Incentivise Foreign Investment In Financial Services: Deloitte

With the economy still reeling under the pandemic's impact, the union budget is expected to provide a much-needed fillip and act as a catalyst in improving ease of doing business.

Below are some of the critical measures the government may consider for the financial services sector:

Concessional tax rate regime for new companies in the services sector

The concessional tax rate regime of 15 per cent should be extended to the services and the manufacturing sector. It would encourage growth and make sure India remains competitive. 

Capital markets

Buyback tax: There is a need to re-visit the applicability of tax on share buyback by listed companies following the withdrawal of dividend distribution tax and levy of taxes on shareholders. This would ease the challenges faced by companies in determining tax liabilities.

Real Estate Investment Trust (REIT): Holding period of REITs needs to be reduced from three years to a year to make them attractive.

Alternate Investment Fund (AIF) and International Financial Service Centre (IFSC)

Change in tax incidence for Category III AIFs: At present these funds are subject to tax. There is a growing need to introduce a specific taxation regime for Category III AIFs where the investor is taxed.

Relaxation for Alternative Investment Funds set-up in IFSC: Gains of these funds from offshore investment transfer are exempt from tax. This exemption should also be extended to Category I and II AIFs set-up in IFSCs to encourage investors.

Setting-up infrastructure fund similar to National Investment and Infrastructure Fund (NIIF) in IFSCs: NIIF as a collaborative investment platform has enabled domestic and foreign investors to invest in a broad range of sectors, including infrastructure. Similar funds sponsored by the government may be set up in IFSCs to invest in infrastructure companies. This will attract additional foreign investment in the infrastructure sector, increase regulatory ease for infrastructure funds and boost the financial services ecosystem.

Rationalisation of tax provisions for financial services players in IFSCs: IFSCs worldwide are typically subject to lower tax rates. India, at present, does not provide low tax rates. Additional measures are needed to make IFSCs competitive vis-à-vis peers.

The government could consider providing additional benefits such as increasing tax deduction from 10 years to 20 years and treating foreign banks at par with Indian banks on corporate tax rates.

Banking

Given an expected increase in NPAs, there is a need to relax the provisions relating to deduction for doubtful debts by banks and Non-Banking Finance Companies (NBFCs).

Incentives for Global In-house Centres (GICs)

World over, multinational corporations are looking to centralise their corporate treasury functions into regional management centres with a centralised corporate role at a single location. These are managed by an on-location central team. Many countries in the Asia Pacific region offer incentives to these data centres. To continue with India's position as a market leader, the IFSC - GIC Regulation 2020, needs to provide a framework for their recognition and operation.

Infrastructure

Introduce group taxation regime: Entities in power and the road sector need to float multiple Special Purpose Vehicles (SPVs), resulting in business inefficiencies. This has adversely impacted global competitiveness and the growth of the Indian infrastructure sector. A group tax approach may be introduced to facilitate efficiencies in operation.

Incentivise data centres: The government should incentivise foreign data centres on setting up base in India. This will also generate employment opportunities.

Clarity on withholding tax on interest: It is not clear if interest payment on specified borrowing instruments would be taxed at a concessional 5 per cent rate. An explicit clarification that extends the benefit to all kinds of debentures issued by Indian company and business trusts without requiring specific government approval would be a welcome step.

Income tax exemption for foreign funds: Sovereign Wealth Funds (SWFs) and Foreign Pension Funds (FPFs) face challenges in availing tax exemption on dividends, interest and long term capital gains on investments made in qualifying Indian infrastructure projects.

Few key challenges are:

(i)              Investments made in non-operating Indian holding companies that invest in SPVs of infrastructure projects are not eligible for tax exemption

(ii)            It is unclear whether secondary acquisitions of debt, shares, or units in infrastructure companies would be eligible for tax exemption under Section 10(23FE). It is also unclear whether investments made in a renewable energy company qualify as infrastructure investment under Section 10(23FE).

Conclusion

With the start of the vaccination programme, it is anticipated that the economy will rebound soon. The financial sector needs to be geared up to meet the challenges of post-pandemic revival and provide necessary support to the economy.

The author is a Partner with Deloitte Haskins & Sells LLP