Union Budget 2020 - Breaking it down for Foreign Investors

PREFACE

Last Friday, our Hon’ble Finance Minister (FM), Nirmala Sitharaman, tabled the Economic Survey 2020 in the Parliament for the fifth largest economy in the world. The Union Budget was presented the following day amidst high expectations of big-bang reforms to bring the economy out of the slowdown and back onto the track of becoming a $5 trillion economy by 2025.

Explaining the color of the folder that contained the Economic Survey, the Chief Economic Adviser, Krishnamurthy Subramanian, said that the color was chosen to depict blending of the old and the new, be it in the combination of ancient Indian tradition with contemporary evidence or in suggesting the use of FinTech for Public Sector Banks.

The overarching theme of this year’s Economic Survey was ‘ethical wealth creation’ with emphasis on entrepreneurship at the grassroots, pro-business policies that unleash the power of competitive markets to generate wealth for the country as against ‘pro-crony’ policies that may favor incumbent private interests.

Continuing to rely upon behavioral economics to bring about investment and savings, the Survey took an interesting take on explaining affordability through the concept of ‘Thalinomics’ – what a common man pays for a thali (plate of food) across India. The Survey revealed that the affordability of vegetarian thalis has improved by 29% while that for non-vegetarian thalis improved by 18% from 2006-07 to 2019-20. As a result, an average household of five individuals that eat two vegetarian ‘thalis’ a day, gained around ₹10,887 (~$156), on an average per year, while a nonvegetarian household gained ₹11,787 (~$168), on an average per year.

INDIA’S ECONOMIC SNAPSHOT

  • Country’s Gross Domestic Product (GDP) growth stood at 5% in 2019-20 as compared to 6.8% in 2018-19. The projected GDP growth rate for 2020-21 is in the range of 6-6.5%
  • India’s Foreign Direct Investment (FDI) inflows in 2019-20 remained strong. The country attracted a net FDI of $24.4 billion during the period April-November 2019 as compared to $21.2 billion during April-November 2018
  • Along with the weakening of global economic activity, inflation the world over also remained muted in 2019. In India, inflation rose to 4.1% in April- December 2019, after a sharp decline from 5.9% in 2014 to 3.4% in 2018. However, in December 2019, the headline inflation rate stood at 7.35% due to a temporary increase in food inflation, which is expected to decline in the near future
  • Fiscal deficit target for 2019-20 is estimated at 3.3% of GDP vis-à-vis 3.4% for 2018-19
  • As per the latest available data on employment, there has been an increase in the share of formal employment, as captured by ‘regular wage/salaried’, from 17.9% in 2011-12 to 22.8% in 2017-18

KEY STRATEGIC ANNOUNCEMENTS IN UNION BUDGET 2020

Union Budget 2020 - Key Highlights & Takeaways

A. Aspirational India

  • Confirmation that the new National Education Policy that promises to bring about major changes in school as well as the higher education sector will be announced soon.
  • Steps to be undertaken to enable External Commercial Borrowings and promote FDI in education sector so that greater inflow of finance can be made available to the sector to attract talented teachers, innovate and build better labs.
  • Around 150 higher educational institutions to start apprenticeship embedded degree/ diploma courses by March 2021 for general stream students (vis-à-vis services or technology stream)
  • Proposal to allow institutions ranked within the top 100 National Institutional Ranking Framework to start degree level full-fledged online education programme. Initially, only a few such institutions would be asked to offer such programme. The aim of this proposal is to provide quality education to students of deprived section of the society as well as those who do not have access to higher education
  • Under ‘Study in India’ initiative, Ind-SAT proposed to be held in Asian and African countries. It shall be used for benchmarking foreign candidates who receive scholarships for studying in Indian higher education centers
  • A National Police University and a National Forensic Science University are being proposed in the domain of policing science, forensic science, cyber-forensics, etc.
  • Recognizing the huge demand for Indian teachers, nurses, paramedical staff and care-givers abroad as well as the gap in skill sets needed to meet the employer’s standards, it is proposed that special bridge courses will be designed by the Ministries of Health and Skill Development together with professional bodies to bring in equivalence. Language requirements of various countries will also be kept in mind while designing the courses.

