Foreign investors give thumbs up to India’s budget

Foreign and domestic investors have responded positively to India’s union budget for 2017-18 presented on February 1. In his budget speech, finance minister Arun Jaitley said there is now the possibility of phasing out the Foreign Investment Promotion Board (FIPB), adding that a roadmap will be announced in the next few months.

The National Democratic Alliance government has undertaken substantial reforms in FDI policy over the past two years, and further liberalisation is under consideration, Mr Jaitley said in his budget speech. 

The FIPB was set up in the early 1990s to approve FDI proposals up to Rs30bn ($445m) but currently, more than 90% of FDI inflows into India are under the automatic route. Regarding the FIPB’s replacement, Ministry of Finance economic affairs secretary Shaktikanta Das said in the Times of India that a system similar to a non-banking finance company could be created to deal with FDI proposals.

A big relief for foreign portfolio investors is that they are exempt from tax on indirect transfers from the assessment year 2012-13. In 2012, the Income Tax Act was retrospectively amended from April 1, 1962 to tax those transactions of shares or interest in a foreign entity deriving its value substantially from Indian assets.

Foreign portfolio investors, especially those investing in offshore funds, were apprehensive when the Central Board of Direct Taxes issued a circular last December saying these provisions apply in case of transfer of stake of investors in India-based funds located abroad but investing in India-based companies.

To address these concerns, Mr Jaitley proposed to exempt foreign portfolio investor in sovereign wealth, broad-based and regulated funds from indirect transfer provisions. He said a clarification would also be issued that “indirect transfer provision shall not apply in the case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investments in India which is chargeable to tax in India”. Consequently, stock markets have responded bullishly to the budget.