International trade, partnership, and investment are vital to the Government of India’s target to set up a US$5 trillion economy by 2024-25 while ensuring socio-economic development for all. The Government aims to reach this goal by strengthening the Indian market and export growth with new and amended policies and regulations, and the nation’s Union Budget for the financial year 2020-21 sought to ascertain just that. The Budget improved and introduced provisions to boost foreign investment and trade as a step towards building a future-ready economy. India’s investor-friendly policies have already led to a 15 per cent jump in foreign equity investment (FDI) inflow to US$26.1 billion during the first half of 2019-20. With the new investor policies, among others such as those related to insolvency/bankruptcy resolution, credit reform, and infrastructure investment, India is targeting growth of 6- 6.5 per cent in 2020-21.
India’s investor-friendly policies lead to a 15 per cent jump in FDI inflow to US$26.1 billion during the first half of 2019-20
Here are certain provisions of the Budget about foreign trade and investment:
- In order to incentivise investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, the Budget has proposed to grant 100 per cent tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure and other 36 notified sectors before 31st March 2024 and with a minimum lockin period of 3 years.
- To make available foreign funds at a lower cost, the Budget proposes to extend the period of concessional withholding rate of 5 per cent under section 194LC for interest payment to non-residents in respect of money borrowed and bonds issued up to 30th June 2023. Meanwhile, specific government securities will be opened up for nonresident investors.
- An Investment Clearance Cell to be set up by the Government to provide end to end facilitation to investors, as per the Budget. Additionally, the foreign portfolio investment (FPI) limit for corporate bonds to be increased to 15 per cent. The Government is also preparing to offer a special series of government securities (G-secs) without any limit for FPIs during the first half of 2020-21.
- Union Budget 2020-21 has proposed to extend the period up to 30th June 2023 for a lower rate of withholding of 5 per cent under section 194LD for interest payment to FPIs and Qualified Foreign Investors (QFIs) in respect of bonds issued by Indian firms and government securities.
- Non-availability of credit of DDT to most of the foreign investors in their home country results in a reduction of the rate of return on equity capital for them. To increase the attractiveness of the Indian equity market and to provide relief to investors, the budget has proposed to remove the DDT and adopt the classical system of dividend taxation under which firms would not be required to pay DDT. The dividend shall be taxed in the hands of the recipients at the applicable rate.
- To incentivise the listing of bonds at IFSC exchange, the budget has proposed to further reduce the withholding rate from 5 per cent to 4 per cent on interest payment on bonds listed on its exchange.
- Niryat Rin Vikas Yojana (NIRVIK) Scheme for higher export credit disbursement has been launched. Additionally, a scheme anchored by EXIM Bank and SIDBI has been introduced to handhold MSMEs in export markets.
- An international bullion exchange to be set up at Gujarat International Finance Tec-City (GIFT); to facilitate better price discovery of gold.
- Indian customs authorities can now check for the valuation of imports under free trade agreements (FTA) for up to five years. Simplified GST return system from 1st April 2020. The refund process to be fully automated.
The latest Budget sought to modernise the customs duty layout to make it relevant for the current time:
- Customs Act is amended, including a review of Rules of Origin requirements, to ensure that imports under Free Trade Agreements (FTAs) are competitive with local production.
- Government to review customs duty exemptions by September 2020 to ensure that they are relevant to the need of the time (80 exemptions have been withdrawn). Customs laws and procedures will also be reviewed.
- Customs duties are being raised on items like footwear, furniture, machinery that are manufactured by labor-intensive sectors under MSMEs. This will help curb cheap and low-quality imports.
- Plan to impose a nominal health cess, by way of a customs duty, on imports of medical equipment keeping in view that these goods are now being made significantly in India.
- Under Make in India, customs duty on items such as mobile phones, household goods, and appliances, electronics items, electric vehicles, and components has helped increase local manufacturing. The duties are being revised.
- Meanwhile, customs duty has been proposed to be reduced on a variety of raw materials and inputs like certain fuels, chemicals and plastics, precious metals, newsprint, and electronics parts, sports goods.
Apart from these and many others provisions to aid trade and investment growth, Union Budget 2020-21 offered provisions for international skill development and employment opportunities with solutions such as (1) Ind-SAT to be conducted in Asia and Africa under Study in India program; and (2) Special bridge courses to improve skill sets of those seeking employment abroad. Empowered with these new and amended policies, India is on its way to achieving its growth targets.