India Strives to Attract Foreign Investment in New Budget
March 10, 2015
The Indian government announced several changes to their tax code on February 28th as part of the 2015-2016 budget. Along with a corporate income tax rate reduction, the budget attempts to remove many impediments to foreign investment. These measures are part of Prime Minister Narendra Modi’s “Make in India” campaign, which aims to increase manufacturing in India.
To achieve the goal, the new budget calls for:
- A two-year delayed of the General Anti-Avoidance Rules (GAAR), which were slated to start on April 1st of this year. The delay is one year less than the three-year delay recommended.
- Procedural changes in the courts, which includes updated bankruptcy rules and faster dispute resolution of public contracts.
- A restriction in the scope of the retrospective tax, an indirect transfer tax on the sale of Indian assets.
- Extending pass-through status to specific investment funds and modifies the permanent establishment rules for fund managers.
- An increase in the application amount of Advance Pricing Agreements (APA) from 50 million rupees (~US$810,000) to 200 million rupees (~US$3.25 million).
- A reduction of custom duties on raw materials and intermediate goods.
- Abolishing the patchwork of federal and state indirect taxes in favor of a unified goods and service tax (GST).
- Replacing the 1% wealth tax with a 7% surtax on income for companies with incomes between 10 million rupees (~US$163,000) and 100 million rupees (~US$1.63 million).
- A phased reduction of the corporate income tax rate from 30% to 25%. For companies within the surtax range, the effective tax rate is 32%.
Many of the changes in the 2015 budget were recommendations from the Tax Administration Reform Commission (TARC), which was set up by the previous government in 2013. The TARC focused on lowering compliance cost for companies and streamlining tax disputes in the courts as a means of promoting foreign investment and economic growth.
These are much needed reforms according to the World Bank's Doing Business report, which ranks India as the worst of the BRIC countries to conduct business. India was ranked 142nd in the world for overall easy of doing business and 156th for its tax code.
Prime Minister Narendra Modi is hoping the tax provisions in the new budget, along with increased infrastructure spending, will fix many of the structural problems in the Indian economy. Modi has been touting that the “Make in India” push will propel the country from the projected growth rate of 6.5% to 8%.
Although this is a step in the right direction, there are concerns about how the provisions will be implemented and how to deal with a considerable backlog of transfer pricing agreements. Although markets are betting on India, it remains to be seen if Prime Minister Narendra Modi will realize the additional 1.5% growth.
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