The new Indian annual budget, outlined on 1 February by finance minister Nirmala Sitharaman, contains a range of tax reforms that will be welcomed by foreign businesses and fund managers, says Christian Lütkehaus , a partner at international law firm Pinsent Masons.
There are also ambitious plans to modernise transport infrastructure and boost the renewable energy sector in India giving rise for some interesting investment opportunities, he explains in the online briefing note.
The tax changes announced include plans to grant a tax exemption to sovereign wealth funds in respect of their interest, dividend and capital gains income from investments made in infrastructure in India before the 31 March 2024. The exemption will only apply if the investment is held for at least three years. The Indian government has the power to extend the exemption to other sectors too under the Finance Bill 2020.
A further change will see new power generation companies benefit from a reduced corporate tax rate of 15%. The move comes after the Indian government last year announced that newly incorporated domestic companies in the manufacturing sector would benefit from a 15% corporate tax rate where they start manufacturing by 31 March 2023. The corporate tax rate was also dropped from 30% to 22% for existing manufacturers.
“In order to attract investment in the power sector, it has been proposed to extend the concessional corporate tax rate of 15% to new domestic companies engaged in the generation of electricity,” according to an official summary of the budget announcement.
Change to dividend tax
In her budget speech, Sitharaman also announced plans to remove the dividend distribution tax (DDT) payable on the distribution of dividends. The Indian Ministry of Finance said the measure “will further make India an attractive destination for [foreign direct] investment”.
The Indian Ministry of Finance said: “Currently, companies are required to pay dividend distribution tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess, in addition to the tax payable by the company on its profits.
“In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, the finance minister has proposed to remove DDT, and adopt the classical system of dividend taxation, under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.”
Vinayak Kapur, research assistant at Pinsent Masons, confirmed that abolishing DDT will provide a significant benefit to foreign multinationals and equity investors with interests in India. “Not only will the change reduce a foreign investor’s dividend related tax liability from effectively 20.56% to the level provided under the applicable tax treaty, which is anywhere between 5% to 15%, it also solves the problem of non-availability of DDT credit in most foreign investors’ home countries,” he said.
