India: a bright spot in the global economy
India’s finance minister has forecast GDP growth of 6.75% to 7.5% for 2017/18, along with higher public expenditure, amid slow global growth and sluggish private sector investment.
Emerging economies face three key challenges at the moment. Firstly, there is the monetary policy stance of the US Federal Reserve. Then there is uncertainty around commodity prices (particularly crude oil), combined with increasing pressure from protectionism around the world with an apparent retreat from globalisation of goods, services and people.
The recent Union Budget was a clear reiteration of the Indian Government’s focus on achieving fast track growth via reforms, such as the introduction of Goods & Sales Tax, the promotion of a cashless economy and digitisation alongside financial sector reform and the recapitalisation of banks. At the same time, the Government continues to pursue its ‘Make in India’ campaign and large investments in infrastructure. It is widely expected that India will stand out as a bright spot in the world economy.
Highlights from the Union Budget
India’s corporate tax rate will be reduced from 30% to 25% for domestic companies with a total turnover or gross receipts in FY 2015/16 of under INR500m (approximately US$7.5m). This will make the micro, small and medium enterprise (MSME) sector more viable and competitive compared with large companies. There has been no change in the tax rates of foreign companies. Minimum alternative tax (MAT) was not abolished as had been expected, although changes to the rules were proposed.
Ease of doing business
The Government has provided more clarity on the indirect transfer provisions introduced in the 2012 Budget, which have been of concern to foreign investors. Retrospectively from FY 2011/12, they will not apply to any asset or capital asset held by a non-resident, directly or indirectly, in specified foreign institutional investors and foreign portfolio investors.
Foreign company income from the storage of crude oil in India and its sale to a resident is already exempt from tax. It is proposed to extend exemption to income of a foreign company from the sale of leftover stock of crude oil after the expiry of the agreement or arrangement with the Government. It is hoped that this will provide clarity for foreign companies, boost foreign investment into India and augment the country’s strategic petroleum reserves.
It is proposed that the Authority for Advance Rulings for income tax, central excise, customs duty and service tax will be merged, enabling applicants to file all applications under one roof.
To reduce the excess interest expenses claimed by companies and in view of OECD BEPS Action Plan 4, it has been proposed that interest expenses above INR 10m (approximately US$150,000) claimed by an Indian company or a permanent establishment of a foreign company on the money borrowed from its associated enterprises will be restricted to 30% of its EBITDA. Entities engaged in the business of banking or insurance shall be excluded from this.
To align the transfer pricing provisions with OECD guidelines, it is proposed that a secondary adjustment be introduced in cases where a primary transfer pricing adjustment exceeding INR 10m has been made, if the excess money attributable to the primary adjustment is not brought to India within the prescribed time.
Measures for stimulating growth
The concessional rate of withholding taxes for external commercial borrowing (ECB) has been extended for loans made before 1 July 2020. Further, the benefit of the concessional rate of withholding taxes has been extended to rupee-denominated bonds issued outside India before 1 July 2020. This will benefit non-residents through continued exposure to high-yielding ECB and rupee denominated bonds and will also boost the inflow of foreign capital into India.
FDI policy reforms
With more than 90% of total foreign direct investment (FDI) inflows under the automatic route and the successful implementation of e-filing and online processing of FDI applications, the Government has decided to abolish the Foreign Investment Promotion Board (FIPB). This will ease the process of investing in India and help boost foreign capital inflows.
The finance minister confirmed that GST will be rolled out from 1 July 2017. No changes were announced to the standard rate of service tax, excise and customs duty as they will be replaced by GST. Attempts to promote the cashless economy are being made through concessional rates for certain technology products.
R&D cess, a tax payable on imported technology, will be withdrawn from 1 April 2017.
For more information, contact:
Chaturvedi & Shah, India
T: +91 22 3021 8500
Chaturvedi & Shah, India
T: +91 22 3021 8500