIPB was initially constituted under the Prime Minister’s Office (PMO) in the wake of the economic liberalization drive of the early 1990s. One of the major roles of FIPB was to oversee the FDI through the prior approval route. A major source of business opening in India – Limited Liability Partnerships (LLPs) can be formed by a foreign national only through this prior approval route.

In the last year, i.e. 2016, almost 90% of the sectors had been brought under the automatic route. The FIPB has already implemented e-filing and online processing of FDI applications. Hence, this move does seem practical.

To summarize, the abolition of FIPB can mean the following:

(i) Formation of LLPs will be much easier. Foreign nationals looking for easy, small scale businesses may now be able to avail this option. However, any confirmation on this can be obtained only post availability of fine print of the phasing out the mechanism of the FIPB.

(ii) Further flexibility of FDI norms is on cards.

(iii)Tedious approval processes and ancillary red-tapism will be eradicated.

(iv) An indication of opening up of strategic sectors.

2. Fiscal Deficit of 3.2% of GDP

This was indeed an expected move. Particularly because it goes hand in hand with the drop in revenue deficit. In the current scenario of economic volatility, this seems to be a prudent move. This coupled with the huge focus on infrastructural and rural spending has received positive nods from the market leaders. 

3. Reduction in Corporate Tax Rates

This is another move which will benefit all startups. In the initial years, a startup does not earn. Yet it has to pay same rates of taxes as that of the blue chips. There had been a legitimate demand from the startup ecosystem to lower the corporate tax rates. Giving heed to the same, the Govt has reduced the tax rates to 25%(from the existing 30%) for startups and SMEs whose turnover is not more than 50 crores. This is a move towards making India more in line with international best practices.

However, this benefit is available only to domestic companies. Foreign companies (i.e. companies with no Indian subsidiary) and other forms of businesses like LLP and partnership firms are not eligible for this reduced rate. Even individuals and HUFs are required to pay income tax @ 30 percent for income above Rs 10 lakh. The idea is to promote private limited companies, which is a more structured form of business organization.

4. Reforms in State specific laws

In India, state specific laws constitute a very integral part of the compliance bucket. Unfortunately, most of these laws are grandfathered and their compliances are too manually driven. However, in the last few years, owing to the Modi Govt’s huge digital push, a large chunk of these compliances have been brought under the online umbrella. Carrying along this tune, the FM announced that major state laws like Shops & Establishment Licensing and Provident Fund & ESI rules shall be amended.

5. Tax Holidays 

This is another major amendment. The FM has also announced that entities incorporated post 31st March 2016 and approved by Startup India can avail a three-year tax holiday in the first seven years of the business instead of the first five years which were previously provided to them.

6. Global Trading scenario

We live in days where policies in one country create a domino effect in various other countries. We can now hardly rely on simply our own country’s policies for growth and development. Now, what makes India a stronghold in recent days is its conservative economy with the cherry of liberalization. US investors may not focus in India owing to Trump’s anti “job creation outside US policy”. However, the UK and European investors are likely to turn their focus towards India, especially post Brexit. Singapore and Mauritius are two other major contributors to India’s FDI reserves. The taxation treaty with these two countries had been recently modified giving rise to some confusion regarding taxing of capital gains. It is yet to be seen how this affects the business scenario and when does the due clarification come across.

7. Upcoming Goods & Service Tax (GST) regime

The introduction of GST has been the talking point for quite some time now. In the Budget, the FM particularly stated that the Govt is very close to implementation of the GST module as a whole shortly. The migration process from existing VAT laws had already started some time back.Several team members both at Central and State level of Central Board of Excise and Customs has been working in close proximity with each other to give finishing touches to the Model GST Law and the associated rules and other necessary details. It is not long before GST gets implemented fully.

8. No capital gains on conversion of preference shares to equity shares

Earlier, the conversion of preference shares into equity shares was considered a transfer and thus attracted capital gains tax. The government has exempted conversion of shares from preference to equity and otherwise from the definition of ‘transfer’ and given a big relief to startup investors who prefer buying convertible preference share. This is a very good step on the part of the government to boost the investments in startups. More so because preference shares are the most common instruments for foreign investors to invest in India.

To conclude, India’s conservative budget has a lot to offer to foreign investors in terms of tax holidays, lower tax rates, easier compliance regime. 




Leave a Reply

Your email address will not be published.