To boost domestic investment, Sitharaman's Budget focuses on foreign firms

The enthusiastic response of foreign business chambers in sharp contrast to their domestic counterparts suggests that on balance, Budget 2020-21 sought to encourage videshi companies more than desi ones to explore the Indian market.

A fiscally-strapped finance ministry was not expected to hand out any major sectoral sops. It has offered, instead, room for larger sector-agnostic investments, in spite of the protectionist character of its import tariffs. It turns out that many of these measures will benefit investors from abroad rather than domestic industrialists who were looking for the existing capacity to be utilised.

The one that moved the needle in this Budget is obviously the removal of the dividend distribution tax (DDT). But check out some of the others. Investment avenues have been expanded for non-resident investors in certain categories of government securities on a par with domestic investors. Limits for foreign portfolio investors for entry in the corporate bond segment have been raised. The rate of tax deducted at source has been reduced to four per cent from five on the interest payable to a non-resident, in respect of money borrowed in foreign currency from a source outside India through any long-term debt papers listed on a recognised stock exchange located in GIFT City, India’s international financial services sector. 

It is possible to question how enthusiastic foreign investors would be about investing in, say, corporate bonds since there is a 40 per cent unutilised capacity within the current limits. But it is important to remember that no Budget proposal gets written in India unless there has been a demand for it from interested parties. That these proposals have made it to the Finance Bill, 2021, means the tax department received representations to this effect and felt they were worth considering.

Besides, the Budget has deferred the significant economic presence rules for companies that do business in India. This is a big measure for the digital economy. It means just because a foreign company sells a product in India (often a digital product), the tax department cannot deem it a domestic company and tax it accordingly. The provision was supposed to ring in from the next financial year, but has been pushed back to 2022-23. This was, in fact, a 2018 proposal, but the deferral is significant. The US-India Strategic Partnership Forum has promptly cheered it. “There is an applaudable effort to align India’s digital taxation policy with global norms,” it said.

There are, of course, caveats. The one per cent tax at source imposed on sellers on e-commerce platforms will hurt both Amazon and Walmart-Flipkart. And there are also the widening customs duties on ICT products. Yet, the domestic production lines for these products are expected to be the wholly-owned Indian subsidiaries of foreign digital giants.

There is another clutch of investors: domestic start-ups. For them, Finance Minister Nirmala Sitharaman has offered incentives. These include deferring tax payment on Employee Stock Option Schemes and increasing revenue threshold to Rs 100 crore for claiming profit exemption for a period of three years out of the first 10. Again, start-ups know their major source of money will not be the domestic banks, but a different class of investors which, in turn, will largely be financed by foreign money such as SoftBank and other Silicon Valley-based funds. 

True, the Budget makes a targeted sectoral push for airports, roads, cement, steel and construction industry, but these are meant for companies that are planning to invest to raise capacity. The largest swathe of Indian industry is still not talking in those terms; it was looking at the government to find the money, which would make the domestic consumer feel rich enough to buy. That has not happened.

Another notable announcement is the support to build the National Mission on Quantum Technologies and Applications. Sitharaman has provided Rs 8,000 crore for a period of over five years for it. No other project in fundamental research has received a similar scale of government funding, and no domestic company has the capability to fulfil these requirements.

And then, there is announcement of a policy for private sector to build Data Centre parks. Arguably, these are meant to complement India’s promised push for data localisation. But, guess which business segments have made the most noise over it over the weekend?

Also, the contrasting fate of two key demands shows which way the wind blew this Budget. One demand to remove long-term capital gains tax, introduced by former finance minister Arun Jaitley in 2018, was mostly by domestic asset holders. The tax remains. Another demand, mostly by foreign constituencies, was to remove the DDT. It has gone.

Finally, there is a small matter of higher taxation threshold for Non-resident Indians (NRIs). Many newspapers have carried lists of Indian business leaders who carry the NRI tag. In a small way, the government seems to be differentiating between the wealth creators and wealth holders. That could hurt the fortunes of some of the established business wealth holders in India.