India has recently announced laudable measures geared towards broadening opportunities for foreign investment in several sectors of its economy while, at the same time, enhancing investor confidence on the domestic tax system through mechanisms being implemented to handle unreasonable tax assessment cases.
1. Review of Foreign Direct Investment (FDI) Policy
India is carrying out major reforms in its FDI policy, covering 15 major sectors of the economy, including agriculture, mining, construction, banking, manufacturing, broadcasting and retail trading. The reforms aim at further easing and simplifying the process of foreign investment in India and put more FDI proposals on the automatic route, instead of the Government route.
The reforms focus primarily on the liberalization of FDI norms in specified sectors, as well as norms applicable to NRI-owned entities and LLPs. Some of main policy changes are set out below:
(a) 100% FDI is now allowed under the Automatic Route in sectors such as:
• Operation and management of townships
• Malls / shopping complexes and business centres
• Non-News & Current Affairs TV Channels
• Plantation of coffee, rubber, cardamom, palm oil tree and olive oil tree
• Duty Free Shops
• Wholesale cash & carry activities
• Non-Scheduled Air Transport, Ground Handling Services, Satellites
(b) 100% FDI is also allowed (49% under the automatic route) in activities such as teleports, Direct to Home (DTH), Cable Networks, Mobile TV, Headend-in-the Sky Broadcasting Service.
(c) FIIs, FPIs and QFIs can now invest up to the sectoral limit of 75% in the banking sector, provided there is no change of control and management of the investee company.
(d) The conditions for foreign investment in Single Brand Retail Trading sector and construction development sector have been eased.
(e) 100% FDI under the automatic route will now be permitted in LLPs in those sectors where 100% FDI is allowed through the automatic route, with no FDI-linked performance conditions. LLPs will also be permitted to make downstream investment in similar sectors.
(f) Currently, NRIs have special dispensation for investment in the construction development and civil aviation sectors, and NRI investment is deemed to be domestic investment, at par with investment made by Indian residents. Such special considerations have now been extended to companies, trusts and partnerships which are incorporated outside India and are owned / controlled by NRIs.
This broad FDI policy reform confirms India’s stated objective of attracting / facilitating foreign investment into the country and is expected to create substantial opportunities for foreign investors.
2. Liberalisation of FDI Policy on investment in Indian Investment Vehicles
Pursuing the Government’s objectives to boost foreign investment into India, the Reserve Bank of India (RBI) has issued a notification which permits foreign investment in Investment Vehicles regulated by the Securities and Exchange Board of India (SEBI), including Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (IITs) and Alternative Investment Funds (AIFs).
Currently, foreign investment is allowed only in Venture Capital Funds, if structured as a trust, subject to prior approval by the Foreign Investment Promotion Board (FIPB) on a case to case basis.
The main changes to the FDI Policy are set out below:
(a) Any non-resident of India, including a registered Foreign Portfolio Investor (FPI) or Non-Resident Indian (NRI) can buy and sell units of an Investment Vehicle regulated by the SEBI, including REITs, IITs and AIFs, without prior FIPB approval.
(b) The non-resident investor may pledge the units in the Investment Vehicle to secure credit facilities.
(c) The underlying investment made by the Investment Vehicle in India shall be considered as domestic investment provided the Sponsor or the Manager of the Investment Vehicle is owned and controlled in India. This classification shall apply irrespective of the percentage of foreign investment in the Investment Vehicle.
This development is attractive for foreign investors, including FPIs and NRIs, to consolidate their investment objectives in India without having regard to sectoral FDI limits. It undoubtedly contributes to increase the attractiveness of India as an investment jurisdiction. The provisions of the India-Mauritius Double Tax Avoidance Treaty remain applicable for such investment if structured through a Mauritius vehicle.
3. Taxpayer Grievances from High Pitched Scrutiny Assessments
The Central Board of Direct Taxes (the “CBDT”) has reported having consistently advised Indian tax officers to be fair, objective and rational while framing scrutiny assessment orders on taxpayers. However, it has been brought to the notice of the CBDT that the tendency to frame high-pitched and unreasonable assessment orders is still persisting, a situation which not only causes taxpayer harassment but also lead to unproductive work for the tax officers.
Accordingly, the CBDT has decided to lay down an institutional mechanism to quickly resolve taxpayer grievances arising on account of high-pitched and unreasonable assessments. The mechanism would operate as follows:
(a) Local Committees will be constituted across India, each comprising of 3 selected officers of the rank of Commissioner of Income Tax. Other members may be co-opted if necessary.
(b) Taxpayers would be able to file their grievance petitions with the Local Committees which will endeavor process the case and reach a conclusion within two months.
(c) The petition will be examined with a view to establish any prima-facie case of high-pitched assessment, non-observance of principles of natural justice, non-application of mind, gross negligence or lack of involvement of the assessing officer. In particular, the Local Committees will ascertain whether the adjustments made in the assessment order are not backed by sound logic, provisions of law have been grossly misinterpreted or well established facts have been ignored.
(d) In case a Local Committee concludes that high-pitched assessments have been made by the assessing officer, it shall be reported to the Principal Chief Commissioner of Income tax, who will take suitable administrative action, where required.