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India’s Finance Minister announced a new federal budget over the weekend. The budget emphasizes increasing growth and investment, while putting undesirable but necessary reforms on the back burner.
Many analysts viewed this budget announcement as an opportunity for India’s leadership to display major economic reforms; however, the result was underwhelming. The budget announcement detailed very few structural reforms, such as spending and policy changes, and forecasted over-optimistic revenue targets. The reforms laid out in the new budget are much less significant than the reduction of expensive subsidies and privatization of government operated banks and industrial corporations economists wished for.
One notable aspect of the budget announcement was the desire to support foreign investment. The government is deferring a new set of tax laws that would have given Indian agencies the ability to investigate operations that they believe to be been structured specifically to avoid taxation. Some foreigners invest in the country via tax havens. These investors feared the budget announcement would address this by attempting to close more tax loopholes. Instead, the implementation of the policies known as the General Anti-Avoidance Rules has been delayed until the year 2017. This provides foreign investors with the opportunity to restructure their investments. The country also extended its concessionary 5 percent tax rate on income from debt investments until 2017.
While the recent budget update was not as dramatic as some had expected, there were definitely some impactful announcements. For the time being, foreign investors need not worry about increased taxation. As the Finance Minister clarified, the government will only tax deals in which at least 50% of all assets owned by the foreign firm are from India. This budget is good news for firms looking to expand overseas, at least until 2017.
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