B. Economic Development

  • India to host G20 Presidency in the year 2022.
  • Proposal to set up Investment Clearance Cell for entrepreneurs to provide pre-investment advisory, information related to land banks and facilitate clearances at Centre and State level. This will be done through a portal.
  • In order to facilitate seamless application and capture of Intellectual Property Rights (IPRs), a digital platform is proposed to be introduced. Further, an Institute of Excellence will be established as a center to work on the complexity and innovation in the field of IPRs.
  • Gujarat International Finance Tec-City (GIFT City), India’s first operational smart city and International Financial Services Centre (IFSC), to set up International Bullion exchange as an additional option for trade by global market participants.
  • The limit for Foreign Portfolio Investors (FPIs) in corporate bonds will be increased from 9% to 15% of the outstanding stock of corporate bonds
  • A scheme is proposed to be introduced that would focus on encouraging the manufacture of mobile phones, electronic equipment, and semiconductor packaging. Details of this scheme will be announced at a later date. With suitable modifications, the scheme is proposed to be adapted for the manufacture of medical devices as well.
  • The Government of India to sell a part of its holding in the state-owned Life Insurance Corporation (LIC), by way of Initial Public Offering (IPO). This big dis-investment move gives a peek into Government’s strategy to generate funds from alternate sources.
  • Announcement of accelerated development of highways including the development of 2,500 km access control highways, 9,000 km of economic corridors, 2,000 km of coastal and land port roads and 2,000 km of strategic highways. Delhi-Mumbai Expressway and two other packages would be completed by 2023. Chennai-Bengaluru Expressway would also be started soon.
  • Scheme for reversion of duties and taxes on exported products to be launched this year. The scheme will support digital refunding of duties and taxes levied at the Central, State and local levels, such as electricity duties and Value Added Tax (VAT) on fuel used for transportation, which is not getting exempted or refunded under any other existing mechanism available to exporters.
  • Proposal to bring out a policy that enables the private sector to build Data Centre Parks throughout the country. It will enable companies to skillfully incorporate data in every step of their value chains.

C. Caring Society

  • Keeping the promise of sustainable development made through the Nationally Determined Contribution (NDC) under the Paris Agreement in 2015, an advisory will be issued to operators for shutting down of thermal power plants that have emissions above the pre-set norms.
  • Ministry of Environment, Forests and Climate Change to notify incentives for States that are formulating and implementing plans for ensuring cleaner air in cities with a population of over a million people.
  • Proposal to establish Indian Institute of Heritage and Conservation under Ministry of Culture, Government of India.

KEY TAX PROPOSALS

The proposals announced in the Budget were aimed at promoting the following agenda points of the Government:

  • Digital economy
  • Ease of doing business
  • Promoting entrepreneurship

The key tax proposals announced by the Finance Minister are as under:

A. Corporates

  • It is proposed to abolish the Dividend Distribution Tax of 20.56%. The same will now be taxable in the hands of shareholders (residents as well as well non-residents) at the rates applicable to them
  • A non-resident receiving income in the nature of Royalty and Fee for Technical Services need not to file a return of income in India provided the applicable tax has been withheld
  • Income tax return due date for assessee not liable to file Transfer Pricing Report changed from existing September 30th to October 31st
  • Further due date for various forms such as tax audit report, Minimum Alternate Tax (MAT) certificate, Transfer Pricing Report etc. has also been changed to one month prior to the due date of filing of its Income tax return.
  • Turnover threshold for tax audit increased to ₹50 million (~$714,000) from ₹10 million (~$140,000) for businesses carrying out less than 5% business transactions in cash
  • E-penalty scheme and faceless appeal scheme to be launched in line with faceless assessments.
  • Income Tax Appellate Tribunal (ITAT) to grant a stay of demand or extension of stay subject to the condition that the assessee deposits 20% tax, interest, and penalty or furnishes equivalent security
  • Tax exemption provided to certain sovereign funds for income in the nature of interest/ dividend/ long term capital gain with regard to debt or equity investment subject to fulfillment of prescribed conditions.
  • Determination of profit attributable to a Permanent Establishment (PE) in India brought under Advance Pricing Agreement (APA) and SafeHarbor rules.
  • New direct tax amnesty scheme introduced under which the taxpayer can pay 100% of the disputed tax by March 31st, 2020 to get a complete waiver of interest and penalty. Opting this scheme post-March 31st will require payment of additional amount over and above the disputed tax

