India - Snapshot Of Union Budget 2019.
Legal News & Analysis - Asia Pacific - India - Tax - FDI
15 July, 2019
The Indian General Elections have concluded in May 2019 and the NDA Government under the stewardship of Hon'ble Prime Minister Narendra Modi emerged victorious continuing into its second term in power.
The Union Budget 2019-2020 (Budget 2019) was presented by the newly appointed Finance Minister Nirmala Sitharaman on the floor of the Indian Parliament on July 5, 2019.
Enclosed below is the Snapshot of Budget 2019.
1. Government to consider further liberalizing foreign direct investment (‘FDI’) in aviation, media, and insurance sectors in consultation with stakeholders
2. 100% FDI to be permitted for insurance intermediaries
3. Local sourcing norms to be eased for FDI in Single Brand Retail sector
4. Increase in statutory limit for foreign portfolio investment (‘FPI’) in a company from 24% to permissible sectoral foreign investment limit
5. NRI portfolio investment scheme to be merged with FPI route in order to facilitate NRI investment in Indian capital markets
6. Existing KYC norms for FPIs to be rationalized and simplified to make it more investor-friendly
1. Government will provide short-term partial credit guarantee for the purchase of high-rated pooled assets of NBFCs for a total amount of INR 1 trn (c.USD 15 bn). This guarantee will be provided via public sector banks for the first loss of up to 10%.
2. Government will provide short-term partial credit guarantee for the purchase of high-rated pooled assets of NBFCs for a total amount of INR 1 trn (c. USD 15 bn). This guarantee will be provided via public sector banks for the first loss of up to 10%.
1. It is proposed to increase MPS for listed companies to 35% from the current 25% i.e., the promoters can’t hold more than 65% - down from the extant limit of 75%.
2. Being a proposal, the suggestion has been made to the Indian securities market regulator, Securities and Exchange Board of India (‘SEBI’), which would consider it in the coming days. This is likely to trigger a selling spree in the Indian equity markets in near term.
1. No change in personal income tax rates for individuals, trusts, association of persons. However, surcharge rates for said persons have been increased as follows:
a. for annual taxable income between INR 20 mn (c.USD 0.30 mn) to INR 50 mn (c.USD 0.73 mn), surcharge has been increased from 15% to 25% on the income-tax amount
b. for annual taxable income exceeding INR 50 mn (c.USD 0.73 mn), surcharge has been increased to 37% (on income tax amount)
Increase in surcharge rates on income-tax (without changing income tax slabs/rates) meant to effectively increase overall tax incidence on higher income groups by marginal amounts [3% overall increment for said persons with taxable income between INR 20 mn (c.USD 0.30 mn) to INR 50 mn (c.USD 0.73 mn) and 7% increment for taxable income exceeding INR 50 mn (c.USD 0.73 mn)].
A significant number of FPIs using trust route (ie non-corporate route) for investment in India are also likely to be impacted by the increase in tax amounts due to hike in surcharge rates. However, majority FPIs using the corporate structure for investing into India not impacted.
2. 25% corporate tax for companies having annual turnover of up to INR 4,000 mn (c.USD 58mn) instead of earlier limit of INR 2,500 mn (c.USD 37mn).
3. Tax deduction at source (‘TDS’) @ 2% on cash withdrawals exceeding INR 10 mn (USD 0.15 mn) in a year from a bank account.
4. Proposal for Legacy Dispute Resolution Scheme to allow quick closure of litigations in the area of service tax and excise.
5. Definition of ‘demerger’ for income-tax purposes relaxed to accommodate Indian Accounting standards (‘Ind-AS’) treatment which requires resulting companies to record the property and the liabilities of the ‘demerged undertaking’ at a value different from the book value of the demerged company.
6. Buy-back tax at 20% for listed companies as well as well – at par with tax on buy-back of shares undertaken by unlisted companies. The step is taken to discourage the practice of avoiding Dividend Distribution Tax (DDT) through buyback of shares by listed companies. Shareholders, nevertheless, would be specifically exempt from tax qua amount received on buy-back since tax incidence is now on the company.
An Indian company distributing/declaring dividend from its distributable profits to shareholders would need to pay DDT (@ c. 17.5%) on the dividend amount. Earlier buy-back of shares by listed companies was subject to only capital gains tax in hands of recipient shareholders who tendered their respective shares for buy-back @ 10% (plus applicable surcharge and cess) and this meant overall lesser tax outflow as compared to dividend declaration option by listed company.
7. Eligible startups (qualifying as such under income tax notification)
a. No scrutiny from tax authorities qua valuation of share premiums subject to KYC verification and required documentation
b. For eligible start-ups incorporated as privately held companies, relaxation of norms for carry forward of losses for income tax purposes in the event of change of shareholding
c. Relief for certain categories of investors in eligible startups - Eligible startups to be exempt from fair market valuation checks from income tax qua issue of shares to Category II - Alternative Investment Funds (‘AIFs’) as well – earlier issue of shares to venture capital company/fund, certain listed companies, non-residents and Category I – AIFs were only exempt from fair market valuation checks
8. Tax incentives for units located in international Financial Services Centre (‘IFSC’)
a. Enhanced deduction of full 100% of profits for any 10 consecutive years out of 15 years instead of earlier 100% deduction for first 5 consecutive years and 50% deduction for next 5 consecutive years
b. Tax exemptions for interest income received by a non-resident in respect of monies lent by him/it to a unit located in IFSC
c. Exemption from capital gains tax while transferring units – for non-resident unit-holders of Category III – AIFs in IFSC, provided all unit-holders thereof are non-residents
d. Extension of exemption from Dividend Distribution Tax (‘DDT’) w.r.t dividend distribution by a company located in IFSC if the same is distributed even out of accumulated profits – earlier this exemption was only w.r.t dividend out of current income and not accumulated profits
e. Mutual funds located in IFSC also exempt from payment of any additional income tax w.r.t distribution of income to unit-holders
9. Tax deduction at source (‘TDS’) @ 2% on cash withdrawals exceeding INR 10 mn (USD 0.15 mn) in a year from a bank account
10. It is proposed to allow pass through of losses in cases of Category I and II AIF similar to pass through of income which is allowed at present
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law