India at the centrestage of global investments

Current Environment

• The Indian economy is recovering from the COVID-19 impact and is gradually picking up amidst these uncertain times and volatile environment, caused by various disruptions, high inflation, and geo-political tensions. The Indian equity markets have scaled new highs in 2021, buoyed by strengthening signs of recovery in economic activity and a strong demand outlook.
• The financial services sector can help define the economy and would need to be its backbone, by playing a pivotal role for strength and stability, while operating in a changing world. From banking and capital markets, to insurance, investment management, and commercial real estate, financial services firms are prioritising digital transformation which could be a big disruptor and create new leaders in the industry.
• With an aim to aid further development and enhance the financial services systems within India and thereby, augment the economic growth, the Union Budget 2022-23 could introduce additional regulatory and tax relaxations to boost spending on innovation and propel growth in the financial services sector.

Expectations

Top three asks:

Expectation #1: Regulatory and tax changes for IFSCs

· IFSC – GIFT City is picking up fast with various stakeholders showing keen interest therein. However, the growth potential is hampered by uncertainties and short sightedness of term benefits.

· To make GIFT City a more attractive proposition, the following regulatory framework and tax-related changes are being expected:

• Negotiating passporting rights for India-domiciled IFSC Investment Funds with overseas jurisdictions to increase marketability and investment appeal of such funds to a global investor base.
• Increasing the longevity of the income-tax deduction benefit, complete exemption from Minimum Alternate Tax (MAT) liability, immediate commitment of a stable and predictable tax regime to investors, removing the applicability of domestic transfer pricing requirements and applicability of GAAR to transactions with IFSC units, incentivising companies/individuals through fiscal incentives for enabling smooth movement of skilled personnel to IFSC – GIFT City, etc.

Expectation #2: Relaxation from digital tax/withholding tax for financial services transactions/securities

• Digitisation has become a key component in today’s financial services – digital app lending, predicting default trends, preventing security breach in work-from-home, and common data sharing between financial institutions, need significant investment/spending on digital upgradation/innovation.
• Existing equalisation levy (globally referred to as “digital tax”) provisions expose transactions involving any online element to potentially trigger an equalisation levy for foreign entities. This creates roadblock and uncertainties for global companies to support, and pass on learnings to Indian companies.
• Hence, some relaxations/clarifications can be expected to make the provisions watertight and clear, to ensure that unwarranted financial services transactions involving a digital element are not caught within the ambit of equalisation levy, especially considering that OCED’s Pillar One has also proposed to keep regulated financial services out of scope.

Expectation #3: Regulatory and tax framework for cryptocurrencies

• Cryptocurrencies are attracting light speed attention in boardroom discussions of most financial services organisations. Cryptocurrency investments grew from approximately US$ 923 million in April 2020 to a whopping US$ 6.6 billion in May 2021, despite no real clarity on its legality and/or acceptability.
• Currently, pending any regulations and absence of any specific provisions in Indian tax laws dealing with the taxability of cryptocurrencies, there are various issues pertaining to whether the investment needs to be disclosed and offered to tax in India by a taxpayer. The method of computing the fair market value, costs, taxable income, reporting requirements, etc., needs to be defined.
• Introduction of a special regulatory and taxation regime for cryptocurrencies and central bank digital currencies to cover various aspects can be expected.