On the back of its new electoral mandate, the Modi Sarkar 2.0 government presented its first budget on 5 July 2019 (for further details please see "Budget 2019: a box of possibilities"). The budget focuses primarily on infrastructure spending and boosting investment from private and foreign investors, with the government forecasting that the Indian economy will grow to $5 trillion by 2025, almost twice its current size. Following the budget announcement, a slew of reforms and policies are expected in the coming months, including a draft of the much-awaited Direct Tax Code, which aims to overhaul the existing direct tax law.
This article highlights some of the key tax-related amendments introduced by the budget.(1)
The present base tax rate for Indian companies whose turnover does not exceed Rs2.5 billion is 25%, which has been extended to companies with a turnover of up to Rs4 billion. This proposal is thus likely to cover almost every Indian company. Tax rates have largely remained unchanged, despite talk of reducing the headline tax rate and extending it to all business entities, including limited liability partnerships.
To facilitate India's start-up culture, the budget proposes that start-ups and their investors which file requisite declarations and provide information in their tax returns will not be subject to any kind of scrutiny in respect of funds raised and valuations of share premiums. Further, special administrative arrangements will be undertaken for pending assessments of start-ups and the redressal of their grievances. This will provide major relief to recognised start-ups which have been penalised for raising capital at premium rates.
At present, start-ups are not required to justify the fair market value of their shares issued to certain investors, including Category-I alternative investment funds (AIFs). This benefit is now proposed to be extended to investment from Category-II AIFs.
The concept of secondary adjustment was introduced in India in 2017. Under the previous law on this matter, Indian taxpayers had to receive a sum representing the adjustment amount within the specified time limit, failing which a secondary adjustment would be made. The budget proposes to relax these provisions by allowing the receipt of such funds from any related party and not just the party with whom an international transaction is undertaken.
Parties should avoid repatriating funds to an Indian entity by making a payment of additional tax at an effective tax rate of 20.97%. Payment of additional tax should mitigate any prevailing uncertainties surrounding secondary adjustments.
Budget 2016 introduced a favourable tax regime for units operating in an international financial services centre (IFSC). To boost investments into IFSCs, the new budget proposes to provide the following tax incentives to IFSC units:
- Exempt Category III AIF units with non-resident investors will receive a tax incentive with regard to capital gains derived from the sale of specified securities (to be notified at a later date), provided that such income is in a foreign currency.
- Interest paid by IFSC units to non-residents in relation to a loan taken out after 1 September 2019 will be exempt from Indian taxes.
- IFSC units are exempt from paying dividend distribution tax on any dividends which they distribute, irrespective of whether they are from existing profits or reserves.
- The tax holiday for IFSC units has been extended to 100% for 10 consecutive years in a 15-year block.
- A minimum alternate tax of 9% applies to IFSC units.
Gujarat International Finance Tec-City in Ahmedabad provides financial services companies with an early opportunity to establish a base in a favoured tax and regulatory zone.
The domestic tax law provides that when any taxpayer, including a non-resident taxpayer, receives specified properties (eg, shares) for a value which is below fair market value, the recipient taxpayer will be subject to tax in India on the differential amount. The budget proposes to include the purported income arising in these situations within the scope of the deeming tax for non-resident taxpayers, thereby expanding India's taxing right extra-territorially. However, non-resident taxpayers would be entitled to tax treaty protection, where applicable.
The proposed changes to India's tax laws and policies indicate the direction in which the new government wishes to move. If the proposed changes are implemented as planned, the 7% growth projected by the government's economic survey should be achievable.
(1) Further information is available here.
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