"What we can do is to encourage foreign investment that is consistent with our economic objectives... the growth rate of an economy is correlated with the investment rate and we will improve communication of our policies to remove any apprehension or distrust in the minds of investors, including fears about undue regulatory burden or application of tax laws"
- Finance Minister P Chidambaram, Union Budget speech 2013.
Investors across time zones were hopeful that there would be definitive steps to restore faith in investing in India. So, has Budget 2013 met the expectations of Foreign Institutional Investors (FII)?
The government did respond to the interest shown by FIIs in Indian debt markets and has promoted it by permitting FIIs to use investments in corporate bonds and government securities as collateral to meet margin requirements. This will provide an impetus to debt fund markets.
Further, allowing FIIs to participate in the exchange-traded currency derivative segment to the extent of their Indian rupee exposure in India is a step in the right direction.
Also, the Budget has proposed to remove ambiguity between Foreign Direct Investment (FDI) and FII. Incorporating international practices, it has been clarified that investors with a stake of 10 per cent or less in a company will be treated as FII and a stake of over 10 per cent will mean FDI.
The Securities Exchange Board of India (SEBI) will now simplify procedures for entry of foreign portfolio investors. The convergence of KYC (know your customer) norms and a risk-based approach to KYC will make it easier for foreign investors.
On the tax front, a key proposed change is on the Tax Residency Certificate (TRC). The TRC will now be a 'necessity' but 'not sufficient proof' to avail tax treaty benefits. This could result in litigation and may have an adverse impact on FIIs investing through favourable treaty countries, such as Mauritius.
In addition, the Finance Minister has imposed a tax of 20 per cent on an investor's gains from selling shares back to unlisted companies. Companies would use the buyback route to avoid Dividend Distribution Tax (DDT), instead of the paying dividend to investors.
From the taxation perspective, FIIs would have liked a clarification on limiting retrospective amendments and powers of tax officers, but the Budget was silent on the subject.
The Finance Bill 2013 has not done enough to regain lost investor confidence and upgrade global perception of India as a lucrative investment destination and has not provided the 'non-adversarial tax regime' that was promised.
ANISH MEHTA
National Head, Tax and Regulatory Services, BDO India
