The Government of India (GoI) is leaving no stone unturned to make India an attractive destination for Foreign Direct Investments (FDI), which will be a significant contributor to the country’s journey of becoming a US$ 5 Trillion economy by year 2025. Few months back, the GoI had taken the historic decision to reduce headline corporate tax rate to 22 percent for all domestic companies and introduced lucrative tax rate of 15 percent for new domestic manufacturing companies, subject to giving-up specified exemptions and deductions. This corporate tax rate reduction measure has opened up new avenues for FDI, making India one of the most attractive FDI destinations to do business, having one of the lowest tax rates in the world, coupled with the cost arbitrage along with skilled labour.

Budget 2020 was again an opportunity for GoI to declare its intention and invite the world at large to come and invest in India. GoI has announced a plethora of measures to attract and boost FDI in India. Budget 2020 revolved around three prominent themes viz. “Aspirational India”, “Economic Development” and “A Caring Society”. GoI has proposed significant measures for economic development as well as to sustain and attract FDI in India.

To preserve and enhance the identity of India as a globally competitive and favored investment destination, the government has proposed a host of FDI friendly measures in Budget 2020. Some of the key proposals are discussed below.

Abolition of Dividend Distribution Tax (DDT)

GoI proposes to abolish DDT and move back to the classical system of taxing dividends in the hands of the shareholders. This will lead to two major reliefs viz. reducing effective tax cost for corporates and enabling foreign shareholders to take tax treaty benefits thus, reducing tax incident on dividends in the hands of both corporations and shareholders.

This move will significantly enhance the return on equity investment from India and in our view, is one of the boldest moves in Budget 2020, which will increase the attractiveness of Indian equity market and will provide relief to large set of investors, especially foreign investors.

Promoting investment from Sovereign Wealth Funds

To attract and incentivise investment by sovereign wealth funds of foreign governments in the infrastructure sector, GoI has proposed 100 percent tax exemption of interest, dividend and capital gains income earned by Abu Dhabi Investment Authority and sovereign wealth funds in respect of investments made in infrastructure and priority sectors before 31 March 2024, and with a minimum lock-in period of 3 years.

This move is aimed to attract host of sovereign wealth funds to invest in infrastructure and priority sectors of India and will also help to meet the long term financing needs of the GoI for making investment in infrastructure sector, making it a win-win situation for all.

Attracting debt investment

Currently, the low tax rate of 5 percent is available to foreign borrowings made by an Indian company until 30 June 2020, in the form of foreign currency loans/long-term bonds or rupee denominated bonds. In order to boost debt investment in India by making foreign funds available at a lower tax rate, the concessional tax rate has been extended to foreign currency loans borrowings and bonds issued up to 30 June 2023. Further, a concessional tax rate of 4 percent will apply to foreign borrowings by way of long-term bonds or rupee denominated bonds until 30 June 2023, listed on a recognised stock exchange in any International Financial Service Center (IFSC).

To attract debt investment from Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs), the concessional tax rate of 5 percent on interest on government securities and rupee denominated bonds of an Indian company, has been extended to include investment in government securities and bonds issued up to 30 June 2023. The concessional rate of 5 percent has been extended also to interest payment made on Municipal Bonds.

Other Measures

  • The GoI has announced measures to attract investment in the electronics manufacturing industry focused on encouraging manufacturing of mobile phones, electronic and networking equipment and semi-conductor packaging.
  • Specified categories of government securities would be opened fully for non-resident investors and limit for FPI in corporate bonds will be increased from 9 percent to 15 percent of outstanding stock of corporate bonds.
  • The GoI has announced measures to liberalise FDI in sectors such as coal and lignite, contract manufacturing, digital media, E-commerce and single brand retail trading.

Our Thoughts

There was much expectation that Budget 2020 would seek to revive the slowdown in the economy, boost investment, create employment and increase the purchasing power to enhance consumption. The GoI has tried to play a balancing act. Continuing its momentum to boost economic development and attract new investment into India, a plethora of measures have been announced in Budget 2020 to make India, a globally competitive and favored investment destination. It is only hoped that these measures will swiftly deliver on their intended results and put India back on the wheels of fast track growth trajectory.

About Authors: Kamlesh Chainani is Partner, Pinkesh Jain is Senior Manager and Shravan Suratwala is Deputy Manager with Deloitte Haskins & Sells LLP.

Kamlesh Chainani, Pinkesh Jain, and Shravan Suratwala

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November 2020