Assuaging foreign investors

Fund inflows from foreign portfolio and direct investors is critical for taking care of our external balance. With private investment activity drying up, inviting foreign capital is an imperative; and improving the ease of doing business is one way by which foreign capital can be attracted.

A major step aimed at improving the ease of doing business has been to scrap the Foreign Investment Promotion Board (FIPB). Over the years, the government has been increasing the number of sectors where FDI is allowed through the automatic route. With increased digitisation of the process for vetting applications for FDI applications, the time appears right to do away with this body. The government has stated that the FIPB is being abolished from 2017-18.

Category I and category II foreign portfolio investors (FPIs) — sovereign wealth funds, multi-lateral agencies, banks and large funds — have been now moved out of the ambit of the retrospective tax amendment of 2012 — where transfer of shares outside India of entities that derived their value from assets based in India — could be taxed in India.

Investors of External Commercial Borrowings (ECBs) issued by Indian companies, bonds and government securities are currently taxed a withholding tax at the rate of 5 per cent on the interest rate. This concession was available up to June 2017. The Centre has now extended the concessionary rate to June 2020. Besides, Masala bonds, which are bonds issued by Indian companies denominated in Indian rupees, will also get taxed at this concessionary rate.

A simplified application form for FPIs for obtaining PAN, opening bank and demat account will also make it easier for FPIs to invest in to India.

With the taxmen going after large multi-nationals such as Vodafone, FPIs had been apprehensive of falling in the taxmen’s net when they sell stakes in Indian companies overseas. With the implementation of the General Anti Avoidance Rules from April this year, and the tweaks to the double tax treaties signed with Mauritius and Singapore, FPIs are going to face the heat from the next fiscal. This change will give some relief to this segment.

With increased global turbulence after Trump took over the reins as the President of the US, there are fears that there could be outflows from Indian debt securities. Investors in to debt tend to be short-term and more influenced by currency volatility. The extension of the concessionary withholding tax regime will help mitigate this outflow to some extent.

A positive step, but more needs to be done.