Union Budget 2017-18: Woos foreign investors in PE & VC, some uncertainties in the way
To advance the ease of doing business in India, it was announced that there will be further liberalisation to the Foreign Direct Investment policy and abolishment of the FIPB.
Ever since the Narendra Modi led government has assumed office, it has made its emphasis on attracting foreign capital very clear and the Union Budget 2017 has once again substantiated this resolve. While, the uncertainties resulting from the recent demonetisation process led to delays in investment decisions, some of the budget proposals should positively impact the investment climate.
In his budget speech before the House, the finance minister presented that currently, more than 90% of foreign investment in the country is under the automatic route i.e. such foreign investment can be made without the permission of the Foreign Investment Promotion Board (FIPB). To advance the ease of doing business in India, it was announced that there will be further liberalisation to the Foreign Direct Investment policy and abolishment of the FIPB. These measures will make foreign investors look at India with added optimism as an investment destination.
Similarly, to encourage foreign debt, the sunset clause for the concessional tax rate of 5 per cent on interest on qualifying foreign debt has been extended from June 2017 to June 2020. It has also been explicitly made applicable to rupee denominated bonds, issued overseas. This tax rate is attractive since it is lower than the rate in most tax treaties, leading to a higher yield on debt investments.
Applicability of indirect transfer provisions
The Finance Minister addressed some demands of the industry for relaxation of the indirect transfer provisions. These are proposed to be retrospectively relaxed in case of non-residents who have made investments in Category I and II Foreign Portfolio Investors (FPI)/Foreign Institutional investors (FII). Further, the clarification in the Budget speech on the intent to not let the indirect transfer provisions lead to double taxation, is again a positive message for the industry which is worst hit by the provision. One will however need to evaluate how this clarification is drafted in the law.
Continuing with the various initiatives to support the start-up ecosystem in India, announcements were made in the Budget 2017 which included reducing the rate of tax to 25% for small turnover companies, granting more flexibility on loss carry forward and liberalisation of the tax holiday regime for start-ups. This should provide more breathing space to start-ups in their operations and support seed funding.
There are welcome measures to encourage the real estate sector such as i) reduction in the period of holding for land and building to qualify as long term capital asset, from 36 months to 24 months; ii) granting ‘infrastructure’ status and liberalisation of some conditions for availing tax holiday to affordable housing. Clarity on the taxability in case of transfer of land under a Joint Development Agreement (JDA) in year of project completion, provides some relief for land owners. This could provide some respite to the Real Estate sector which has recently been adversely impacted by the currency demonetization.
Ambiguities / unfinished agenda
Restricting the tax exemption on long term capital gains arising on sale of listed equity shares only if Securities Transaction Tax (STT) is paid at the time of acquisition of such shares, has led to some anxiety. While the government has expressed that its intent is to tax only sham transactions and not genuine ones, the industry keenly awaits a quick resolution on this ambiguity.
However, not all prayers have been answered in the Budget 2017. India Inc was also hopeful of an across the board reduction in corporate tax rates as promised, which it will have to wait for. Certain demands of the industry like complete relief from indirect transfer provisions, rationalisation of safe harbour provisions, grant of pass through status to losses from investments made by Alternate Investment Funds (AIF) were not met. Further, non-deferral of implementation of General Anti-avoidance Rules (GAAR), Place of Effective Management (POEM), Income-tax Computation & Disclosure Standards has led to some disappointments.
Overall, the Union Budget 2017 is a step in the right direction to promote the growth agenda of the current government to continue with economic reforms and accelerate investments into India.
The author is Partner and Head, Deal Advisory at KPMG in India.
Views expressed are personal.