B. Withholding Tax / Tax Collected at Source

  • Withholding tax rate for payment of fee for technical services to resident reduced from 10% to 2%. No change in withholding tax rate for professional fee payment
  • Lower withholding tax rate of 5% specified under section 194LC and 194LD of the Income Tax Act, 1961 on interest payable to specified foreign investor with regard to specified investment extended upto June 30th 2023
  • Following new provisions introduced:
    • An e-commerce operator is required to withhold tax @ 1% on payments made to participants selling goods or providing services through the e-commerce platform; 
    • An authorized dealer bank to collect tax @ 5% in case of foreign remittance under liberalized remittance scheme (applicable to resident individuals) of amount in excess of 0.7 million (~$10,000);
    • A tour operator to collect tax @ 5% on sale of overseas tour packages;
    • A seller that has turnover in excess of 100 million (~$1.4 million) to collect tax @ 0.1% on consideration received for sale of goods in excess of 5 million (~$70,000) from a buyer during a year

C. Not-for-profit Organisations

  • The tax exemption registration of existing charitable organisations registered as tax-exempt entities will become inoperative from June 01st, 2020. They need to re-apply under the new provisions to make the registrations operative. New registrations to be valid for 5 years only
  • Fresh applications by organisations for tax-exempt status to be disposed of by granting a provisional registration for 3 year period. Thereafter, application for proper registration can be moved within six months of starting activities or six months prior to the expiry of provisional registration, whichever is earlier. This is also applicable to pending applications
  • Entities registered under section 80G to file in prescribed manner details of donations received. The deduction for eligible donations to a donor to be allowed only if a statement in respect of such donation is furnished by the not-for-profit entity. Delay in filing such a statement shall attract late fees and penalties. This provision has also been extended to research associations, universities, colleges as well as institutions receiving funds for scientific research.

D. Individual Tax

  • New optional tax regime with lower slab rates introduced for individuals. However, to avail the new scheme, individuals have to give up all available exemptions and deductions.
  • The condition for determining tax residency for individual/HUF has been modified. They are as below:
    • The period of stay in India triggering residency for an Indian citizen or a Person of Indian Origin who being outside India comes on a visit to India reduced from 182 days to 120 days;
    • An Indian citizen would be deemed to be an Indian resident if such individual is not liable to tax in any other country or territory;
    • A resident individual shall be considered not ordinarily resident in India if the person is a non-resident in 7 out of 10 previous years.
  • The aggregate of employer contribution towards provident fund, superannuation fund and national pension scheme in excess of 0.75 million (~$10,500) is proposed to be taxed as perquisite. Further, annual accretion (interest, dividend or other income) to the extent it relates to the above taxable contribution also to be treated as a taxable perquisite.

E. Other key income tax proposals

  • While calculating Long Term Capital Gain (LTCG) in respect of the transfer of land or building or both which was acquired prior to April 01st, 2001, cost of acquisition shall be the stamp duty valuation as on April 01st, 2001 or actual cost of acquisition, whichever is higher
  • Relief given to start-ups registered with Department for Promotion of Industry and Internal Trade (DPIIT) with regard to taxation of Employee Stock Option Plans (ESOPs) issued to employees as well as relaxation of provisions relating to tax holiday benefit given to such start-ups

F. Goods and Service Tax

  • The Finance Minister has emphasized that the new simpler return filing mechanism will be introduced from April 01st 2020 along with various other simplification measures.
  • Penalty and prosecution provisions also made applicable to person facilitating or retaining benefit of a fraudulent transaction
  • Penalty and prosecution provisions have been made more stringent in case of passing on or availing fraudulent input tax credit.

REMARKS

Overall, the budget has received mixed reactions from the public. Though the Government has made multiple announcements focused on ease of doing business, better healthcare, boosting infrastructure, considering the tight fiscal space in which the Government is operating, the Finance Minister has done a good job. We hope that the announcements made will go a long way in bringing foreign investment in India and steer the economy back on its growth path.

What needs to be seen now is how fast the Government manages to implement the proposals announced once the same is passed by both the Houses of Parliament followed by the approval of the President of India.

