UK: What You Need To Know About India's 2017-18 Budget

Last Updated: 16 February 2017
Article by Mahesh Kumar and Farhana Siddiqui
  1. India's 2017-18 Budget is mostly populist with a big focus on infrastructure and rural development. While some proposals seek to improve ease of doing business in India, certain key areas of difficulty and uncertainty will continue to bother global investors. Singapore based funds, MNCs and other corporations are one of the largest investors into India. They will be impacted by the Budget as well as other recent developments including the amendment of the India-Singapore tax treaty and new anti-avoidance rules. 
  2. On the positive side, the Budget provides further stimulus for India's shift from a cash to digital economy. The number of India's internet users are likely to double to 600 million in 2020. More than half of this will be located in rural areas where over 70% of India's 1.2 billion population resides. Global investors are betting on a fintech boom in India. Several Singapore based funds including Temasek have invested majorly into Indian fintech opportunities. With Singapore emerging as a regional fintech hub, there is immense scope for deploying fintech products in India, which will continue to be one of the fastest growing economies. 
  3. India is actively trying to create an environment for startups to flourish. The Budget proposes to expand some of the tax incentives provided last year including a lower corporate tax rate of 25% and a 3 year tax holiday within a block of 7 years. However, so far many startups have faced difficulties in claiming such reliefs. While tapping global markets, Indian startups can continue to explore synergies with Singapore which is recognized for its competitive tax and business friendly environment. 
  4. There is significant scope for Singapore to play an active role in supporting India's smart city mission which seeks to establish 20 smart cities nationwide. Singapore is already collaborating with the State of Andhra Pradesh for design of its new capital city, Amaravati. The 2017 Budget has announced additional tax reliefs for development of this city. 
  5. Investors can continue to explore debt based investments which are popular in sectors such as infrastructure and real estate construction. Debt investments are more tax efficient and the Budget has extended the lower 5% withholding tax rate to certain types of debt investments made till 2020. These bonds are long term and subject to certain conditions including ceiling on interest payouts. For most debt investments, the Indian tax rate can range between 20% to 40% and investors usually claim relief under a tax treaty. In this regard, Singapore is at a relative disadvantage since the treaty with India reduces the withholding tax rate to 10% as opposed to 7.5% which is offered in India's new treaty with Mauritius. The Budget also introduces a thin capitalization rule that limits the ability of Indian bond issuers to deduct interest payouts beyond 30%. 
  6. Singapore based investors will be impacted by the amendment to the India-Singapore tax treaty which removes the capital gains exemption for transfer of shares after April 1, 2017. Investments prior to this date will be grandfathered. Companies in Singapore claiming this exemption have to fulfil various expenditure and 'substance criteria'. Investors have to gear up for capital gains tax exposure arising after April 1, 2017 and many are considering appropriate restructuring to address this risk. 
  7. The Budget has finally confirmed the tax exempt status of conversions of convertible shares (CCPS) into equity shares. Most PE/VC investors prefer to invest into CCPS. However, there is need for clarity that the tax exemption under the Singapore-India treaty covers CCPS investments prior to April 1, 2017 even if they convert into equity shares after this date. 
  8. Some relief has been provided in relation to Indian taxation of overseas transactions leading to indirect transfer of Indian securities. This relief is limited to certain categories of foreign portfolio investors, while PE/VC funds and other investors are mostly excluded. Several funds and companies in Singapore risk such exposure in the course of redemptions, reorganizations or share transfers at an overseas level. 
  9. The Budget provides further relief to certain categories of overseas funds to promote fund management out of India without incurring tax risks. However, the safe harbour very narrow and there is still significant motivation for Singapore based funds to beef up their activities in Singapore. 
  10. While some guidance was recently provided in relation to residence of companies based on 'place of effective management' (POEM), there is still much uncertainty. Overseas subsidiaries of Indian companies risk being taxed in India based on POEM and business groups have focused on employing key decision makers overseas so that the companies are not controlled from India. Singapore has emerged as a key platform for Indian companies to globalize, thanks to the ease of doing business, proximity and ability to depute senior business leaders to Singapore. This is also visible from the increasing interest of Indian entrepreneurs in setting up family offices in Singapore. Matters of 'substance' and decision making in structures are also relevant once India's general anti-avoidance rules (GAAR) are implemented from April 1, 2017. GAAR will override all of India's tax treaties. Singapore's stability and reputation makes it a preferred choice for Indian MNCs and entrepreneurs expanding globally.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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