Foreign Direct Investment and the Tax Laws of India Page | 2

Foreign Direct Investment and The Tax laws of India

Submitted byArjun Singh Rathore 11A028and Abhishek Chatterjee 11A006

Submitted toDr.Anjani Singh TomarAssociate Professor of Law, GNLUINDEXChaptersPage

Acknowledgment 3

Research Note4

Hypothesis5

What is FDI6

Make in India7

Sectors in which FDI is not permissible8

Aspects of Taxation9

Conclusion12

Bibliography13

AcknowledgmentThe authors of this research paper would like to give our heartfelt thanks to Dr. Anjani Singh Tomar, Associate Professor of Law for her continuous support towards the making of this project and providing us with the opportunity to make a project which pertains to a very current topic in today's Indian Scenario

Research NoteForeign Direct Investment and The Tax Laws of INDIA.At the outset the authors of this research note would like to point out that this research paper does not in any way deal in the workings of FDI but looks into the conduciveness of FDI in the current tax scheme in India.The question arises as to why the authors have chosen in fact such a topic, the answer to the afore mentioned question, simply put, is because the present government tends to increase the FDI in India and the question that arises in the minds of the authors is what are the tax implications and weather the Indian Tax laws are well suited to handle FDI.

HypothesisThat the Indian Tax laws are well suited to handle the influx of Foreign Direct Investments in India.

1. What is Foreign Direct Investment?Foreign Direct Investment, hereafter referred to as FDI, is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased.[footnoteRef:2] [2: Shawn Grimsley- What is Foreign Direct Investment]

The OECD[footnoteRef:3] defines control as owning at least 10% of the business so invested in. [3: Organization of Economic Cooperation and Development]

In India the RBI[footnoteRef:4] has given certain directions as to how a Foreign company can conduct business in India, A company planning on operating in India has two methods of operation:-[footnoteRef:5] [4: Reserve Bank of India ] [5: https://www.rbi.org.in/scripts/FAQView.aspx?Id=26]

1) Incorporate a Company under the Companies Act, 1956 as a Joint Venture or a wholly owned subsidiary.2) The second method is to set up a Liaison Office or a Branch Office of the foreign company which can undertake the businesses permitted by the Foreign Exchange Management Regulation Act of 2000.An Indian organization may get Foreign Direct Investment under the two courses as given under:[footnoteRef:6] [6: https://www.rbi.org.in/scripts/FAQView.aspx?Id=26]

i. Automatic Route FDI is permitted under the programmed course without former support both of the Government or the Reserve Bank of India in all exercises/divisions as indicated in the united FDI Policy, issued by the Government of India every now and then. ii. Government Route FDI in exercises not secured under the programmed course requires former regard of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.Foreign Investment is considered as FDI just if the investment is made in equity shares, completely and compulsorily convertible in preference shares and completely and obligatorily convertible debentures with the price being chosen forthright as a figure or taking into account the formula that is chosen forthright. Partly paid equity shares and warrants issued by an Indian organization as per the Companies' procurement Act, 2013 and the SEBI rules, as pertinent, might be dealt with as qualified FDI instruments w.e.f. July 8, 2014 subject to consistence with the FDI scheme.Make in India.In the current political scenario it is necessary to know about Make in India as the scheme intends to increase FDI in India and make India a manufacturing HUB in Asia if not the World.The question therefore arises as to what is Make in India and why it is necessary for our project.'Make in India is a major new national program which is designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build a best in class manufacturing infrastructure.'[footnoteRef:7] [7: http://www.makeinindia.com/]

A plain reading of the definition tells us the campaign is directed to allow an easy influx of investment into India for the purposes of manufacturing products in India.India is considered as one of the fastest growing economies in the world, since 1991 the regulations of FDI has been such so as to make the environment more investor friendly.[footnoteRef:8] [8: http://www.makeinindia.com/policy/foreign-direct-investment/]

Let us also look at the various caps provided under the Make in India policy,[footnoteRef:9] [9: http://dipp.nic.in/English/policies/FDI_Circular_2015.pdf]

1) 100% FDI allowed in medical equipments.2) The FDI ceiling has been increased from 26% to 49% in insurance and sub-activities.3) In the Telecom Industry there is a 100% FDI allowed.4) 100% FDI in Single Retail industry.5) FDI in commodity exchanges, stock exchanges & depositories, power exchanges, petroleum refining by PSUs, courier services under the government route has now been brought under the automatic route.6) Restrictions from the tea plantation sector on FDI has been removed.7) The FDI ceiling has been raised to 74% and 100% in credit information and asset reconstruction respectively8) In the defense sector the FDI ceiling has been increased to 49% from erstwhile 26% under the government approval route.

