India’s union budget for 2020-21, presented on February 1, contains significant proposals on the tax front to encourage foreign investors to participate in a $1400bn infrastructure plan, invest more in rupee-denominated government and corporate bonds and equity markets. At a time when budgetary resources are constrained by a sharply slowing economy, foreign capital is being invited to play a huge role in transforming the India into a $5000bn entity within five years. The government of Narendra Modi is confident that it can attract such inflows: FDI amounted to $284bn during 2014-19, up from $190bn during 2009-14.
The 2020 budget announced 100% exemption on interest, dividends and capital gains on long-term investments in infrastructure made by sovereign wealth funds (SWFs) of foreign governments like Singapore’s GIC and the Abu Dhabi Investment Authority ADIA), for example. These SWFs will pay no taxes on what they earn from their investments in debt or equity made before March 31, 2024, provided they are held for three years. GIC and ADIA have already acquired stakes in several infrastructure projects in the country, including investments of $2.2bn in a renewable energy firm that has just bagged the largest renewable-cum-storage power purchase tender.
As a prelude to eventual listing on global bond indices, the budget announced that “certain specified categories of government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well”. Opening up the sovereign debt market for foreign investors and inclusion in global bond indices enables the government to access a stable flow of foreign borrowings to meet its spending priorities. Ten-year yields are currently at an attractive 6.6%, which is bound to attract investor interest. Indications are that a special series of government securities may be issued within the first half of financial year 2020-21. The limit for foreign portfolio investors in corporate bonds, currently at 9%, is also being increased to 15% of the outstanding stock.
For foreign portfolio investors and qualified foreign investors, there is a lower rate of withholding of 5% for investments in government securities, Indian companies and municipal bonds until June 30, 2023. To meet long-standing demand for foreign investors, the dividend distribution tax has been also abolished for companies, with dividends to be taxed only in the hands of recipients. Foreign investors can claim the treaty benefits of lower rates, alongside claiming credit at home for taxes on dividends paid in India.
N Chandra Mohan is an economics and business commentator based in New Delhi.