What NRI investors want from the government

Foreign investors are keenly awaiting the upcoming Union Budget, watching out for the investment climate it will augur and possible opportunities for partnering with one of the largest growing global economies. The Indian government’s vision of turning the country into $5 trillion economy and its adoption of Pillar I & II solutions set down by the Organisation of Economic Cooperation and Development (OECD) to counter base erosion and profit shifting (BEPS) or tax evasion by multinationals, while also tackling other macro-economic factors such as the looming global recession, the persistent Russia-Ukraine war and a soaring inflation are expected to make for a sustainable and balanced budget.

In the interest of the ‘Make in India’ initiative, incentivising the manufacturing sector, creating jobs and triggering overall growth, the government had offered a concessional tax of 15 per cent for new manufacturing companies incorporated after October 1, 2019 and commencing production no later than March 31, 2024. However, the window between incorporation and commencement seems too short, especially in the light of the impact the pandemic has had on every sector. Extension of this timeline by at least a couple of years – say March 31, 2026, will only boost prospects for the domestic manufacturing sector.

Similarly, the concession tax rate of 5 per cent on borrowing from foreign lenders needs to be extended beyond the present deadline of July 1, 2023 for loan agreement formalisation. This could go a long way to help India Inc maintain desired liquidity and manage the overall costs.

While India’s corporate law and bourses has allowed outbound mergers and acquisitions, the tax liability for such transactions is not at par with the tax breaks offered to inbound amalgamations, which get exemptions from capital gains tax. This needs to be remedied. Similarly, parity is sought in offering tax exemption to amalgamations where a domestic company’s shares are transferred from one foreign entity to another, whether the share transfer in direct or indirect.

There is an anomaly in the consideration of set-up cost of acquisition when computing long-term capital gains. While step up benefit is provided in case of merger of an unlisted company to a listed company by giving indexation benefit till Financial Year 2017-18, no such benefit has been provided for a merger of a listed company to another listed company. This has led to situations wherein the taxpayers are being asked to pay tax for the gains on shares of a listed company acquired prior to 31 January 2018, which, subsequently, in the scheme of merger, got exchanged for shares of the listed amalgamated company. In order to bring parity in all investments and avoid any unnecessary litigation, clarification on availability of cost step up benefit, in case of merger of two listed companies, should be brought in.

The government also needs to present a clear roadmap on its implementation of the two-pillar solution proferred by OECD. India is a signatory to the Pillar II solution, so the government needs to align the existing equalisation levy (EL) and the Significant Economic Presence (SEP) provision with emerging global consensus and provide clarifications on various open issues.

As per the current provisions, conventional service transactions, which have been served in an offline mode or not through digital means (for instance, accommodation in an overseas hotel for which payment is made by an Indian payer from India) may also fall within the ambit of SEP. This taxability seems to defeat the purposes of non-resident taxation by effectively bringing into the tax ambit, a service which has been provided and consumed in a physical mode outside India. Globally, SEP provision was introduced in the light of the BEPS discussion to respond to the taxation of digital business. one would seek necessary clarifications from the government to this aspect. Furthermore, clarity on attribution of business profits for computing the India taxes, where an SEP of a non-resident is constituted in India, should be provided to enable a proper compliance of these provisions by the non-resident.

These constitute the wishlist of non-residents who have been contributing to nation building. These would also pave the way for India getting closer to becoming the preferred destination for foreign investors and its dream of becoming a $5 trillion economy.

(The author is Partner- Price Waterhouse & Co LLP)