INDIA

Amendments to tax law by Finance (No. 2) Act 2019

INDIA - Amendments to tax law by Finance (No. 2) Act 2019

September 2019

After being re-elected, the Modi Government presented the mid-term Union Budget on 5 July  2019. The Budget announcements primarily focus on infrastructure spending and boosting investment from private and foreign investors. The tax amendments introduced as part of Finance (No. 2) Act 2019 (the Act) support the larger agenda of the easing of doing business, widening the tax base, etc.    

This article highlights some of the key tax and regulatory changes made by the Union Budget.

Tax rates

The existing corporate tax rate for Indian companies whose turnover does not exceed INR 2.5 bn was reduced to 25% in the earlier Budget. It is now further reduced to 25% for all companies with turnover not exceeding INR 4.0 bn. While it is expected that this measure will cover almost every Indian company, the tax rate of non-corporate entities (such as Limited Liability Partnerships) has remained unchanged.

Transfer pricing

The concept of secondary adjustment was introduced into the Indian tax law in 2017. Under the previous law, Indian taxpayers were required to receive a sum representing the adjustment amount within the specified time limit, failing which a secondary adjustment would be made. The Act has relaxed these provisions by:

  1. Allowing the receipt of such funds from any related party - not just the party with whom an international transaction is undertaken.
  2. Enabling parties to avoid repatriating funds (equivalent to a Transfer Pricing adjustment) to the Indian entity by making a payment of additional tax at an effective tax rate of 20.97%.

International Financial Services Centre incentives

Budget 2016 introduced a favourable tax regime for units operating in an international financial services centre (IFSC). To boost investments into IFSCs, the Act has provided for the following tax incentives to IFSC units:

  • Exempt Category III AIF units with non-resident investors will receive a tax incentive with regard to capital gains derived from the sale of specified securities (to be notified at a later date), provided that such income is in a foreign currency.
  • Interest paid by IFSC units to non-residents in relation to a loan taken out after 1 September 2019 will be exempt from Indian taxes.
  • IFSC units will be exempt from paying dividend distribution tax on any dividends which they distribute, irrespective of whether they are paid from existing profits or reserves.
  • The tax holiday for IFSC units has been extended to 100% for 10 consecutive years in a 15-year block.
  • A minimum alternate tax of 9% will apply to IFSC units.

Gujarat International Finance Tec (GIFT)-City in Ahmedabad provides financial services companies with an early opportunity to establish a base in a favoured tax and regulatory zone.

Start-ups

To facilitate India's start-up culture, the Act provides that start-ups and their investors which file requisite declarations and provide information in their tax returns will not be subject to any kind of tax scrutiny in respect of funds raised and valuations of share premiums. In addition, special administrative arrangements will be undertaken for pending assessments of start-ups and the redressal of their grievances. This will provide major relief to recognised start-ups which have been penalised for raising capital at premium rates.

At present, start-ups are not required to justify the fair market value of their shares issued to certain investors, including Category-I alternative investment funds (AIFs). This benefit is now extended to investments from Category-II AIFs.

Deemed income - Non Residents

The Indian tax law provides that when any taxpayer receives specified property (eg shares) for a value which is below fair market value, the recipient taxpayer will be subject to tax in India on the differential. The Act has extended the deeming fiction to similar situations involving non-residents, thereby triggering an extra-territorial operation. However, non-resident taxpayers would be entitled to tax treaty protection, where applicable.

Social Stock Exchange

The Finance Minister has proposed setting up a Social Stock Exchange on an electronic fund-raising platform. The objective of this Exchange would be to list social enterprises and voluntary organisations working with a social welfare objective so that they can raise capital. As of now, India has been averse to foreign funds for not-for-profit activities, and any such foreign investment has been highly regulated to ensure that foreign funds are not diverted for unwarranted purposes. While further details are awaited on the proposed platform, it remains to be seen whether the Government would be open to attracting foreign investors or companies to be listed on the social platform, in what appears to be the first such move by a Government body across the globe.

Foreign investments

The Government has proposed the following measures to boost foreign investments into India:

  • Removing the 24% ceiling on foreign portfolio investment and increasing the Foreign Portfolio Investment (FPI) to sectoral limits (i.e. the maximum amount that can be invested in Indian  Companies by the foreign investors).
  • Merging the Non Resident Indian Investor (NRI) portfolio investment route with the FPI route. Overall, this should help to bring much larger pools of NRI capital through pooled and professionally managed structures.
  • Opening up sensitive sectors such as aviation, media and insurance to Foreign Direct Investment (FDI).
  • Easing local sourcing norms for FDI companies for the single brand retail sector; at present, 30% is to be sourced locally.
  • Allowing 100% foreign investment for insurance intermediaries, as against the current 49% cap.

The relevant notifications will be issued in due course.

Jiger Saiya
jigersaiya@bdo.in

Jagat Mehta
jagatmehta@bdo.in