The Big Picture – Financial Policies And Tax Reforms And Their Impact On Doing Business In India In 2020

Key Highlights

  • There have been major reforms from a financial and tax policy-basis in India to promote businesses in the manufacturing space, however there are various other factors which need consideration
  • While there is an undeniable presence of cheap labor, the aspect of skill development should be placed as a priority to bridge the technical gap between India and other economies
  • Investor confidence is positive towards India even now, although there are certain concerns with regards to uncertainty in policy framework and infrequent changes
  • However, the growth graph still continues to stay strong with investments, new initiatives, as well as new companies from other developed economies entering the Indian market to set up manufacturing capacities owed to its new tax reforms

In this post, we speak to Shrey Aggarwal, who currently leads the Corporate Tax and Litigation practice at Coinmen as a Senior Manager. Given his experience in a multitude of sectors over the years, Shrey discusses the various financial and tax policies/reforms which have the propensity to influence investor confidence in India.

The discussion with Shrey has been captured in a highly insightful podcast with his inputs, and you can listen to it, here:

And for those who prefer reading over listening, the transcript of the entire podcast has been shared below for you to read. Feel free to share your thoughts with us in the comments!

Hi, Shrey. One of the things that we wanted to discuss with you today, is the entire movement in India with regards to the Government’s push on manufacturing as well as its push on ease of doing business (especially with India’s rankings jumping in the World Bank’s index). But from a ground reality point of view, what do you think is really happening in this field?

Given the work that you do, with foreign companies setting up in India, have you seen a change from a business point of view as well as from a perceptive point of view (with regards to how foreign companies perceive India as a market)?

Ever since the new Government took charge, its agenda has been to promote business in India, especially with regards to the manufacturing sector. Manufacturing is the backbone of the Indian economy, just like it is in other countries. Even with the recent reforms, loans are being given out in a relatively hassle-free manner to SMEs, as compared to maybe a decade ago with a lot of formalities and issues which persisted.

The change has been in term of policies as well. The Government has set up special desks within banks for SMEs to ensure that the funds are properly given to SMEs and they’re able to run their business properly. Similar changes and reforms were also except for bigger manufacturing companies and projects, where the project size can run into billions of rupees, especially seeing big accounts becoming NPAs (Non-performing assets) and with the increase in banking frauds. As of now, that has not come into place but we’re hopeful that the Government is working on these to make way for financing to flow freely to these large corporates.

Given that the funding from India has been slow, FDI and ECB guidelines have been eased out to ensure that there are no issues in getting financed from outside India. Obviously, financing from outside India is a relatively cheaper option as compared to financing in India itself. Though it requires the payment to be in foreign currency which may or may not average out or tie up to the finance cost of the business in India, but the businesses are able to get foreign funding relatively easily, be it via FDI or ECB.

Talking about the tax reforms, the sunset clause discussed in the Union Budget in February 2020, the sunset clause for ECB funding, here the withholding tax on ECB funding has been further extended to a period of 3 years. Given that the funding has been slow from the banks to the large corporates, there have been positive moves from an FDI and ECB perspective.

Are these moves translating into actions from investors? Are they picking up on the proactivity of the Government?

Foreign investors have always been very positive about the Indian economy, with the Indian economic scenario being highly dynamic. The growth rate projected has been if not the highest, has been equivalent to the global GDP growth.

Though there have been a few bumps by way of tax reforms made last or last to last year by taxing long-term capital gains on listed shares; these measures may have given a certain setback to foreign investors, but by and large, foreign investors are quite positive about the Indian market. Even talking from a ground reality perspective, we are seeing funding coming from outside India and seeing people from outside India willing to invest here not just to exploit the Indian market, but to manufacture as well as sell in India.

With respect to how these companies are structured, the Union Budget mentioned a provision regarding the residency of a company’s directors? How do you see this impacting the business scenario?

The Finance Minister had, in the Budget, mentioned the change in the residency provision to be an Anti-Abuse provision. So, earlier, the situation was as such that whenever there is a person of an Indian origin staying abroad visiting India, and if they don’t stay in India for less than 182 days, they won’t become a resident in India. Now, the threshold of 182 days has been reduced to 120 days.

The reason that the Government gave for this was that often, people plan their visit as such that they don’t stay in India for 182 days and therefore, they don’t get taxed in India or become liable to be taxed in India.

This would impact the Indian-origin people going abroad and their subsequent visits and stay to India. From an industry perspective, these changes haven’t been received positively but I feel the Government has a valid reason here in making the change.

A similar change has been made in another residency provision, where the person is not liable to be taxed in any other country if he/she holds an Indian passport and he/she would only be taxed in India. This has also been introduced as an anti-abuse measure.

