India managed to attract a whopping $81.7 billion in foreign direct investment, or FDI, last year, the highest amount the country has ever seen. But India still needs much more investment, and so the government has an ambitious budget for the coming year, focusing on a major upgrade of India's infrastructure, the transition to a digital economy and clean energy, and making it easier and more profitable for foreign investors to do business.
Key proposals
These are some of the key proposals in the new budget that will affect how foreign investors and companies do business in India:
Taxes
1. No change in tax rates for companies
The income tax rates (including surcharge and cess) for companies (domestic and foreign), corporations and limited liability companies remain unchanged, including the rates for the Minimum Alternate Tax (MAT) and the Alternate Minimum Tax (AMT).
2. Repeal of favourable tax rate on dividends received from foreign subsidiaries
Currently, dividends received by Indian companies from their investments in foreign companies are taxable at a reduced rate of 15%. Moreover, under certain conditions, these companies can avail of a special tax deduction if the foreign dividend received is further distributed. Under the new budget plans, this favourable tax rate of 15% will be abolished and the foreign dividend received will be taxed at the ordinary corporate tax rates. The deduction for further distributions remains.
3. Tax benefits for producers and start-ups
Newly established manufacturing companies and factories can benefit from the preferential tax rate of 15 per cent (plus surcharge and cess) for one more year. The scheme will be extended until 31 March 2024. Start-ups that qualify for the so-called tax holiday benefits can also avail of them for one more year, until March 31, 2023.
4. Submission of updated tax returns
Previously, no changes could be made to a submitted income tax return, but with the new budget, this changes. To encourage voluntary tax compliance and filing of returns, taxpayers can file an updated tax return within three years of the end of the tax year, provided they pay additional taxes on undisclosed income. However, an updated tax return cannot be filed if it leads to a reduction in tax liability, a tax refund or an increase in the refund.
5. Changes in withholding tax
Under the Indian tax code, the value of any benefit or fringe benefit received by a taxpayer in the course of his business is taxable as business income. The Budget 2022, therefore, proposes the imposition of a 10% withholding tax on such benefits or favours, requiring the person paying or providing such benefits or favours to a resident of India to withhold such taxes.
6. International Financial Services Centre (IFSC)
In recent years, India has introduced various tax breaks for entities based in the IFSC to make it a global hub of the financial services industry. A tax exemption is now announced for non-resident income from offshore derivatives or over-the-counter derivatives issued by an offshore bank, income from royalties, and income from portfolio management services provided by the IFSC, subject to certain conditions.
7. Deadline for submitting the monthly GST declaration
The deadline for filing monthly GST returns by foreign companies is brought forward to the 13th of the month (previously it was the 20th).
8. Input tax credit (ITC)
Budget 2022 imposes additional restrictions on the application of the ITC under the GST laws, making taxpayers even more compliant.
The Indian tax system can become a real headache without the right local help. IndiaConnected has therefore put together this guide, which provides insight into the complex tax and financial system every CFO in India has to deal with, and which we can support you with at all times. From obtaining all necessary documents for your first export from the Netherlands to taking care of the entire back-office of your Indian entity, so you can always fully focus on your activities in India.
Export
1. Less benefit on import duties and more focus on Make-in-India
The new budget announces a phased review and partial elimination of nearly 350 duty exemptions to encourage companies to set up a manufacturing plant in India.
2. Special Economic Zones (SEZ)
To promote exports from India, the Special Economic Zones Act is being replaced by a new legislation that will bring the states together as partners in 'Development of Enterprise and Service Hubs'. The aim of these hubs is to improve cooperation between all major existing and new SEZs, make the best use of available infrastructure and increase export competitiveness.
The number of SEZs in India will also increase substantially in the coming year, with almost 40% of the approved SEZs yet to become operational.
Interesting opportunities for international companies in India
Defence
In the new budget, 25% of the 66 billion dollar defence budget will be made available for R&D in this sector by companies, start-ups and academia, providing opportunities to international players with innovative solutions. In addition, this investment is expected to create exciting opportunities for manufacturers in this sector based in India. In 2020, India changed its regulations for FDI in the defence sector and now allows investments of up to 74 per cent.
Healthcare
The Indian government is expanding the favourable tax regime for manufacturers in this sector, with the aim of stimulating, among other things, the production of pharmaceuticals and medical devices. It has also identified the pharmaceutical sector as one of the key growth sectors and is supporting the sector with favourable policy measures. However, in the budget it leaves out the R&D segment of this sector, which is a missed opportunity. 100 per cent FDI is allowed in almost all segments of the healthcare sector.
Digitalisation and technology
India's new budget shows the ambition to move towards a digital society and economy. As a result, almost every sector (digital currency, infrastructure focuses on EVs, e-passport, etc) will get a digital boost, creating significant direct and indirect opportunities for start-ups and companies, such as software, hardware and service companies. In the technology sector, 100 per cent FDI is allowed.
The Indian government also aims to boost the country's data centres and energy storage systems, charging infrastructure and battery systems. It wants to build a world-class data centre ecosystem by attracting investments from domestic and international players, thereby boosting this sector.
Agriculture
One of the sectors where the government is trying to make a big push for development is agriculture. A new fund has been announced that will support start-ups that lease agricultural machinery to farmers and provide companies with innovative, digital solutions to make their operations more efficient. Innovative solutions are also being looked at: such as using drones to help farmers with land registration. In the agricultural sector, 100 per cent FDI is allowed.
Are you curious about the specific opportunities that exist in the Indian market for your company or sector? Our local experts are ready to answer your questions.