Budget 2015: Foreign Investment

Given the economic orientation of
the new government, one would expect that the Budget would make wholesale
relaxations to the foreign investment policy and open up or further liberalise
various sectors. But, anyone adopting that tack is bound to be disappointed as
the Budget makes minimal changes regarding foreign investment.
First, the vehicle of alternative
investment funds receives a boost as it now eligible to receive foreign
investment. Hence, entities in India that are pooling vehicles for investments
such as private equity, hedge fund or real estate funds may now attract foreign
investment. This sector would therefore be able to attract further capital.
However, some
doubts remain
on the effectiveness of such an approach given some
outstanding issues (including taxation) in relation to alternative investment
Second, and more significantly, the
Budget seeks to abolish the differential caps on foreign investment under the
two categories of foreign direct investment (FDI) and foreign portfolio investment
(FPI). Currently, in several sectors there are different caps for FDI and FII.
For example, in the banking sector, while there is an overall foreign
investment cap of 74%, FPI is capped at 49%. The rest of the foreign investment
must necessarily come in through FDI. Once composite caps are introduced, the
total investment through either route (or both collectively) could be 74%.
Hence, FPI would obtain more headroom and enhance their stake (which is likely
to be the case in certain private sector banks as reported here
and here).
Finally, the section on foreign
investment refers to a “Look East Policy” with a view to encouraging Indian
companies to make outbound investments in manufacturing facilities in countries
such as Cambodia, Myanmar, Laos and Vietnam.
Overall, the Budget is quite thin
on reforms pertaining to foreign investment. They are relatively minor in
nature. The Finance Minister appears to have adopted a cautious approach, and
has avoided the issue of opening up further sectors or enhancing the caps in
existing sectors open to foreign investment. Given the broad focus of the
Budget in terms of advancing industrial activity in India, this is somewhat

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


    The topic selectively chosen and briefly discussed i.e. foreign investment mainly covers two areas on which there has always been contradicting and mutually excluding schools of thought and conflicting views.
    On the specific item of agenda referred to as ‘Look East Policy’, one is perforce obliged to instantly doubt-which requires to be gone into in details- whether that in any manner runs counter to the new government’s basic policy namely, ‘Make In India’.

    As regards the underlying ambition / aim at ‘Ease of Business’, how far that is expected to be achieved or fulfilled through anymore or more of the connected fresh proposals is debatable; but left open to guess. Be that as it may, while GAAR itself has been deferred for now, the far reaching implications and most likely adverse reactions against the proposed amendment, through insertion of further explanations in section 9 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2016 call for an anxious in-depth study.
    The main thrust of the viewpoints, underscoring the inadequacy of and resulting disappointment from the proposals are summed up in the opening Para, which reads:
    “Given the economic orientation of the new government,… as the Budget makes minimal changes regarding foreign investment.”

    However, for being satisfied that there is ample scope for looking at the proposals in a different but better and larger perspective, recommend to read the well articulated article > The Budget beyond the economics – TOI Blogs

  • To Add:
    As viewed and understood, quite obviously, the referred new Explanation 6, goes to, in terms, further amplify the scope of the preceding two Explanations 4 and 5 (earlier inserted w.e.f. 1-4-1962); – albeit, for a change, prospectively, with a changed effective date of 1-4-2016 .
    As per the recent reports, the DTC,- that had been a serious talk/earnest hope of the nation, intended to usher in a ‘simplified’ code/ a rationalised new tax regime,- is decided to be given a decent burial. Even so, the added Explanation seems to be a renewed attempt to not-let-go but pursue / keep fathoming newer and deeper waters. That is through incorporating one of the path breaking provisions in the DTC – i.e. Sec. 5(4)(g), rw 5(6), but in a distinct format.

    For an appreciation of the foregoing points of view, in better light, it may be worth looking back, and seek clues from, –

    HERE "Changes in capital gains taxation | Business Line"

    < As commented then:
    The categorical assumption underlying the referred observations of the learned writer, going by my understanding, seems to have overlooked the intended object / far reaching effect of certain crucial but path breaking provisions in the DTC – i.e. Sec. 5(4)(g), rw 5(6). Albeit, according to a view, the said provisions are prima facie misconceived, illogical, and bear ample testimony to the oft complained mindless drafting. The article published in the BL Issue of Jan 29 2011 – Capital gains taxation for non-residents under DTC, was on this very subject.>

    HERE "Capital gains taxation for non-residents under DTC – The …"

    Also, HERE http://vswaminathan-vswaminathan-swamilook.blogspot.in/2012/01/sc-on-vodafone-tax-case-contd.html

  • Attention is invited to a since published write-up @


    Also to: http://www.mondaq.com/…Tax/Knowledge+Sharing+Alert+Union+Budget+20...

    As is noted, one of the budget proposals dealt with/attempted to be summed up, is the amendment of section 9. As observed, that is of relevance to transactions of the type as in Vodafone case.
    The newly inserted Explanation 6, with effective date of 1st April 2016 (that is prospectively), as read and understood, goes to substantially supplement, and in a way, amplify the preceding two Explanations 4 and 5; which were earlier inserted with retrospective effect from 1st April 1,1962. As such, the very first intriguing poser, with no clarity even remotely, that arises is, – for and from which assessment year the amended scheme of things as a whole is proposed to be applied.

    As is said, ‘devil is always in details’. On the first blush, one is left with an unmistakable impression that this is an instance in which for recognising/identifying the ‘devil’, – that is to identify the areas of possible controversies and far reaching implications of the subject amendments of section 9,-an independent mindful study, with a fine toothed comb, by tax law experts, having a good and reliable expertise and exposure, is a must. In short, prima facie, it might not, in one’s tentative view, be prudent for anyone else to proceed on the premise that all is well with the new scheme, with no stumbling block in the way of accomplishing its intended objective/aim of providing ‘stable and predictable taxation regime ’.

    Incidentally, it requires a special mention that, –
    (A) The new Explanation is structured a ‘deeming provision of a singularly unique kind; and
    (B) certain very crucial aspects, of a substantive nature, have been left to be covered/prescribed in Rules, which are yet to be framed and made known. As such, for a better idea of what is in store one has, in any case, no other option except to prudently wait and see.

    (May be contd.)

  • More:
    When given further but unending thoughts to the implications or repercussions of the amendments to Sec 9 (1) of IT Act, – to be precise, the Explanations 4 and 5 previously inserted,and the Explanation 6 as proposed n the 2015 Budget, – perforce comes to one’s mind an associated idea often heard of, – ‘Pandora’s Box’; instantly, also the known concept of, – ‘open and shut’. As defined, the phrase refers to a problem or legal matter which is easy to prove or answer. Everyone concerned, mainly the FM who has commended the proposal to the august legislature, so also taxpayers at large and advising lawyers, seem to think that it is an open-and-shut case. One personally does not think much less believe that to be really so.
    Anyway, the attendant posers arising in the aftermath of the subject amendments , – ostensibly made with the aim of putting an end to the controversies as in Vodafone case, – do not appear to be that easy to find answers, in any case, self- satisfying / convincing answers, without an in-depth research.
    So much so, the need for a devoted study is inevitable.
    It is now left for one and all truly concerned, to explore and form an opinion as to how far or how soon the intended objective/aim of providing stable and predictable international tax regime could be expected to be accomplished.
    Tail Note: Most may have heard of Pandora's box ; but not that Pandora is a kind of 'theodicy'.
    Anyone wishing / itching to intimately know HERE >

    (May be contd.)

Top Posts & Pages


Recent Comments


web analytics

Social Media