Sectors in which FDI is NOT permissibleThe foreign direct investment is prohibited in both routes that is govrernmrnt as well as well as automatic routes in the following sectors: Atomic energy Lottery business Gambling and betting Business of chit funds Nidhi company Agricultural sector which is excluding floriculture, horticulutre, development of seeds, animal husbandry, Pisciculture and cultivation of vegetables etc under controlled conditons and services related to agro and its allied sectors. Plantation sector [footnoteRef:10] [10: Notification number FEMA 94/2003-RB 18.06.2003]

Housing and real estate businesses with the execption of development of town ships, construction of residential and commercial premises and roads and bridges to the extent that is specified in the notification number FEMA 136/2005- RB dated 19.06.2005 Trading in transferable development rights Manufacturing of tobacco and tobacco substitutes including cigars, cheroots and cigarettes

Aspects of TaxationDirect TaxThe investor has to pay taxes on the net income that is earned in India. The rate of taxes vary among the various tax structures as defined under. This is in accordance within the ambit of scope of income which is envisioned in section 5 of the Income Tax Act.[footnoteRef:11] [11: Section 5 of Income Tax Act, 1961]

CompanyThe company that is incorporated in India must pay a 30% tax plus surcharge and education cess on net Income earned in India. Tax is also deducted on profits distributed at the rate of 15% plus surcharge and education cess.[footnoteRef:12] This is for those companies coming in via the first method of operation as stated earlier in this paper.[footnoteRef:13] [12: http://www.makeinindia.com/policy/foreign-direct-investment/ ] [13: ibid Page 3]

Branch Office/ Project Office/ Liaison Office or Permanent Establishment:The place of business in India will be treated as a permanent establishment and for this purpose the tax rate applicable would be 40% tax plus surcharge and education cess. However unlike a company incorporated in India there will be no tax on the profits so distributed.[footnoteRef:14] This is for those companies coming via the Second route as mentioned earlier in this paper.[footnoteRef:15] [14: http://www.makeinindia.com/policy/foreign-direct-investment/] [15: ibid page 3]

Limited Liability PartnershipsLLPs are charged tax at 30% plus surcharge and education cess. There is no tax on profits so distributed.[footnoteRef:16] [16: http://www.makeinindia.com/policy/foreign-direct-investment/]

Minimum Alternate TaxLet us first get an understanding of what Minimum Alternate Tax is, hereafter referred to as MAT, The MAT is a tax levied in India on those companies under the IT act of 1961 that targets those companies that show profits on their books and declare dividends but pay minimal or no tax.[footnoteRef:17] [17: Recent developments regarding Minimum Alternative Tax by Sherman and Sterling LLP ]

The MAT functions by not allowing a company's minimum tax liability to fall below a certain thresh hold value.[footnoteRef:18] [18: Recent developments regarding Minimum Alternative Tax by Sherman and Sterling LLP]

MAT is a concept which was originally introduced to tax those local companies which were suppressing their profits in order to pat minimal or no tax at all and was not levied on foreign portfolio investors generally.The IT Act of 1961 does not specify the scope of the tax to be levied on foreign portfolios, hereafter refered to as FPI, hence the taxation on foreign companies is largely dteremined by the authority for advanced rulings,hereafter refered to as AAR for the determination.[footnoteRef:19] [19: Recent developments regarding Minimum Alternative Tax by Sherman and Sterling LLP]

