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FM needs to relax foreign investments policies, have friendly taxation system: Deloitte  |  July 2, 2019

Hemal Mehta

Indian government should be cautious that global investors have other choices and if the policies and fiscal laws are not eased, the country may become a second choice destination for such investors


The fiscal budget under the new government and especially under the leadership of the new Finance Minister needs to focus on strengthening the financial services sector, which is a backbone of the industry and country's economic growth.


With India being an inbound foreign investment economy, it is imperative that the Finance Minister needs to consider relaxing the policies for foreign investments in India and also have a friendly fiscal system, especially on direct and indirect taxation that gives certainty to the investors.


Today, global investors do consider India as a growth market and prefer to invest in India. However, the Indian government should be cautious that global investors have other choices and if the policies and fiscal laws are not eased, the country may become a second choice destination for such investors. Having said this, certain key areas that can be priorities in the forthcoming Budget are discussed below.


1. The foreign investor needs to have the flexibility to invest, divest, and repatriate its funds in a tax efficient manner. There is a need to create foreign investment via a long-term debt instrument without any conditionality attached for end use.


2. The banking system needs to be supported by additional liquidity and address the current non-performing assets situation. The insolvency process needs to be more effective and quick as to revive the NPAs. The current process does not allow any stakeholder and investor to have a timely acquisition/resolution of such NPAs.


3. To boost the NPA resolution, the FM may consider to pull the NPAs together in a common pool and invite global investors to create a pool of funding and a PPP model for its resolution.


4. Most NBFCs are under a huge liquidity crunch, which has a direct impact on the economic activities resulting in financial pressure and slowing down of businesses. The FM along with support from RBI needs to create a professional panel to address the situation on a war footing. The NPAs of NBFC also need a solution as discussed for the banks above.


5. Prime Minister is focused on housing for all. Prime Minister AwasYojana (PMAY) will need to have a focus is this term. There are investors and developer community who are likely to participate in the said scheme, provided land acquisition and requisite approvals are obtained on time. It is imperative for the success of PMAY to have a single window approval system, irrespective of central and state regulations, and policies around that.


6. Affordable housing/compact housing (other than PMAY) is going to be the future of real estate in the country. To incentivise investment in the said sector, fiscal benefit can be offered such as tax incentive for developers, effective GST system (which can reduce the burden on end customer), minimal stamp duty levied by state, foreign debt funding in the said projects, non-applicability of thin capitalisation (BEPS Action Plan 4) regulations, etc.


7. Introduction of an alternate platform like REIT/INViT has been explored by certain players. However, the domestic investors are unable to foresee a real benefit due to the restricted asset class that it can invest in and limited players. FM may consider the benefits of merging two platforms to create a unique investment opportunity in real estate and infra assets. This will give fund managers a wider asset class to invest and manage a better return (higher than the government paper) to attract domestic and international investors.


8. The regulations of LLP has been introduced for easing out the operational and compliances issues faced by the SME sector. LLP options are explored by many start-ups like Fintech, IT/ITES, real estate development, etc. Foreign investment including debt and also local debt funding by banks and NBFCs should be permitted freely in the LLP. The regulations should be streamlined to have ease of operations for the SME sector.


9. There are few other fiscal benefits tweaks that can be considered by the FM. For example


a. Indirect transfer taxation applicability for foreign investors in certain cases like investments in AIF, REIT, INViT, group restructuring of overseas holding companies, etc.


b. MAT and DDT impact, which actually increases the overall tax cost due to non-availability of the credit against the home taxation.


c. Restricting interest deduction for funding raised from associated enterprises (group entities).


d. Deduction of bad debts in case of banks and NBFCs should be linked to the RBI guidelines on provisioning norms to avoid litigation on the same.


e. Impact of non-allowability of expenses related to tax-free income &ndash this issue is the most contentious issue and has created a plethora of judicial decisions. To boost the FS sector, this provision needs to be revamped completely for ease of planning and implementation.


(The author is Partner at Deloitte India.)