The Government of India has complied with its announcements made in the annual union finance budget to set up composite caps for foreign investment. However there was a setback to its tax reforms when the GST Bill could not be passed.

Composite Caps for Foreign Investment.

The Government has removed individual caps for different types of foreign investment. This is in line with its announcement in the annual finance budget in February this year. The Consolidated Foreign Direct Investment Policy (FDI Policy) which was issued in May this year has been suitably amended vide Press Note 8 (2015 Series) issued by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry, at various paragraphs to give the effect. The following are the salient amendments:

  • Foreign investment now includes all types of foreign investment, direct and indirect, regardless of whether the said investments have been made through FDI, Foreign Institutional Investor (FII),  Foreign Portfolio Investor (FPI), Non-Resident Indian (NRI), Foreign Venture Capital Investor  (FCVI), Qualified Foreign Investor (QFI), Limited Liability Partnership (LLP) and Depository Receipts (DRs)’.
  •  Investment by FPI upto aggregate foreign investment level of 49% or sectoral/statutory cap, whichever is lower, will not be subject to either Government approval or compliance of sectoral conditions, as the case may be, if such investment does not result in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities.
  • There are no sub-limits of portfolio investment and other kinds of foreign investments in commodity exchanges, credit information companies, infrastructure companies in the securities market and power exchanges.
  • The aggregate FII/FPI/QFI investment, individually or in conjunction with other kinds of foreign investment, will not exceed the sectoral/statutory cap.
  • The only 2 exceptions to the above rules relating to portfolio investment are (a) Banking sector – investment by FII/FPI/QFI will be upto 49% whereas sectoral cap is 74%. (b) Defence sector – investment by FII/FPI/QFI/NRI will be upto 24% under the automatic route.

FDI in Multi Brand Retail.

The Government of India has categorically informed the European Union (EU) that it will not allow multi-brand retail firms to set up shop in India, even as both sides decided to resume negotiations towards concluding the long-pending Bilateral Trade and Investment Agreement. The Government told the EU that it cannot allow the entry of multi-brand retail chains due to political compulsions, although the same is allowed under the FDI Policy. This is seen as fallout of the current ruling party’s election manifesto last year where it had promised removing FDI in multi-brand retail. There was a huge relief when the Consolidated FDI Policy notified in May this year did not put this into effect. However, it now appears that the Government has found a circuitous way to achieve its objective.

GST Bill Not Passed.

A logjam in the Indian Parliament crippled proceedings and virtually washed away its Monsoon Session. The planned introduction of Goods and Services Tax (GST) on April 1, 2016 has hit a roadblock now. The GST Bill seeks to replace multiple local levies across India’s states with a uniform tax structure across the country with respect to goods and services.

This is also a basic requirement for improving India’s image from foreign investment perspective, since it is expected to provide certainty in tax calculations and a boost to geographical parity for setting up business. For many months in the run-up to the building of the GST framework, it has been touted as the biggest tax reform in the country.

The proceedings in the 18 day Parliament Session in July-August barely saw any business taken up since there were continuous protests by the main opposition party regarding some other internal issues. Another peculiar problem relating to the GST Bill is that the Government is in minority in the Upper House, Rajya Sabha and the GST Bill requires a majority to be passed.

The Government is planning to have a special session of Parliament to introduce and pass the GST Bill. It is also in talks with some opposition parties and independent members to get a majority. However, as on date no concrete decision has been taken and thus the fate of the GST Bill remains uncertain at the moment.

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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