AAR The AAR is a quasi judicial body which gives rulings and decisions on tax liabilities of investment ventures that are only binding upon the investor in question and the tax authorities. This body has held in a matter concering US based The Timkin CO that the MAT applies to foreign companies that are having a permanent presence in India or are conducting businesses in India but not to foreign companies that are having share holdings in Indidian companies and no business presence on its own. However in an un-reported ruling handed down in 2010 and a second 2012 ruling regarding a Mauritius based company Castleton Investment Ltd, the AAR has founded fit to extend the application of MAT to foreign companies that do not have any offices or employees or agents in India. As a result of such a ruling and these decesions it is no longer clear what connecting factors are necesary to bring about a foreign company under the ambit of MAT. This leads to creation of uncertainity not for the FTIs so involved but for any foreign company that is owing shares in India without any presence. An appeal in this regard lies before the supreme court of India and a hearing on this case was to be held in August of 2015.The uncertainity surrounding the MAT closely follows a number of high profile tax disputes between the government of india and many major foreign investors notably the Vodafone Group which initially succeeded to set aside a tax levied of US $ 2.5 Billion by the Indian courts in 2012. A little over three months after the setting aside of US $ 2.5 Billion tax bill by the INdian supreme court the legislation of India amended its tax legislation to reverse the decision of the court and hence re-instated their Us $ 2.5 Billion tax demand.

Due to the un-certainity that surrounds MAT the Indian government has sought to provide clarity via it's amendments in the IT Act of 1961. These amendements were introduced by the Finance Act of 2015. The amendments have brought under its ambit not only FPIs but all foreign companies. However such amendments have not brought about comfort to the FPIs for the following reasons that are set out below: The amendments made via the Finance Act of 2015 are applicable prospectively from the date of 1 April 2016 and hence these amendments ensure that FPIs will not be liable for MATs for all future income i.e income that has arisen after the 1st of April 2015.[footnoteRef:20] Morevover the government holds the position that only the avenue of redress for the foreign investors who have been charged with MAT in respect of income accrued prior to April 1 2015 will be done via the indian courts. [20: FInance Act, 2015]

The amendments brought about by the finance act of 2015 in no way exempt foreign companies from MAT completely, in particulary they exclude MAT in relation to only certain sources of income which include capital gains arising out of securities transcations royalts, intrests and technical services. For the first time there is now an express referrence to the foriegn companies has been made in the amendemnts that were brought about by the finance act of 2015 this would mean that forieng companies are subject to MAT in respect of all sources of income that have not been exempted by the finance act of 2015.Keeping in mind the above deliberation so made of MAT the taxes so to be levied are 18.5% plus surcharge plus education cess which is to be paid by corporations where the tax payable according to regular tax provisions is less than 18.5% of their book of profits. However MAT credit can be carried forward for the next 10 years to set off against the regular tax so payable during subsequent years subject to certain conditions.

ConclusionIt can be seen by the above deliberations made by the authors of this research paper that the current laws in India especially with regard to Foreign Direct Investment are capable enough to handle the incidences of Tax so involved in the process.Moreover the Make in India campaign provides a conducive environment for foreign investors to come into India and bring in much needed Foreign Investment into the country.This environment is achieved by a simple process of simplification of the tax laws for foreign investors. The legislation of the country is working towards the removal of ambiguity in the areas concerning the Charge of Tax, giving the FPI's a sense of comfort and stability for investment.It cannot be argued that a countries Tax scenario is a determining factor in bringing in foreign investments and to that regard India as a country is moving forward.The hypothesis hence placed forward stands proved at the end of the paper.

BibliographyIncome Tax Act, 1961Taxman's Direct Taxes, 50th Edition, Dr Vinod K Singhania and Dr. Kapil Singhania.Articles referred to:-Recent developments regarding Minimum Alternative Tax by Sherman and Sterling LLPShawn Grimsley- What is Foreign Direct InvestmentOrganization of Economic Cooperation and DevelopmentOnline Articles and Websiteshttp://dipp.nic.in/English/policies/FDI_Circular_2015.pdfhttp://www.makeinindia.com/policy/foreign-direct-investment/A project by Abhishek Chaterjee and Arjun Singh Rathore