Let the global capital flow into India

In the backdrop of high expectations, the finance minister has provided a significant impetus to investors by addressing some of their long-pending concerns.

Abolishing the dividend distribution tax (DDT) as been on the wishlist of companies, especially foreign investors. This will be advantageous to investors as they can claim treaty benefit of lower rate of tax (10-15%). Also, they can now claim foreign tax credit in their home country for tax paid on dividend in India. For domestic investors, especially those in the highest tax bracket, this may lead to a significant tax burden and therefore, the government must look at taxing dividends at a lower rate.

However, this is a disadvantage for investors in REITs/InvITs. Hitherto, dividend received by REIT/InvIT from 100% SPV was not liable to DDT and not taxable either in the hands of REIT/InvIT or investors. The SPV paid tax on rental and other incomes earned and hence there was a single point of taxation. But as per the Budget proposal, unit holders will need to pay tax on dividend income from the SPV, received and distributed by REIT/InvIT, leading to double taxation in the hands of SPV and unit holders. The Government needs to relook at this proposal and restore the single point of taxation as changing policies once significant capital is committed has long-term ramifications. The government is also looking at monetising its assets through InvIT and the Budget proposals may pose a serious impediment to that.

To promote investment of sovereign wealth funds (SWFs), the Budget proposes to exempt any income by way of dividend, interest or long-term capital gains arising from an investment made by SWFs in infrastructure, provided it is wholly-owned and controlled by the government of a foreign country and the investment is made before 31 March 2024 and held for at least three years. This will give a big fillip as these are long-term investors and provide much needed capital for the sector. To encourage further investments, the scope of investments by wealth funds should be widened. To amplify the impact, the government should also consider including pension funds in the ambit of these provisions.

Increasing corporate bond market participation from 5% to 15% of outstanding bonds will enable larger global funds into triple A credit. Encouragement for upto BBB+ participation at market rates through secondary sales of loans from banks may enable derisking of the economy and better pricing of credit and a positive step towards a deeper bond market.

Further, the concessional TDS rate of 5% on interest payment on investment in municipal bonds as also ECB borrowings and rupee dominated bonds has been extended till 2023. This provides certainty to companies raising ECBs.

Non- residents receiving only royalty and FTS income from India on which tax is deducted at 10% plus surcharge and cess are now exempted from filing the return of income. This is a relief for the non-residents as it will save them from the prosecution risk of non-filing of returns. One of the grievances of global investors has been the interface with the tax authorities. Continuing the focus on ease of paying taxes by leveraging technology, the Budget introduces an e-appeal scheme on the lines of e-assessment scheme for greater efficiency, transparency and accountability in disposal of appeals. The scheme may take a while to settle, but it gives a clear signal to the investors about the intent of the government to move towards transparency.

At a time when about Rs 10 trillion are stuck in direct tax litigation, the ‘Vivaad se Vishvas' Scheme to unlock the disputed amounts is welcome. This will also provide a much-needed relief for taxpayers reeling under litigation on multiple issues. The timeframe provided is short, however, and the government could look at extending the time beyond 31 March for companies to comply. The above measures along with low corporate tax rates will encourage long-term investments into India.

Shalini Mathur, Director at EY, co-authored the article.

This article was first published in Business Standard on 2 February, 2020