With the increase in tax rates last year, we’ve seen an outflow of people going abroad and settling there as well. So, this will most likely also impact the system from a litigation point of view as well.

You mentioned an interesting aspect which will slightly change the direction of the conversation. It’s about Indians moving outside to stay. One aspect that has been consistent is that Indians go outside India to study further (higher studies) and settle there.

This brings me to the topic of education. You work with a lot of companies in the education sector (especially the ones which are not-for-profit). There’s an education bill in the works. If you had to list out certain things which you look forward to from the education bill, what would those be (with regards to the companies that you’re working with)?

From the bill’s perspective, what we’re seeing these days is that there has been a traverse from the conventional CBSE boards to international boards. The education sector is a “social” space for the Government to work on, and the Government has time and again set measures to encourage people to work in the education space.

Owed to these trends, I think we will be looking at private universities affiliated to foreign universities, set up in India. This can ensure that our children, who study in those international-board schools can get the type of quality education they desire without going abroad. We could also be looking at separate state acts for these private universities affiliated to foreign universities.

Going back to our previous discussion: Another major reform that happened last year was the cut in the corporate tax rate, especially for new companies entering the manufacturing space after a certain date. While it’s a good thought on paper, has it seen any action from companies investing into India?

Well, yes. We were previously seeing companies manufacturing abroad and then exporting their goods to India for a small process/last-step manufacturing process/assembly function. With the recent tax reforms, the corporate tax rate has brought down to a level which is one of the lowest in Asia.

This would encourage the big business houses of foreign companies to set up manufacturing units in India and reap the benefits of this low tax rate.

Given that tax is only one of the factors which a foreign corporate would look at; there is an unstable environment as well as unstable policies in the manufacturing sector which might hinder the investor form getting the bets out of his/her investment.

This is the other aspect that the Government should look into; the Make In India scheme has been one of the ways with which the Government has addressed this issue to some extent, but the quality and benefits of the scheme haven’t got the desired results. The files being blocked by the bureaucrats, etc. is something which is frowned upon by the investors.

There’s one key aspect of policy uncertainty and the infamous red-tapism. Aside from these, are there other challenges which have been dominant, and have been mentioned by foreign companies in your conversations with them?

To an extent, yes. Tax is only one of the factors; other factors like ease of doing business and policy certainty have a much bigger impact in influencing the decision of foreign companies setting up a manufacturing unit here.

When a foreign investor is setting up a manufacturing capacity with a huge investment (which can be one-time and irreversible), he would look up to a business conducive environment to operate in. So, while tax as a factor has been worked upon by the Government, there is still room for other factors to be looked into.

One of the reasons why India is considered a favorable business destination is because of the low-cost labor. Then, there’s the aspect of skilling of labor that is a concern in most cases, especially because there is an issue of technological gap compared to foreign companies from developed countries setting up operations in India (which explains why Indian companies get into joint ventures with foreign companies).

While the Government is trying to address it via its Skill India initiative (not just from an internal labor strength point of view but in terms of outsourcing manpower as well), has this concern come up in practical conversations from the industry or companies that they face this particular hurdle?

Labor in India is comparatively cheaper than other developed Asian countries, agreed. But these days, not a lot of labor-intensive industries which are being set up. The focus is more on the brand name, the knowledge, and the technology. With the foreign company being the owner of an IPR setting up a unit in a different country (be it any country), the IPR would always stay with the foreign company.

Therefore, while labor is cheaper, the important point that the foreign company looks at is the technical expertise and the ability of the labor to deal with work on that IPR, which the mechanical labor in India may or not be able to work with so the foreign company will have to train the labor by deputing its own employees here and training the Indian labor.

This has been very nice, Shrey. Before we let you go, there’s one last question where we’d like your opinion. Given where we are, there is a vision and a dream of a USD 5 trillion economy. From where we are right now to 3 or 5 years down the line in the future, what would you think would be a good way to progress towards this goal?

One thing is bridging of the technological gap for the advancement of the country, via bigger infusion and involvement of foreign participants or would you look at more home-grown companies?

Well, it must be a mix of both. There are not a lot of Indian companies which have an IPR with global visibility. Most of the brands which we use in our daily lives are owned by foreign countries. This is one of the major factors which comes in the way of the Government focusing on the home-grown industries and not regulating the foreign companies more than home-grown companies.

The other thing which needs be worked upon is the kind of regulations which the Government has in place; not just from a tax perspective, but from an administrative point of view to make some space for the businesses to thrive. Major industries in India are on survival mode (such as infrastructure, banking, real estate, etc., which practically form the backbone of the Indian economy). These sectors need to be given more space so that they can thrive and prosper in a better fashion.

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