A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 17, Issue 2 April 2015

The Indian Budget - 2015

The Government of India’s Budget each year is normally preceded and followed by trips to places of worship by non-resident Indians (NRIs). Historically, the ones going to pray before the budget and the ones going after the finance minister’s speech are markedly different.

Indian FM Arun Jaitley’s speech was being anticipated as one that would change this little bit of history. The jury is still out on whether he and the present Indian government have achieved that goal. The current budget has many points that are expected to be beneficial when it comes to the real estate market and, among other sectors, to NRI property investments.

General indicators
There are a lot of positive indicators in the Indian economy with improvement in GDP growth prospects, consolidation of the fiscal deficit, a clear dip in the inflationary trend, the rupee stabilizing and hopes of a more accommodative monetary policy with cuts in the repo rate on the horizon.

The budget hints at benefits for NRI property investors with a long-term strategy, however, the real benefit for investors is in the abolition of the wealth tax which is expected to bring substantial tax relief to investors.

Property Pointer
There are hints towards benefits for NRI property investors with a long-term strategy. From a tax perspective, the budget has dictated that service tax would be increased from 12.36% to 14%. As a result, market analysts are predicting that the cost of residential real estate could rise by up to 5% in the short term, with inflation also expected in services pertaining to real estate as well, such as property management, electricity and utilities. However, the real benefit for investors lies with the abolition of the wealth tax. This direct tax, levied on high net-worth individuals, currently applies to gains generated from residential property. With this tax being abolished, investors can expect substantial tax relief.

Other benefits for the real estate market include the plans to boost infrastructure and create more jobs, which, in turn, will heighten the demand for housing. There is money set aside in the budget to assist start-up companies in Tier II cities, which will foster higher rates of employment and therefore contribute to both local economies and the demand for local accommodation. The budget also revealed that proposed changes to visitor visas could result in more long-term visitors, which could as a ripple effect bolster the demand for housing.

NRI real estate advisors have reason to feel positive about the impact of the budget on the property sector. Tax benefits and plans for growth could spell a positive future in the short and long-term, especially for markets around Tier II cities.

Banking & Investment
There is a provision in the budget allowing for foreign investment in alternative investment funds (AIFs) subject to approval by the Foreign Investment Promotion Board (FIPB).

For AIFs:

  • Income other than business income will be exempt from tax;
  • Business income will be taxable at rates applicable to the legal entity (i.e., company, trust, etc.);
  • Dividend distribution tax and tax on distributed income provisions shall not apply;
  • Losses cannot be passed on to investors and must be retained at the AIF;
  • Any income, other than business income, payable to unit holders, will be subject to withholding tax @ 10%.

For unit holders:

  • Income (other than business income) shall be chargeable to tax in the same manner as if the investments were made directly;
  • Business income distributed by investment funds to unit holders shall be exempt.

On a separate yet related note, there also seems to be a sincere attempt at rationalizing foreign investments by:

  • Removing the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments;
  • Bringing in composite caps.

Gold Monetization

  • Introduction of the Gold Monetization Scheme is aimed at allowing gold depositors to earn interest and jewelers to obtain loans in their metal accounts;
  • There is a proposal for a Sovereign Gold Bond to be introduced as an alternative to purchasing the metal;
  • An Indian gold coin is under development.

Infrastructure

  • Public Private Partnership (PPP) mode of investment in infrastructure is to be revitalized
  • Issuance of tax free infrastructure bonds for the projects in rail, road and irrigation sectors has been announced

Currently, NRIs can invest in bonds issued by a public sector undertaking (PSU) in India. The fine print of the Infrastructure Bond and Sovereign Gold Bond schemes would need to be analyzed, to determine the eligibility of NRI investment in such bonds.

Financial Market
There is a proposal to amend Section 6 of the Foreign Exchange Management Act (FEMA) to clearly provide that control on capital flows as equity will be exercised by the Government, in consultation with the RBI on the premise that capital account control is a policy rather than a regulatory matter. In its current form, Section 6 provides that RBI may in consultation with the Central Government, specify-

  • any class or classes of capital account transactions which are permissible;
  • the limit up to which foreign exchange shall be admissible for such transactions.

Taxing Matters

  • Tax rate for income of non-residents (including foreign companies) by way of Royalty and FTS has been reduced from 25% to 10% for all such income earned pursuant to any agreement entered into after March 1976. However, this will not impact the tax rate;
  • Certain income from sale of securities by FII and its corresponding expenditure will not be taken into consideration while calculating book profits under Minimum Alternative tax provisions;
  • A clarification has been issued on taxability of indirect transfer of shares deriving substantial value from assets in India. ‘Substantial value’ has been defined as 50% Indian assets vis-a-vis global assets and minimum Indian assets of INR 100 million;
  • Cost of acquisition and period of holding of the capital assets of a demerged company is to continue post-demerger for the resulting company;
  • Applicability of General Anti-Avoidance Rule (GAAR) has been deferred till Financial Year 2017-18;
  • Direct Tax Code has been sent into limbo for the foreseeable future with an emphatic statement from the FM that “there is no great merit in going ahead with the Direct Tax Code as it exists today”;
  • The benefit of concessional rate of 5% withholding tax in respect of investments made by foreign institutional investors (FIIs) and qualified foreign investors (QFIs) is to be extended in respect of interest payable up to 30th June 2017;
  • Interest paid by the permanent establishment (PE) in India of a banking company to its head office or any other branches outside India will be deemed to be income subject to tax in India and subject to tax deduction at source;
  • The concept of place of effective management (POEM) has been introduced to determine the residential status of the foreign company;
  • Fund manager’s presence in India, subject to satisfaction of certain management conditions, does not constitute business connection of eligible investment funds;
  • Explanation has been amended to restrict the tax benefit only in respect of depository receipts issued to investors against the issue of (i) ordinary shares of an issuing company, being a company listed on a recognized stock exchange or (ii) foreign currency convertible bonds (FCCBs) of the issuing company;
  • Norms related to minimum land area, capitalization and repatriation of funds for foreign direct investment (FDI) in construction development projects have also been further liberalized; however, the ambiguity in classifying FDI in different activities under the services sector continues.

Other provisions

  • There is a proposal to set up an international finance centre (IFC) in Gujarat (Gujarat International Financial Tec-city or GIFT) on the same lines as IFCs in Singapore and Dubai;
  • Extension of visa on arrival facility from 43 countries to 150 countries to be implemented in stages.

There appears to be a genuine effort in the direction of making India a more attractive jurisdiction for foreign investors

There appears to be a genuine effort in the direction of making India a more attractive jurisdiction for foreign investors. Still the effort is largely a cautious one, considering that this is the new government’s first budget. Only time and further economic and tax reforms in the next few years will tell us whether there is a genuine drive to make NRIs look homewards for investment avenues.

(This article is compiled by Mr. Chaitanya G. Kirtikar, Manager, Offshore and Free Zone Services.)