“This budget saw the Indian government’s “Make in India” ambition and accompanying protections for making it successful, come in direct conflict with the adoption of low-cost cleaner technologies that are needed to power a competitive domestic manufacturing sector.Both renewable energy and electric vehicles will become more expensive after yesterday’s budget, making India Inc less competitive. India’s safeguard duty on solar panels, which has been in effect from July 2018, has not yet resulted in any new manufacturing capacity investment. The government now hopes that adding on a Basic Custom Duty (BCD) of 20% will help change the situation. This is in the context of an ongoing global oversupply of solar panels.However, due to its limited local domestic manufacturing capacity that is unlikely to increase anytime soon, India will still need to import solar panels to meet its targets. This is likely to lead to an increase in renewable power tariffs. The increased tariffs on companies looking to import components for assembly of electric vehicles in India will similarly act as a dampener of new electric vehicle launches.We hope that the money collected from tariffs and duties can be re-invested in strengthening the renewable and EV sectors through other policy or infrastructure investment measures so that it doesn’t act as an undue tax on going green.”

Joe Phelan, Director, WBCSD India (a part of World Business Council for Sustainable Development)

“The budget has been presented in the backdrop of an economy facing a slowdown. No major solutions were announced but moderate measures were introduced to gradually revive the economy. There is a focus on attracting foreign capital, with measures like abolishing DDT, easing of investment norms for sovereign wealth funds in the infra sector and easing of foreign ownership limits in corporate bonds. However, the changes to personal income tax rules are more of a mixed bag, with benefits of the new optional rates dependent on individual savings. Given the focus of growth, fiscal consolidation has taken a back seat, with a fiscal deficit much higher than the initial target. An ambitious disinvestment plan has been announced to supplement government revenues. For the development sector, renewal of 80-G and 12-A certification every five years will cause hardship. Overall, the budget did not introduce any major measures but the execution of the initiatives announced will be key in the coming year”

Arun Monga, Director, JSI R&T India Foundation

“The Budget for FY20/21 seems to have made an effort to have a balanced set of proposals in a difficult macroeconomic environment, though, at the same time, lacking any big ideas. In the context of education, the intent to allow India’s educational institutions to deepen the capital pool by promoting FDI and opening up the external capital borrowing route may help the education sector in India build the much needed academic and research capacity. These measures will likely open doors for overseas academic institutions to participate in India’s capacity-building endeavors in the academic arena.”

Faisal Beg, Director, University of British Columbia (India Office)

“I think while the idea for the government was to simplify taxes for individuals, the introduction of an added option to pay your tax without claiming any tax deductions has left people more confused than before, especially the salaried individuals.

The changes proposed in the dividend tax regime should go a long way in attracting foreign capital investments. I am happy to see that there is an emphasis on renewable energy and the government has plans to incentivize states that are working towards addressing the issue of air pollution.”

 Shipra Baranwal, Head of Member Satisfaction (Asia-Pacific), Ten Lifestyle Group

“The February 2020 Indian budget seems to have generated some genuine debate.  Early indications from the stock market suggest it didn’t go as far as some were hoping. From a foreign investor perspective, the removal of the dividend distribution tax is a good step forward for companies.  A boost in spend and focus on certain sectors will no doubt be welcomed by players in these sectors: infrastructure, defense, aviation, textiles, healthcare, and agriculture.  Clarifications in Education provide a more concrete route for foreign universities to partner in India.  Focus on single window clearance is always welcome and reflects a continuation of efforts to improve the process to set-up a business. As for the rest of the budget, it remains to be seen whether the various tax changes, etc. will adequately stimulate the economy; investors will be keeping a close eye.”

Ed Dixon, Group COO and Managing Director, Sannam S4

“The budget has made critical announcements for the farms and farmers through solarisation of farms, rationalisation of fertilisers usage, enhancing block and village-level storage capacities, enhancing cold supply chains for far-flung areas, expanding integrated farming systems-based approaches and integrating e-NAM with negotiable warehousing receipts (NWR). The budget intends to expand the scope of fishery sector, reduce disease burden in small ruminants to benefit the small and marginal households and double milk processing capacity by 2025. Also, expanding the SHG movement and assigning them responsibility for local food storage and security could play a critical role in doubling incomes for the farmer and landless households while ensuring food and nutrition security for all. Focussing on the water in the 100  water-stressed districts will be key towards farming-systems sustainability and ensuring the success of village water supply schemes. It will be interesting to see how the government implements the strategies outlined in the budget document.”

Bhaskar Mittra, Director, Cornell Education Research Foundation

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