India’s 2013 budget raises concerns among investors, companies

Proposed higher taxes in the 2013–14 budget proposed by Indian Finance Minister P. Chidambaram on February 28th have caused concern amongst foreign investors and companies in India. 

If approved, the budget would take effect April 1st 2013. The finance minister is proposing to increase government spending by 16%, to ₨ 16.65 trillion (about $300 billion).

Some of the tax proposals affecting businesses and investors include:

• 10% tax surcharge for domestic companies with taxable income over ₨ 100 million (about $1.8 million).
• 5% surcharge for foreign companies with taxable income over ₨ 100 million.
• 10% dividend distribution tax.
• 15% tax on dividends received by Indian companies from foreign subsidiaries.
• 20% withholding tax on corporate share buybacks.
• 10% tax surcharge for individuals with taxable income over ₨ 10 million (about $180,000).
• ₨ 2,000 (about $36) tax credits for individuals with income up to ₨ 500,000 (about $9,000).
• 15% deduction for firms spending more than ₨ 1 billion (about $18 million) on new plant or machinery over the next two years.
• Lower tax rate on securities transactions.
• New tax on non-agricultural commodity futures.
• Foreign direct investment treatment where foreign investors own a 10% or more equity stake in an Indian company.
• 6% customs duty on mobile phones costing more than ₨ 2,000.
• 30% excise duty on SUVs and certain large automobiles.
• Increased duty on imported luxury automobiles and yachts.
• 30% service tax on large and/or expensive homes.
• Increased limits for tax-free infrastructure bonds.
• Tax-exempt status for angel investor pools.
• Voluntary disclosure plan for defaulting service taxpayers.
• Set up a Tax Administration Reforms Commission.

The finance minister would also reportedly like to introduce a goods and services tax, which might be implemented as soon as 2014.

One goal of the budget is to avoid a ratings downgrade from global ratings agencies, and Moody’s Investors Services quickly signalled its approval, calling it a “step in the right direction,” according to The Times of India in a March 4th article.

Concerns

However, Indian stock markets fell on the day the budget was announced; the Bombay Stock Exchange Sensex benchmark index fell 1.52%, and the CNX NSE Nifty equity market index fell 1.79%. One item spurring the drop was concern by foreign investors about a proposal that appeared to give Indian tax authorities a greater ability to go after investors who benefit from income tax treaties. The provision says that a tax residency certificate, which exempts a foreign investor based in a country that has a double taxation treaty with India, “shall be necessary but not a sufficient condition for claiming any relief” under the treaty. Investors were worried that this means Indian tax authorities would cast doubt on the legitimacy of tax residency certificates.

Chidambaram quickly backtracked on this point, telling ET Now TV that the provision was “clumsily worded” and reassuring investors that the Indian government did not mean to question tax residency certificates’ legitimacy.

Others expressed disappointment with the budget as a whole. “The honeymoon is over,” Richard Iley, an analyst for the European bank BNP Paribas SA, wrote in a report on the budget. He complained that the budget finances increased spending with “populist tax hikes on the rich, a sharp pickup in disinvestment proceeds and, that old friend, implausible control of subsidy spending.”

Chartered accountant Mukesh Butani, chairman of BMR Advisors, based in Gurgaon, India, wrote in the Business Standard on March 1st that the message from the finance minister to high-income taxpayers is that they will just have to “grin and bear the additional surcharge of 10 per cent.”

Butani, however, applauded the proposal to create a Tax Administration Reforms Commission, which, he said, “is a positive move, and would go far towards overhauling India’s image among foreign investors in particular.”
 
—Alistair M. Nevius (anevius@aicpa.org) is CGMA Magazine’s editor-in-chief, tax.