In the past month the Indian Government took action towards facilitating foreign investment as was promised in the annual Union budget. However, all the beneficial steps were overshadowed by the controversial levy of Minimum Alternate Tax on capital gains by Foreign Institutional Investors. There were welcome comments by the Prime Minister in favour of entry of foreign law firms.
Composite Cap on Foreign Investment – The Department of Industrial Policy & Promotion (DIPP) has recently circulated a note to the Cabinet of Ministers in the Central Government to do away with the distinction between different types of foreign investments through a composite cap on foreign investments. The move, aimed to promote ease of doing business in India, was announced by the Finance Minister, Arun Jaitley, in the annual Union budget in February. The composite foreign investment caps will encompass foreign portfolio investment, NRI investment and depository receipts, and will include foreign currency convertible bonds and fully and mandatorily convertible preference shares or debentures.
Proposal to Remove Multiple Permissions to Start a Business – The Central Government, through an Office Memorandum issued by the DIPP, has constituted an expert committee for examining the possibility of replacing multiple prior permissions with pre-existing regulatory mechanism and preparing a draft legislation for this purpose. The committee is required to submit its report within 30 days. This step has been taken to improve the existing process for starting a business in India and appears to be a step to further facilitate foreign investors.
FDI in Pension Funds – DIPP has issued a notification which provides that in pursuance of the enactment of the Insurance Regulatory & Development Authority Act, 2013, Government has decided to permit FDI in the Pension sector. The cap, in line with FDI in Insurance sector, shall be 49% with upto 26% in the automatic route and approval route beyond 26% and up to 49%. FDI in pension funds is allowed as per the Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013. FDI in pension funds will be subject to the condition that entities bringing in FDI shall obtain necessary registration from the PFRDA and comply with the PFRDA Act. Further, where such foreign investment involves control or ownership by the foreign investor or transfer thereof from Indian residents or companies to foreign entities, the same shall require approval from the Foreign Investment Promotion Board (FIPB).
MAT levied on FIIs – The revenue department issued notices to foreign institution investors (FIIs) demanding 20% of Minimum Alternate Tax (MAT) on capital gains made by them till March 31, 2015. The move drew sharp criticism and protest from majority of FIIs, especially in view of the following statement made by the Finance Minister while presenting the Annual Union Budget in February this year: In order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT. However, this being a prospective amendment, it did not take away the right to levy MAT for the past period. It is to be noted that countries with which India has a double taxation avoidance treaty (DTAA) may be exempt from this levy if they have already paid the tax in their home country. Recently media reports quoted the Minister of State for Finance stating that “Clarificatory amendments to MAT rules are under consideration of the government”.
Entry of Foreign Law Firms – The prospect of entry of foreign law firm got a big boost when Prime Minister, Narendra Modi, recently publicly stated “Why should we need to go outside the country for global arbitration? We shouldn’t think that if foreign lawyers come here, they will take away our jobs”. This was followed by tweets by Harish Salve (@hsalve): Entry of foreign law firms will result in young Indian lawyers being hired and trained to global standards. No foreign lawyer can or will practice Indian law. The only affected persons would be some domestic law firms Foreign firms are NOT interested in litigation – the bread and butter of 90% of Indian lawyers. They are here for transaction work. They will provide competition to a handful of big firms in delhi, Mumbai etc.
These sensational statements should speed up entry of foreign law firms in India.
- DIPP is the Government department under the Ministry of Commerce & Industry, responsible for formulation of the FDI policy and facilitation of FDI inflows into the country
- FIPB is an inter-ministerial body under the Department of Economic Affairs, Ministry of Finance, responsible for processing of FDI proposals and making recommendations for Government approval
- India has DTAA with 88 countries
- Harish Salve is one of India’s top notch lawyers. He is former Solicitor General of India. He has argued in several landmark matters before the Hon’ble Supreme Court of India including securing relief for Vodafone in its tax dispute with Indian authorities in 2012. He joined London’s Blackstone Chambers and has been called to the Bar of England and Wales.