An attempt to provide certainty to foreign investors

With the economy facing turbulent times, everyone was waiting with bated breath, whether Finance Minister P Chidambaram introduces a reformist Budget, which the country needs very badly, or will he come out with a populist Budget due to the upcoming elections. We must give him credit as he was not bogged down by the upcoming elections and has delivered a realistic Budget.

India continues to be a growth story and the investors world over were looking for one key thing, certainty in tax legislation. Was this concern addressed? Chidambaram did recognise this aspect and also mentioned it in his speech.

To quote the Finance Minister, “Investment is an act of faith. We will improve communication of our policies to remove any apprehension or distrust in the minds of investors, including fears about undue regulatory burden or application of tax laws. ‘Doing business in India’ must be seen as easy, friendly and mutually beneficial.” In this direction, the Shome Committee was set up to relook the provisions of the General Anti-Avoidance Rule (GAAR). On the basis of their recommendations, GAAR has been postponed by couple of years and several other recommendations of the committee have been accepted. This provides certainty. However, I believe the expectation regarding reconsidering the Budget proposals introduced last year which had retrospective effect (taxation of indirect transfers such as Vodafone), remains unfulfilled. Uncertainty on such transactions still persists.

Making a tax residency certificate a necessary but not a sufficient condition for claiming the relief under the tax treaty could raise some uncertainty. There could be protracted litigation as the Supreme Court decision of Azadi Bachao Andolan could be challenged. Making tax residency certificate mandatory is a good measure to check anti-abuse of law, but it could have been restricted to some treaty shopping countries.

Chidambaram recognises that the only way to increase growth is to increase the investment and infrastructure spending. A good amount of proposals have been introduced to incentivise infrastructure sector. There are measures which push infrastructure growth by introducing energy reforms in terms of promoting shale gas, clearing NELP blocks, Public Private Partnership with Coal India, restoring generation based incentives. These measures would help the foreign investors investing in infrastructure sectors.

Increasing the surcharge on the foreign investors will increase the tax payable in India. Further, withholding tax rate from any payments made on account of royalty or fees for technical services has increased to 25 per cent from the current rate of 10 per cent. However, the rate of withholding would reduce to 10 or 15 per cent in majority of the cases where India has a tax treaty with such a country. Having said which, in cases of net of tax contracts, cost to the Indian company could substantially increase. Another anti-abuse measure has been introduced. A company conducting a buy-back would now have to pay tax @20 per cent while buying back the shares.

With the sluggish growth, weak global economy, high inflation and ever increasing fiscal deficit, the Finance Minister was left with no option but to bring reformatory measures. In my view, he has delivered a balanced Budget and has attempted to provide certainty to investors. We must appreciate that the Government has gone full bang on these measures instead of being populist and without worrying about the upcoming elections.

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