India Budget 2021—What Multinationals Are Expecting

As marked out by the World Bank, India, despite facing recession and the pandemic, has made noteworthy progress in its ranking for ease of doing business. India advanced from its ranking of 130th in 2016 to 63rd in 2020. However, businesses in India still face impediments in conducting their operations due to tedious procedural compliances and requirements. Consequently, India attracts a smaller share of foreign direct investment (FDI) as compared to other growing economies.

It is therefore anticipated that the government would propose a slew of reforms to attract more FDI. The government may introduce new sectors for FDI or initiate reforms, particularly in the manufacturing sector to foster India as a global low-cost manufacturing hub. Also, India’s vast reservoir of skilled manpower is a distinct advantage. Therefore, a solution that leverages the wide availability of human capital is more likely to succeed in the context of the Atmanirbhar Bharat strategy of the government of India.

In the insurance industry, FDI is currently permitted only up to 49%. Besides, not many Indian joint venture partners (JV) are keen on infusing additional funds, particularly owing to the long gestation period. Likewise, existing foreign insurance groups are also reluctant to further infuse funds as they do not have majority control and ownership over the Indian operating entities owing to the laws that require Insurance companies to be Indian owned and controlled. Last year, the government permitted 100% FDI in insurance intermediaries such as corporate agents or third-party administrators. In the times ahead, to bring better technical know-how and innovation in the industry, the government is expected to enhance the FDI limit to at least up to 74% with a dilution of the requirement of “Indian controlled.” Also, foreign reinsurance branches grapple with several issues with regard to withholding of taxes, repatriation of dividends, etc. It is also imperative on the government’s part to provide an unambiguous, transparent, and stable law and taxation framework to induce FDI in the industry.

Whereas in the multi-brand retail trading industry, FDI up to 51% is permitted subject to stipulated riders such as minimum investment of US$ 100 million. Since the minimum investment requirement is significantly high at US$ 100 million, foreign investors in this sector seek complete ownership and control of branded stores in India. Given that all other forms of retail trading (food retail, single-brand retail trading, e-commerce marketplace) have been liberalized to 100%, the government must look into enhancing the FDI limit to 100% in this sector as well.

The MNEs in the automobile industry too, need minimum trade restrictions for expanding their operations in India. The recent introduction of Bureau of Indian Standards quality control orders (QCO) towards import of vital parts, namely, windshields, wheel rims, tires, brake parts have adversely and severely affected the luxury car segment. It is certainly not feasible to manufacture these parts locally due to lower economies of scale. Also, the short implementation timeline for QCO, rigorous test cycles, and certification requirements of global manufacturing make business operations ineffective. Certain measures such as eliminating the goods and services tax on luxury cars, exempting luxury car segment from QCOs, and allowing availment of the income tax credit without restrictions of time limit will boost FDI in the automobile sector.

The upcoming budget should also unfold economic reforms for foreign banks including the much-needed level playing field in tax structure for domestic and foreign banks and relaxations around local governance structure for foreign banks operating in India. To empower foreign banks to more deeply engage with MNEs, there is a need to widen the definition of Priority Sector Lending sectors. Internationalization of domestic debt markets by introducing reforms that enable Indian bonds to be added to global indices will also attract significant FDI.

While distributing dividends to foreign portfolio investors, Indian companies withhold tax at prevailing domestic rates and pass on the balance amount to overseas investors. Being non-residents, FPIs can also avail the benefit of a lower or nil withholding tax rate on dividend and interest prescribed under the bilateral tax treaty. However, Indian companies are not permitted to do so under the domestic tax laws. Thus, FPIs seek a refund of surplus tax withheld by corporations, while filing their annual income-tax returns in India. Budget 2021 is expected to bring changes in domestic tax laws enabling Indian corporates to apply tax treaty rates while withholding tax on payment of dividend and interest to FPIs.

Owing to the Covid-19 pandemic, the government was swift to recognize and provide relief to the tax residency-related conditions for stranded individuals for the year ended March 31, 2020. While the government also stated that suitable relief would be provided for the year ending March 31, 2021, no such relief has been pronounced until now. The relief—which may be in the form of exemption for a part of the year (say up to July/September) for all stranded individuals—might also be pronounced in the awaited budget. Further, MNEs have allowed their employees to work from their home country indefinitely due to the ongoing Covid pandemic. Pertinently, clarification is expected from the Indian government as to whether for such MNEs there would be a permanent establishment created in the home countries of employees and taxes would be required to be paid by MNEs.

A convergence of global forces has resulted in substantial increase in the number and size of tax audits, assessments, and disputes with revenue authorities worldwide. MNES are under constant competitive pressure to structure their worldwide business operations effectively and efficiently. In India, tax litigation numbers, pendency, and resolution times are significantly very high when compared to other countries. The income tax dispute resolution mechanism in India is multi-layered and time consuming, which affects the environment for doing business in India. The recently introduced faceless e-assessment program, the faceless appeals program, the faceless penalty program, and the Taxpayers’ Charter are transformational initiatives, expected to bring in greater efficiency, transparency, and accountability in tax administration.

However, the Taxpayers’ Charter mandates that an assessee’s request for a personal hearing is possible only with the approval of the Chief Commissioner or Director General of Income-tax, and if it is covered within certain (yet to be) prescribed circumstances. This creates a detrimental impediment, particularly in cases of cross-border taxation or interpretation of tax treaties where in person interactivity becomes imperative to assert important aspects upon the tax authorities. To provide an effective framework for allowing international investors to mediate their complex tax disputes within the territory of India, the government should consider incorporating a permanent dispute resolution system with trained external specialists to be part of the “mediation process” allowing the tax regulator and assessee to work collaboratively to reach a mutually acceptable solution on a wide range of tax disputes within a definitive timeline.

India has the potential to be the manufacturing hub and key measures in the right direction can really boost the investment climate in the country.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Rakesh Nangia is chairman and Neha Malhotra is a director at Nangia Andersen LLP.