Budget shows that India is moving towards non-adversarial tax regime: Vikas Vasal

By Vikas Vasal HEAD- TAX MARKETS, KPMG

One of the underlying themes in the Budget has been to address some of the key concerns of the foreign investors and send a message that the government is committed to provide an investor-friendly policy and tax regime to do business in India.

Anti-abuse rules, wherever introduced overseas, have been done with a soft hand to ensure that while tax avoidance structures are brought within the tax net, genuine investment structures and commercial transactions enjoy tax protection. As India has just started regaining investors' confidence, the deferment of General Anti Avoidance Rules (GAAR) by two years is a step in the right direction. Besides, investments made up to 31 March 2017 outside GAAR's ambit, would provide certainty to existing structures and transactions, and avoid litigation.

In absence of clarity, the tax on indirect transfer of shares has been a big concern for foreign investors. It has been proposed that the provision relating to substantial value of assets located in India would get triggered, if the Indian assets represent at least 50%of the value of global assets. Also, a threshold limit of Rs 10 crore has been proposed to provide relief to small transactions. It is also proposed that only proportionate value of the transaction as it relates to Indian assets would be subject to tax in India, unlike the current provisions, where the entire value of the transaction may be taxed in India. Certain exemptions have been carved out for amalgamation and demerger transactions.

It is a pity that while investments into our stock markets have been increasing multifold, a large part of fund management activity is structured and managed outside India. The primary reason has been fear in the minds of the off-shore funds that the presence of a fund manager in India may create a permanent establishment for the fund thereby subjecting the overseas income to tax. Budget has clarified that subject to certain conditions, the fund’s income arising only from investment in India would be subject to tax in India, irrespective of the fund manager’s location.

Last year, it was clarified that income arising to Foreign Institutional Investors (FIIs) from securities transactions would be treated as capital gains. Revenue's attempt to levy Minimum Alternate Tax (MAT) had raised concern among the investors community. This year's Budget proposes to set this issue at rest by clarifying that MAT will not apply to such income earned by FIIs except in few specified cases.

As Indian companies evolve in their growth journey, they necessarily need to import the cutting edge technology and allied services from the global companies. The tax rate of 25% on royalty payments was considered harsh and has been rightly reduced to 10%.

Though there are many other issues of the foreign investors that need attention, however, this Budget provides a direction that India is moving towards a non-adversarial tax regime, being a hallmark of a matured tax jurisdiction.