In recent times, the Centre has undertaken several steps to attract foreign investors and boost the Indian economy. By opening up and increasing Foreign Direct Investment (FDI) in several sectors it has unlocked the gate of opportunities. Through the Finance Act, 2020, it provided a reduced tax rate of 15 percent for new manufacturing units in order to provide a boost to the manufacturing sector. Taking this baton further, it is expected that the Union Budget 2021 will dole out several incentives to project India as a country, of immense opportunity. Here are certain tax proposals that could aid in attracting foreign investments.
Safe harbour rules
In order to bring tax certainty and reduce Transfer Pricing litigation, the Safe Harbour Rules were introduced in 2013. These rules provide the transfer price declared by an eligible taxpayer in respect of a specified transaction to be accepted by the revenue authorities, subject to fulfilment of specified conditions. While these rules were valid till the fiscal year 2018-19, its applicability was till FY 2019-20. The Budget should extend the validity of this Rule by at least two more years.
Further, due to the COVID-19 pandemic, businesses have been severely impacted and have seen a downturn. The parameters mentioned in these rules may not be applicable during these times. Hence, the Budget should also rationalise the parameters to bring them in line with the current economic situation.
The sudden lockdown resulted in several expats being stranded in India. With the extended lockdowns and restriction on international travel, stranded foreign nationals/non-residents were at risk of being regarded as Indian tax residents. To resolve this issue, the Central Board of Direct Taxes had issued a circular relaxing the period to be considered for computing the tax residential status. However, such relaxation was for FY 2019-20 only. With the travel restriction and lockdown spilling to FY 2020-21, the Budget should bring similar relaxations for subsequent years as well.
Place of effective management (POEM)
The overstay of an individual due to the COVID-19 induced lockdowns and restriction on international travel led to an exposure of foreign companies having a POEM in India if the overstaying individual happened to be a key decision-maker. Once a foreign company has a POEM in India, it is regarded as a domestic company for income tax. Since the overstay in India is not intentional but is forced by uncontrolled circumstances, the Budget should provide some relaxation for cases where the key decision-makers had to stay in India.
Cross border transaction
Indian companies are now transforming themselves to have a more global outlook. They are scouting for opportunities to expand their operations overseas. One of the ways for expanding the business is by way of acquisitions and mergers with offshore companies. While a merger of two Indian companies, subject to fulfilment of certain conditions, is tax neutral, a similar tax benefit is not available when one of the firms is not an Indian company. Hence, the Budget should introduce a provision to bring the merger of an Indian company and a foreign company within the ambit of a tax neutral merger.
In May 2020, the finance ministry announced that Indian companies will be permitted to list in overseas foreign exchanges. This is a welcome move as it will give more fund-raising opportunities to Indian companies. Currently, Indian listed companies enjoy certain tax benefits (say a change in management control will not result in a lapse of brought forward business losses). This Budget should extend the tax benefits/relaxations available to an Indian listed company to Indian companies listed on overseas foreign exchanges as well.
With the effect of the pandemic easing out in India and hope for a speedy revival, this Budget is expected to be a gamechanger. The finance minister’s announcement that this Budget will be a never like before one, has only doubled the expectations of citizens and businesses alike. While the government has taken steps to attract FDI, a tax certainty will increase the confidence of foreign players and hopefully, this Budget will address various concerns of foreign investors.