What NRI investors want from the government

Foreign investors are eagerly awaiting the upcoming budget of the Union, anticipating the investment climate that it will herald and the potential opportunities for partnership with one of the largest and growing global economies. The Indian government’s vision to transform the country into a $5 trillion economy and its adoption of Pillar I and II solutions developed by the Organization for Economic Co-operation and Development (OECD) to counter base erosion and profit shifting (BEPS) or tax evasion by multinational corporations, while also addressing other macroeconomic factors such as recession The looming world economy, the ongoing Russian-Ukrainian war, and high inflation are expected to lead to a sustainable and balanced budget.

In the interest of the ‘Make in India’ initiative, which stimulates the manufacturing sector, creates jobs and stimulates overall growth, the government has offered a concessional tax of 15 per cent for new manufacturing companies established after 1st October 2019 and starting production no later than 31st March 2024. With However, the period between incorporation and start-up seems very short, especially in light of the impact of the pandemic on every sector. Extending this timeline by at least two years – say March 31, 2026, will only enhance the prospects for the domestic manufacturing sector.

Likewise, the 5 percent franchise tax rate on borrowing from foreign lenders must be extended beyond the current deadline of July 1, 2023 to formalize the loan agreement. This could go a long way to help India Inc maintain desirable liquidity and manage overall costs.

While the Companies and Exchange Act of India has allowed outward mergers and acquisitions, the tax liability of such transactions is not equal to the tax credits provided for inbound mergers, which get exemptions from capital gains tax. This needs to be addressed. Similarly, parity is sought in providing tax relief for mergers where shares of a domestic company are transferred from one foreign entity to another, whether the transfer of shares is direct or indirect.

There is an anomaly in considering the purchase creation cost when calculating long-term capital gains. While an escalation advantage is provided in the event of a merger of a non-listed company into a listed company by granting an indexing advantage up to the 2017-18 financial year, no such benefit is provided for the merger of a listed company with another listed company. This has led to cases where taxpayers are required to pay tax on the shares of a listed company acquired before January 31, 2018, which were subsequently redeemed in the merger plan by the shares of the merged listed company. In order to achieve parity in all investments and to avoid any unnecessary litigation, a clarification should be made regarding the availability of cost increase advantage in case of merger of two listed companies.

The government also needs to provide a clear roadmap for its implementation of the two-pillar solution endorsed by the Organization for Economic Co-operation and Development. India is a signatory to the Pillar II solution, so the government needs to align the existing parity tax (EL) and provide significant economic presence (SEP) with the emerging global consensus and provide clarification on various open issues.

Subject to the present provisions, traditional service transactions, which were made in an offline mode or not through digital means (for example, accommodation in an overseas hotel paid for by an Indian payer from India) may also fall within the scope of September. Such subjection to taxation seems to thwart the purposes of taxation of non-residents by effectively introducing the tax band, the service provided and consumed in the physical situation outside India. Globally, the SEP clause was introduced in light of the BEPS discussion to respond to the taxation of digital businesses. One may seek necessary clarifications from the government for this aspect. Further, an explanation shall be provided regarding the attribution of business profits to the account of India taxation, where the SEP is constituted to a person who is not a resident of India, to enable proper compliance with these provisions by the non-resident.

These make up the wish list for non-residents who have contributed to nation building. It would also pave the way for India to move closer to becoming the preferred destination for foreign investors and its dream of becoming a $5 trillion economy.

(Partner author – Price Waterhouse & Co LLP)

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