Budget 2019

Budget 2016: Clearing the air for foreign investors

LOKESHWARRI SK FROM OUR RESEARCH BUREAU | Updated on January 20, 2018 Published on February 29, 2016

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The change

With the ongoing thrust to promote the ‘Make in India’ theme, it is important to address the grouses of foreign investors, both portfolio as well as foreign direct investors. The Budget has done just that. There are number of changes in this Budget that address these issues. The determination of residency of a foreign company based on Place of Effective Management (POEM) was creating a lot of hassles. There were confusions on advance tax payment, applicability of TDS provisions, setting off losses and so on. The Budget has now put off the applicability of POEM-based residence test by one year to April 1, 2017. The implementation date for the General Anti Avoidance Rules has been retained at April 1, 2017. Multi-national companies operating in India will now have to make additional disclosures as part of the Base Erosion and Profit Sharing (BEPS) initiative of the OECD. There have also been clarifications issued on the issue of the applicability of Minimum Alternate Tax (MAT) on foreign portfolio investors. A one-time dispute resolution scheme for issues currently under retrospective taxation has also been introduced.

The background

While Foreign Direct Investment (FDI) in to India is up 40 per cent, India ranks quite low in the terms of ease of doing business. Foreign investors have especially been crying hoarse about the flip-flops on taxation that keeps the uncertainty going about their tax liability. Most foreign investors have turned wary due to the ongoing Vodafone and Cairn tax issues. The Income Tax Department raising demands for Minimum Alternate Tax on foreign investors had further roiled the sentiments last year. Foreign portfolio flows in to country that were robust so far have also turned quite flaky with these investors pulling out close to $3.3 billion so far this calendar from equity and debt market. Against a shaky stock market sentiment and a global economy that is not too robust, India needs to keep these investors happy to ensure that funds keep coming to the country.

The verdict

The Finance Minister has done well to retain the GAAR implementation date at April 1, 2017. Both foreign portfolio as well as foreign direct investors have already begun routing their investments through less controversial offshore business centres such as Singapore. As the country moves towards implementing the BEPS rules of the OECD, the issue of large multi-national companies using tax havens and complex tax structures to save on tax will anyway move lower. MNCs having consolidated group revenue of €750 million or ₹5,395 crore will now have to make additional disclosure on their holdings in various jurisdictions. Additional clarification of the applicability MAT on foreign portfolio investors will also clear the air as it has now been clarified that foreign investors who are not registered as a company in India are not liable to tax and this will be made effective retrospectively from April 1, 2001.

Published on February 29, 2016
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