India — recent developments in the international tax regime for other countries 

An overview of the recent developments and the resulting tax environment and incentives for multinationals. 

In brief

• A wide range of initiatives and tax planning reforms are in play in India, intended to bolster investment and performance in manufacturing, financial services, exports, and the economy at large.
• India's government is also modernizing its international tax policies and administration, with a range of tax incentives and rate reductions alongside significant digitization of key processes.
• Beyond government programs, fundamental advances in technology are helping to transform India, with greater mass connectivity enabling rural regions to participate in the nation’s growth.

India’s transforming economy

The World Bank calls India the world’s fastest growing major economy, even as its population is expected to overtake that of China in 2023. There has been the rise of “Atma Nirbhar Bharat”—“Self-Reliant India”—a raft of initiatives intended to help the nation become a key player in the global economy. These include financial reforms, such as the Insolvency and Bankruptcy code and the National Asset Reconstruction Company, focusing on distressed assets and enabling banks by helping to free up lending capital. Investment reforms expand access to infrastructure investment trusts and real estate investment trusts.

There are comprehensive labor reforms underway—29 current central labor laws are being subsumed under four new central labor codes covering various aspects including wages, social security benefits, occupational safety, health, working conditions, and employee relations matters, with the purpose of bringing more simplicity and ease of compliance for the industry.

There is also an emphasis on developing infrastructure. The PM Gati Shakti initiative, announced in October 2021, promotes integrated connectivity for people, goods, and services between one mode of transport and another. The emphasis on infrastructure building is also supported by the National Infrastructure Pipeline, with a budgeted outlay of approximately $1.4 trillion through 2025, focusing on development of infrastructure projects in areas such as aviation, telecommunication, transport, logistics, energy, water, and sanitation.

Incentives designed to attract investment

The government seeks to attract more foreign direct investment, sponsoring a wide range of incentive programs for investors. These include:

• The production-linked incentive (PLI): The goal of the PLI is to boost India’s progress as a world-class manufacturing destination. Selected global and domestic companies receive a recurring incentive payment from India’s central government as a percentage of sales for a specified duration. Targeted sectors include semiconductors and display fabricators to telecommunications, automotive, and medical devices.
• Gujarat International Finance Tec-city (GIFT): The government is also focusing on enhancing India’s global financial services industry. Indian authorities are backing the GIFT Special Economic Zone. GIFT/SEZ is a greenfield smart city offering state-of-the-art sustainable infrastructure and transportation. Combined with various tax incentives and fast-tracked regulatory approvals, the city is attracting a range of IT and financial services providers. In addition, the Finance Minister announced in the recent Union Budget of 2022–23 that world-class foreign universities and institutions will be allowed in GIFT. Such foreign universities will be exempt from regular domestic regulations (other than those framed by the International Financial Services Centres Authority).
• Other incentives: Individual states can also provide benefits such as stamp duty exemptions, capital interest subsidies, exemptions from electricity duties, state goods and services tax reimbursements or a power tariff subsidy.

A transforming tax landscape

India’s tax authorities are taking significant steps to modernize its domestic and cross-border tax administration. Digitization is a particularly critical focus. Electronic invoicing and the real-time submission of transaction data are being implemented. Various tax and regulatory agencies are digitizing and collaborating through Project Insight, which is a program intended to help increase cooperation and harmonization across the various authorities (e.g., direct tax, indirect tax and corporate affairs).

India intends to use this shared data to guide tax assessments and audits. For example, the Income Tax Transaction Analysis Centre (INTRAC) has been established to focus on data integration, processing, quality, warehousing, and management. INTRAC will also use web-text mining and advanced data analytics, including artificial intelligence, for risk assessment of taxpayer profiles and audit execution.

Beyond these digitally focused efforts, other focus areas of the government include:

• Negotiating trade agreements: A number of fast-track bilateral trade agreements are being pursued with nations including the United Arab Emirates, Australia, UK and Canada. Multilateral talks are also underway with the EU/UAE. India has also agreed to be a part of the US-led proposal for a 13-nation Indo-Pacific framework including Japan, Australia, and Singapore. Unlike conventional free trade discussions that tend to focus on tariff-free market access, these talks address a wider range of issues, including the rise of digital commerce, realignment, and strengthening of global supply chains, plus anti-corruption programs and climate change.
• Enabling advance pricing agreements: Businesses are also being helped to achieve greater tax certainty through India’s fast-growing APA program. Introduced in 2012, the program has attracted over 1,000 applications, with around 330 concluded deals. Multiple bilateral APAs have been successfully closed with countries including the US, Japan, UK, Netherlands, Switzerland, Singapore, and Australia, and the program is credited as being a significant factor in boosting India’s ranking in the ease of doing business index. According to the World Bank, India now ranks 63rd worldwide, up from 142nd in 2014.
• Reforming duties and customs: The complexities of India’s duties and customs environment are being addressed by streamlining procedures and embracing technology. In addition, the country is planning to phase out more than 350 customs exemptions to support domestic manufacturing.
• Enabling deferred duty payments: The government has revamped and streamlined a longstanding program allowing companies to defer import duty payments. Using the manufacturing and other operations in a bonded warehouse program, businesses can delay duty payments on imports of both raw materials/inputs or capital goods—avoiding duty entirely if the goods are ultimately exported.
• Rebating state and local duties/taxes: A Remission of Duties or Taxes on Export Products program has been instituted, where exporters of goods can obtain refunds of embedded central, state and local duties or taxes, if not already obtained under other programs. The program is based on the idea that taxes or duties reduce the attractiveness of exports, and is expected to deliver a significant impact on India’s competitiveness.
• Committing to BEPS 2.0: In 2016, an equalization levy was introduced as a means of taxing digital transactions. While controversial at its inception, the policy has in large part been vindicated in that it accomplishes many of the objectives of the BEPS Pillar One and Pillar Two initiatives. However, having signed on for the Two-Pillar solution, India has since expressed its willingness to drop its equalization levy in favor of other BEPS-driven practices.
• Reducing goods and services tax: Recommendations have been made to reduce the GST rate from 28% to 18% on a wide range of categories.

Driving growth and investment

The above measures translate into significant prospects for capital markets. The Ministry of Finance’s annual Economic Survey of India reported “hectic” fundraising from April through November of 2021. The totals are “much higher” than anything seen in the past decade, with 75 companies raising nearly $11.25 billion.

Meanwhile, joint research from EY and the Indian Private Equity & Venture Capital Association shows that PE/VC investments rose 62% in 2021, reaching $77.1 billion. Similarly, India’s capital markets experienced a surge in large, strategic exits as well as secondary market and IPOs, with 281 deals generating $43.2 billion—a 7x increase over 2020.

India now also represents the world’s third largest ecosystem for start-ups, with 44 nascent businesses achieving unicorn status (valuation of over $1 billion).

Considerations for investors

The picture painted above presents a portrait of an India in transition, committed to growth and attracting investment.

Nonetheless, investors looking to India are advised to:

• Carefully explore—and understand—the opportunities
• Perform rigorous due diligence across:
• partners & Investors
• Explore the full range of incentives:
• Compare competing locations & Negotiate
• Evaluate the tax landscape:
• Examine the customs and duty treatments
• Understand India’s international tax and trade treaties
• Where certainty is essential—consider APAs

Reproduced with permission. First published on 26 September 2022. Copyright 2022. The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com