[Opinion] Budget 2024 | Sweetening the Deal for Foreign Companies and Non-Residents?

CA Ankita Chowdhry & CA Medha Sharma – [2024] 164 taxmann.com 689 (Article)

The focus of the Budget 2024 has been employment, skilling, Micro, Small & Medium Enterprises, and the middle class. As per the Hon’ble Finance Minister, India’s economic growth continues to be a shining exception and the fiscal deficit is estimated at 4.9% of Gross Domestic Product. Also, the focus has been on strengthening the four pillars of ‘Viksit Bharat’ i.e. Women, Youth, Farmers and the Poor.

The net Foreign Direct Investment (FDI) inflows to India declined from USD 42.0 billion during FY 2022-23 to USD 26.5 billion in FY 2023-24. This decline was on account of geopolitical conflicts, high borrowing costs, surge in repatriation, disinvestment on account of profitable exits.

In order to ensure sustainable FDI, the government has announced various tax and regulatory proposals. We have discussed below some of the key proposals that will impact foreign companies and non-residents (NRs):

1. Abolishing Equalisation Levy 2.0

• Finance Act, 2020 widened the scope of equalisation levy (EL 2.0) to introduce 2% levy on consideration paid to NR e-commerce operator on e-commerce supply of goods or services.
• In 2021, the US Trade Representative released a report which concluded that India’s EL 2.0 is discriminatory, unreasonable, and burdens or restricts US commerce. In view of this, it proposed to impose a 25% additional ad valorem tariffs on certain Indian products. However, these were not imposed by the US on account of agreement entered into with India (in November 2021) for providing credit for EL 2.0 paid by US companies.
• Such credit can be availed for EL 2.0 from 1 April 2022 till implementation of Pillar 1 or 30 June 2024 (extended from 31 March 2024), whichever was earlier. Since final consensus is yet to emerge on Pillar 1, it was expected that this period could be further extended.
• Further, there were lot of interpretational issues in implementing EL 2.0 which extended beyond typical digital business models, since some of the words and phrases were not defined, thereby, causing unwarranted litigation. Also, there was litigation on account of EL 2.0 being considered as royalty/fees for technical services and taxed at a higher rate. Also, EL 2.0 was not classified as a ‘tax’ under the Act tax which created issues regarding the allowability of credit in the NR’s home jurisdictions.
• In order to show India’s commitment towards the OECD Pillar 1 solution, considering the ambiguity regarding these provisions and compliance burden, it has been proposed to abolish EL 2.0 from 1 August 2024.

2. Abolishing Angel Tax provisions

• The angel tax provisions were introduced vide Finance Act, 2012, as an anti-abuse measure to prevent the generation and circulation of unaccounted money through the share premium received.
• Earlier, this provision was applicable only for investments made by residents. However, the Finance Act, 2023, expanded the scope of this provision to cover investments made by NR investors as well (Financial year 2023-24 onwards).
• Recently, Indian start-ups were witnessing funding winter and there was a decline in the number of unicorns which emerged in 2023. Investment by NRs being covered within the ambit of angel tax regime was one of the reasons for decline in start-up funding.
• It has been proposed that the angel tax provisions would not apply with effect from 1 April 2025 i.e. Assessment Year (AY) 2025-26.
• The proposed amendment would increase the investor’s confidence by providing tax certainty and thereby increase start-up funding pool. Further, this move will put an end to the litigation on account of valuation of shares. However, the provisions relating to unexplained investments would continue to apply.

3. Reduction in rate of taxation for foreign companies

• Currently, foreign companies are taxed at 40% (plus applicable surcharge and cess).
• It is proposed to reduce tax rate for foreign companies to 35% (plus applicable surcharge and cess), making it closer to the tax rate applicable to domestic companies (i.e. 30% plus applicable surcharge and cess).

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