With a large and expanding economy, favorable demographic profile, and untapped potential, India is emerging as a prime destination for foreign investors. The International Monetary Fund is bullish on the Indian economy, even amid the turmoil of a global recession. The Indian Budget 2023, presented by Minister of Finance Nirmala Sitharaman on Feb. 1, has therefore become an important event for the global business and investing community, as it showcases the economic as well as social priorities of one of the world’s largest and fastest-growing economies.
Here are a few key highlights from this budget for foreign investors to consider.
Angel Tax Ambit to Include Nonresidents
The “angel tax” (Section 56(2)(viib) of the Income Tax Act, 1961) was an anti-abuse measure inserted in 2012 to prevent the laundering of unaccounted money via investments into unlisted companies.
Angel tax is basically applied on the capital raised via the issue of shares by unlisted companies to an investor if the share price is seen as in excess of the fair market value of the company. In other words, if a privately held company issues shares to Indian resident investors at a particular price that is greater than fair market value, the amount received in excess of the fair market value will be considered as income from other sources for the company and taxed accordingly. Currently this law is applicable on capital raised from resident investors and wasn’t applicable to investments by nonresidents. With the revisions proposed in the budget, the government is expanding specific anti-abuse provisions and bringing nonresident investors within the ambit of Section 56(2)(viib) of the Act.
The budget also proposes to include foreign investors under the ambit of angel tax. This is expected to have far-reaching implications for the thriving Indian startup ecosystem, as a majority of the funds are raised from overseas investors. This will mean a reduction in net funds in capital raised, and valuation implications.
Moreover, any investment by a nonresident in the form of equity or preference in a domestic company will now require an income tax valuation report from a merchant bank, and the investment should be made at a value less than or equal to the fair market value of the shares of the domestic company, to avoid tax implications.
GIFT City Updates
The Gujarat International Finance Tech City is India’s first and only international financial services center. GIFT City is a central business hub with world-class infrastructure and the first of its kind as a self-contained, fully operational smart city in India. It is home to domestic and international companies in the financial services and information technology and information technology enabled services sectors.
In the 2023 budget, the government is proposing to streamline regulations relating to IFSCs. Currently, the Special Economic Zones Act 2005 deals with laws related to establishing, and arbitrating cases in, IFSCs. The government is considering transferring regulatory authority and arbitration services from the SEZ Act to the IFSC authority, to avoid dual regulations.
It is also proposed to set up a digital single window for registration and approval from the IFSC authority, SEZ authorities, Reserve Bank of India, and the Securities and Exchange Board of India, to reduce the compliance burden. There are also proposals to encourage sectors such as aircraft and ship financing to use GIFT City.
All these measures will go a long way in making it easier to do business in the IFSC and increasing its global competitiveness.
Income Tax Regime
The budget gives a boost to the growing base of middle-class taxpayers. The threshold for taxable income has been raised to 700,000 Indian rupees ($8,500), and the number of tax slabs has been rationalized. Specific reliefs have been offered to salaried and pensioner taxpayers, and a new income tax rebate framework has been introduced for individuals to channel more investment into the health and life insurance industries. The thrust of these measures is to place more resources in the hands of citizens and, over time, to increase the taxpayer base.
India has one of the highest effective income tax rates for high-income earners, at 42%. The rate of surcharge is proposed to be reduced from 37% to 25%, and accordingly, the highest tax rate for incomes above 50 million rupees would be 39%, as opposed to 42.73%. This will increase the investible surplus in the hands of high-earning individuals.
However, there is no noticeable change for global corporations, which was highly anticipated from the budget.
Trivial Relief for Startups
On one hand, the Indian government has expanded angel tax on startup investments by nonresident investors, as mentioned above.
On the other hand, some minor reliefs have been put forward:
- an increase in the carry-forward of losses due to change in shareholding, to 10 years from seven years; and
- an increase in the period of incorporation to qualify for Inter-Ministerial Board registration by one year, so startups incorporated between April 1, 2016, and April 1, 2024, can qualify for IMB registration.
However, note that changes announced in the 2023 budget for Indian startups will only apply to the approximately 800 IMB-registered startups.
With the Indian general elections coming in 2024, this is a “classic” pre-election safe budget with no structural or significant changes in the tax regime. Although short on specifics for foreign investors, the government has made ambitious declarations to further open up the economy, simplify the tax regime, and create an enabling environment for businesses to thrive.
These reforms have the potential to unleash a fresh wave of investment and spur a new era of growth and prosperity in India. There are major policy moves—a 33% hike in the government’s capital investment on infrastructure, promoting technology and digitalization, a boost to the aviation sector by adding additional airports and aerodromes, centers of excellence for AI in top educational institutions, and avenues for creating more employment opportunities. Likewise, there are specific spend allocations for green growth, inclusive development, skills development, and modernizing the agricultural sector.
In her speech, the finance minister shared her budget’s vision to steer the economy over the “Amrit Kaal” (golden era) for the next 25 years, underpinned by technology drivers, a knowledge-based economy, strong public finances, and a robust financial sector. For foreign investors looking to diversify their portfolio and tap into the world’s fastest-growing market, this budget hits all the right notes.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Anshu Khanna is a partner with Nangia Andersen LLP, a member firm of Andersen Global.
The author may be contacted at: email@example.com
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