On 28 February, Indian finance minister P Chidambaram presented the country’s budget for 2013-14.
According to Economic Laws Practice, “while last year’s budget was firmly geared towards creating a growth platform for essential and large scale infrastructure; this year, social sector infrastructure development, enhancement of micro, small and medium enterprises and technological innovation and skill development have claimed similar mind space.”
The budget offers incentives to manufacturers which invest ₹1 billion (US$18 million) or more in plant and machinery between 1 April and 31 March 2015. These companies will be entitled to deduct an investment allowance of 15% of the investment.
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It also contains capital market reforms to rationalize and simplify procedures and know-your-customer norms for foreign institutional investors (FIIs), qualified foreign investors, sovereign wealth funds, overseas university funds, etc., thus making it easier for them to invest in India.
FIIs will be allowed to participate in exchange-traded currency derivatives, and stock exchanges will be able to open a dedicated debt segment. Infrastructure debt funds (IDFs) will be encouraged “to raise resources and, through take-out finance, credit enhancement and other innovative means, provide long-term low-cost debt for infrastructure projects,” said Chidambaram. Four IDFs have been registered with the Securities and Exchange Board of India so far and two of them were launched last month.
Nishith Desai, the managing partner at Nishith Desai Associates, warned that despite these rosy signs, tax-related challenges often affect the structuring of foreign investment into such funds. “Likewise, the proposal to deem sale consideration from transfer of land or [a] building at the reckoner value creates challenges for infrastructure and real estate companies at the time of restructuring,” Desai said.
The introduction of general anti-avoidance rules has been deferred for two years, however, ambiguity remains on its scope and application to present investment structures. “Unlisted Indian companies buying back shares will be subject to a 20% distribution tax, a cost which will ultimately be borne by the investor, but which may not be subject to treaty relief or creditable in the investor’s home country,” said Desai.
The budget proposes to increase withholding taxes on royalties and technical and consultancy fees paid to non-residents from 10% to 25% on a gross basis. “This will directly impact foreign direct investment in joint ventures and technology transfers and the additional tax burden may be shifted to the Indian company,” added Desai.
Other problems relate to taxation as the budget has not extended pass-through status (enjoyed by venture capital funds) to social venture funds, infrastructure funds, private equity funds and other types of domestic alternative investment funds. “Foreign tax residency certificates will no longer be sufficient for the purpose of relief under tax treaties, which considerably increases tax risks for cross-border M&A, joint venture and private equity investments,” Desai said.
Another disappointment is that the budget has not done away with retroactive taxation. Several countries including Brazil, Russia and Sweden have banned retroactive taxation and Desai argued that India should follow suit.
Budget proposals may be amended and are subject to the passing of the Finance Bill.
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