India’s Union Budget 2024 has introduced significant reforms aimed at fostering a more attractive investment climate, ease of investment and aligning tax with global tax standards. These changes are further expected to simplify regulatory frameworks, enhance investor confidence, and improve trade relations.
In this article, let us explore the changes and their implications for foreign investors.
1. Reduction in Corporate Tax Rate for Foreign Companies
- The Union Budget 2024 proposes to reduce the corporate tax rate for foreign companies from 40% to 35%.
- This move will make India more attractive to foreign investors, enhance its global competitiveness, and stimulate economic growth by increasing foreign capital inflows, expanding international business activities, and creating jobs.
2. Abolition of Angel Tax:
- Under Angel Tax, any amount in excess of fair value was treated as premium and being taxed at approx. 31% under income tax law. This was creating lot of troubles for investors.
- The abolition of Angel tax will positively impact investments by reducing paperwork and complicated formalities in applications, thereby making the investment process smoother.
- This simplification will boost investor confidence, attract more capital and enhance overall investment climate in India, particularly for early-stage startups.
3. Abolition of Equalization levy: Equalization Levy was being made on advertisements hosted on platform of offshore firms for Indian consumers. This was levied at 6% since 2016. The Budget has not abolished this levy.
But the scope of equalization levy was expanded in 2020 to include any provision for digital advertising space or selling o goods to Indian residents or users accessing goods/services through Indian IP addresses. The rate of tax was 2% of gross consideration. This 2% levy is abolished in the Budget.
This was abolished due to complexity of classification and partly due to the frictions with USA. This will surely boost the digital economy and encourage reduction in tax litigation.
4. Reduction in Tax on Long term capital gains
- A flat 12.5% tax rate on long-term capital gains, irrespective of asset type or investor’s residential status, provides clarity and uniformity, enhancing investment attractiveness and ensuring equitable treatment of foreign and domestic investors.
- However, the foreign investors will get currency fluctuation benefits while computing LTCG.
5. FDI through CCD:
In India, the preferred mode of foreign direct investment is the unlisted Compulsory Convertible Debentures. Unlike the earlier rate of 10%, the Budget has increased the tax burden at the rate of 35% i.e., maximum marginal tax rate, by amending Section 50AA of Income Tax Act. Any gain on transfer or redemption will be taxed accordingly. Now, the investors may explore the provisions under relevant tax treaties.
6. Share Buybacks:
Entire buyback proceeds will be taxed as dividend. There will be no option to offset initial investment cost. Earlier, the companies were paying taxes on share buybacks. Now, investors will be paying the tax.
7. Variable Capital Company (VCC):
The Budget has allowed the investors to set up VCC in GIFT City. At the global level, VCC is accepted vehicle for investment fund. It will be an umbrella fund under which many funds can be brought up. This will increase the ease of management and operational dynamics of the funds.
Overall, the Indian Union Budget has taken some positive steps to attract foreign investors. However, there will be new challenges for investors in the form of enhanced tax rates on CCD and taxing of share buybacks.
In case, you are willing to enter into India, you need any support or have any query regarding compliances, valuation and international taxation, you may like to connect with us.
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Abhinarayan Mishra FCA, FCS, LL.B, IP, RV; Partner, KPAM & Associates, Chartered Accountants, New Delhi ; +91 9990013755; +91 9910744992; [email protected]; [email protected]
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