Foreign Investment got a fillip in the Union Budget presented by the Finance Minister, Arun Jaitley earlier this month. It marked the best budget-day gain for Indian stocks in 12 years, with the Bombay Stock Exchange’s (BSE’s) benchmark Sensex gaining 1.74% to close at a three-month high. Quite a number of amendments were announced to remove procedural hurdles and provide taxation benefits. A promise of further liberalization of the FDI policy was made on the backdrop of changes in Special Economic Zones Rules to remove the exclusion of ‘legal services from the earlier list of permitted services.

The highlights of the Union Budget relating to foreign investment:

Substantive reforms in FDI policy in the last two years resulted in more than 90% of the total FDI inflows are now through the automatic route. The Foreign Investment Promotion Board (FIPB) has successfully implemented e-filing and online processing of FDI applications. It has been decided to abolish the FIPB in 2017-18. A roadmap for the same will be announced in the next few months. In the meantime, further liberalisation of FDI policy is under consideration and necessary announcements will be made in due course.

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In 2012, Income-tax Act was amended to provide for taxation of those transactions of transfer of shares or interest in a foreign entity deriving its value substantially from Indian assets. Apprehensions have been raised about some difficulties which arise because of this provision in case of transfer of stake of investors of India-based funds located abroad but investing in India-based companies. In order to remove this difficulty, it is proposed to exempt Foreign Portfolio Investor (FPI) Category I & II from indirect transfer provision. A clarification to be issued that indirect transfer provision shall not apply in case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India.

Concessional withholding rate of 5% charged on interest earned by foreign entities in external commercial borrowings or in bonds and Government securities is extended to June 30, 2020. This benefit is also extended to Rupee Denominated (Masala) Bonds.

A common application form for registration, opening of bank and demat accounts, and issue of PAN will be introduced for FPIs. Securities Exchange Board of India (SEBI), Reserve Bank of India (RBI) and Central Board of Direct Taxes (CBDT) will jointly put in place the necessary systems and procedures. This will greatly enhance operational flexibility and ease of access to Indian capital markets.

In order to address the issue of thin capitalisation, it is proposed to provide that the interest paid by an Indian company or permanent establishment of a foreign company, in excess of thirty percent of earnings before interest, taxes, depreciation and amortisation (EBITDA), or interest paid to its associated enterprise, whichever is less, shall not be allowed as deduction in computing its taxable profit. It is also proposed to allow carry forward and set off of the interest so disallowed for eight assessment years.

In order to align the transfer pricing provisions with the OECD transfer pricing guidelines and international best practices, it is proposed to insert a new section to provide that the assesse shall make secondary adjustment where the primary adjustment to the transfer price has been made in certain cases. The provision shall apply if the primary adjustment exceeds Rupees One Crore (Ten Million) and the excess money attributable to the adjustment is not brought to India within the prescribed time.

Legislative reforms will be undertaken to simplify, rationalise and amalgamate the existing labour laws into 4 Codes on (i) wages; (ii) industrial relations; (iii) social security and welfare; and (iv) safety and working conditions. The Government intends to have a conducive labour environment wherein labour rights are protected and harmonious labour relations lead to higher productivity. This is an initiative from ease of doing business perspective.

Legal Services Permitted in SEZ – The Government has issued Special Economic Zones (Amendment) Rules, 2017 wherein the Special Economic Zones Rules, 2006, in Rule 76, for the words “professional services (excluding legal services and accounting) rental/leasing services without operators”, the words “professional services, rental/leasing services without operators” shall be substituted.

An SEZ is a defined area carved out for carrying out permitted trade and services. An SEZ has various benefits and is also treated as a separate jurisdiction. The net effect of the amendment appears to allow legal services to be carried out from SEZ. The media was abuzz with the interpretation that this amendment allows foreign law firms to be established in SEZs. However, in the absence of changes to Advocates Act, 1961 and corresponding legislations, it is not clear if foreign law firms can commence practice based on this change.

Posted by Sourish Mohan Mitra

Sourish Mohan Mitra, India-qualified lawyer from Symbiosis Law School, Pune and currently working as an in-house counsel in Delhi, India; views expressed are personal; he can be reached at; Twitter: @sourish247

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