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Budget 2020 Key Proposals: PE - VC Perspective

01 February 2020

With the Indian economy lingering under the grey clouds of a slowdown, Modi government’s second Budget included ‘Economic Development’ as one of its core themes. The Budget proposes several measures for development in the financial sector, giving a fillip to foreign and domestic investors and entrepreneurs in the start-up space. Some noteworthy aspects include the government’s continual focus on governance, disinvestment, consolation for stressed assets, fostering MSME growth and expanding the scope of faceless tax assessments.

We have outlined below key aspects of the Budget focused on boosting investor confidence and increasing investment opportunities, which are critical pillars supporting investments in India.

We hope you have an insightful read.

Key Regulatory proposals – For investors and lenders

Investment in Government securities

  • Certain specified categories of Government securities are proposed to be opened fully for non-resident and domestic investors. This would give a boost to foreign investments.

FPI and IFSC

  • Investment limit in corporate bonds for FPIs proposed to be increased to 15% from current cap of 9% of outstanding stock of corporate bonds.
  • Proposal to setup an International Bullion Exchange at GIFT-IFSC as an additional avenue for trade by global investors.

Increased access for NBFCs to debt recovery mechanism

  • Significant relaxation in eligibility criteria for NBFCs to be eligible for debt recovery mechanism via SARFAESI Act, 2002, proposed to reduce limits for asset size from INR 5bn to INR 1bn or loan size from INR 10mn to INR 5mn.

Key Tax proposals – Focused on incentivising investors

Abolition of Dividend Distribution Tax (DDT)

  • Dividend paid by Indian companies / Mutual Funds / Business Trusts shall now be chargeable to tax in the hands of shareholders / unit holders at the applicable tax rates.
  • Deduction for interest is restricted to 20% of dividend income.
  • 10% withholding tax is applicable on dividend upstreaming.

Incentive for Sovereign Wealth Funds

  • Tax exemption for dividend, interest or long-term capital gains arising from debt or equity investment to be made in a specified infrastructure company by sovereign wealth funds and subsidiary of the Government of a specified foreign country, subject to conditions.

Start - ups

  • Tax holiday conditions relaxed to increase coverage and turnover limit increased to INR 100 crore and eligible period increased to 10 years.
  • Relaxation to key employees: incidence of tax on ESOP related perquisites deferred till earliest of 4 years from end of relevant assessment year, exit from start-up or sale of ESOPs.

Beneficial withholding tax rates for certain investments

  • Beneficial withholding tax rate of 5% on interest earned by non-resident lenders from Rupee Denominated Bonds (RDBs), long term infrastructure bonds and foreign currency lending to an Indian company extended until 01 July 2023.
  • Beneficial withholding tax rate of 4% on interest earned from long term bonds or RDBs listed on a recognised stock exchange in IFSC.
  • Beneficial withholding tax rate of 5% on interest earned by FPIs or QFIs from investment in RDB and government securities in India extended until 01 July 2023 and proposed to cover investments made in municipal bonds.

Further relaxation for offshore funds with Indian managers

  • Relaxations proposed to the conditions exempting creation of a taxable presence of an offshore investment fund in India due to an Indian fund manager, in relation to computing 5% participation of Indian residents in the fund in the first 3 years and extension of period for meeting the monthly average corpus requirement of INR 100 crores in the first 12 months. This is yet another set of relaxations hoping to make this regime a feasible and attractive one for offshore funds.

Indirect transfer exemption amended as per new FPI Regulations

  • Investments by non-residents in erstwhile Category I and II FPIs under the SEBI (FPI) Regulations, 2014 to be grandfathered for exemption from indirect transfer provisions.
  • Category-I FPI under the SEBI (FPI) Regulations, 2019 now exempt from tax under indirect transfer provisions.

TCS applicable on LRS remittances

  • Authorised dealers receiving INR 0.7mn or more in aggregate in a financial year for remittance outside India through LRS, liable to collect TCS at 5% (10% if PAN/Aadhaar not provided), subject to conditions.

In case of any clarification or queries regarding any of these pronouncements or other related issues, write to us at [email protected] or kindly get in touch with

Samir Sheth
Partner & Head /Deal Advisory Services
Leader / Private Equity
[email protected]
Pranay Bhatia 
Partner & Leader
Tax & Regulatory Services
[email protected]
Priya Rohira
Director
Private Equity
[email protected]