India's Budget 2020 (Part 2): Takeaways for foreign investors

In 2020, India has overtaken the United Kingdom and France in terms of GDP to become the 5th largest economy in the world. For a growing economy, Foreign Direct Investment (FDI) is highly encouraging as it shows the investor confidence, while bringing in foreign capital. According the Indian Department for Promotion of Industry and Internal Trade (DPIIT), India received about USD 26 billion worth of FDI between April to September 2019. According an UN-report released in January 2020, India was among the top 10 recipients of FDI in 2019, attracting USD 49 billion in inflows, a 16 % increase from 2018. This all due to the government constantly encouraging inflows through active policy. The government achieve to do the same with the proposals in the Budget 2020.

Let’s look at the points from the Budget that can be seen as beneficial for foreign investors.

1. Abolishment of the dividend distribution tax (DDT)

Currently, DDT applies at a rate of 20.56 % on dividends distributed by Indian companies and the dividend income is exempt from tax in the hands of the shareholders. The budget has removed the DDT and adopted the classical system of dividend taxation under which the companies would not be paying the DDT on the dividend paid to its shareholders in addition to the tax payable by the company on its profits, but the individual recipient at applicable tax rates. The company will withhold tax at 20 % on dividends declared, disturbed and paid. This rate can be reduced by a double taxation treaty between India and the respective country.

This will help foreign companies and foreign investors pay lower taxes. The dividend pay-outs will no longer be subjected to the DDT but will be added to the taxable income, and then taxed on the applicable rate.

Multinational companies pay two types of taxes in India, corporate tax and DDT. Earlier, they could claim tax credit in their respective countries only for the corporate tax paid in India. However, now it will be possible for investors to claim credit in their countries for all the taxes paid in India.

The abolishment of DDT, in combination with corporate tax rate cut from 30% to 22%, significantly reduces the effective tax rate, expectantly leading to better FDI environment.

The provisions relating to the abolition of DDT will be effective from April 1, 2020. 

2. Tax exemption for investments by sovereign wealth funds (SWF)

In order to attract investments in the infrastructure sector, a sector that India wants to prioritise, India will allow 100 % tax exemptions (for their interest, dividend and capitals gains income etc.) for sovereign wealth funds for investments, if they invest (through debt or equity) into a company (for at least three years) which develops, operates, or maintains an infrastructure facility by March 31, 2024. 

Tax exemptions will be also be provided for sovereign wealth fund that is wholly owned and controlled, either directly or indirectly, by the government of a foreign country. It should have been set up and regulated under the laws of the foreign country.

3. Increase in foreign portfolio investors limit

According to the budget, the investment limit for FPI in corporate bonds will be increased to 15 % from 9 %. Also, certain government securities will be open for foreign investors. The withholding tax rate for investment made by FPIs in the bond market has been at 5 %, such as government securities, corporate bonds, and municipal bonds. 

4. Amendment to Companies Act, 2013

To improve ease of doing business in India, the government wants to propose amendments to the Companies Act, 2013 and decriminalize various offences.

During the budget presentation, Minister of Finance said, “There has been a debate about building into statutes, criminal liability for acts that are civil in nature. Hence, for Companies Act, certain amendments are proposed to be made that will correct this. Similarly, other laws would also be examined, where such provisions exist, and attempts would be made to correct them.”

5. Tax on funds borrowed from overseas

To further boost foreign investment, create jobs and stimulate the economy, a new regime has been introduced for overseas borrowings with regard to withholding tax rate (WHT). 

The concessional withholding tax rate (WHT) at 5% on interest paid to non-residents on certain borrowings from outside of India on or before 1 July 2020 is extended to loans granted until 30 June 2023 July 1, 2023. Additionally, a concessional WHT of 4% has been proposed on interest paid to non-residents with regard to foreign currency borrowings from outside of India (through an issue term bond or rupee denominated bond) between the period 1 April 2020 and 30 June 2023.  

6. Relief on direct tax dispute settlement 

To reduce the litigation burden –there are almost 500,000 direct tax cases pending in the courts and quasi-judicial forums for years and it could take years before the tax department sees any money, assuming it wins these disputes – and to enable foreign investors to resolve long-pending tax litigation, investors will be provided a one-time opportunity to settle disputes by paying outstanding taxes with complete waiver of interest and penalty by March 31, 2020, and with some additional payment till Jun 30, 2020.

With this, we complete our two-part series about India’s Budget 2020. If you have any questions, don’t hesitate to get in touch with Miss Legal India.