The Reserve Bank of India (RBI) has proposed a host of measures to boost the returns on Indian companies' investments in their joint ventures (JVs) and wholly owned subsidiaries abroad. These include exemption of dividend payout from tax, besides credits for corporation tax paid by the arms of JVs in host countries. The proposals assume importance as these returns are part of the country's current account balance, which has been a major source of worry for the government lately.
At a meeting of the inter-ministerial committee on overseas investment recently, RBI mentioned that inflows from huge investments made abroad by Indian firms had been minuscule. It mooted the idea to exempt dividend received from the overseas JVs or wholly owned subsidiaries from tax.
Budget 2013-14 has extended the concessional rate of tax (15 per cent) on these dividends for another year - up to the 2014-15 assessment year. In the Budget for 2011-12, the finance ministry had announced this rate, against 30 per cent payable earlier.
The RBI proposals have been sent to the Department of Revenue for consideration.
RBI has suggested there is a need to prescribe certain terms and conditions for loans extended by Indian companies to their JVs or wholly owned subsidiaries abroad. These include mandatory and pre-decided fixed-tenure interest rate and repayment schedule for loans. The central bank has argued such conditions will lead to discipline in respect of loans availed of by overseas entities from their Indian parents and, thereby, commensurate inflow into the country by the way of principal repayment and interest.
Another proposal mooted at the meeting includes allowing multi-layer structure for Indian companies overseas. It says firms should be allowed to have structures with step-down subsidiaries as holding companies or special-purpose vehicles. These structures are currently not allowed under the Foreign Exchange Management Act.
Companies prefer multi-layered structures to have flexibility in raising capital, for tax efficiency, ring-fencing of risks, for having more freedom in exiting, mergers and acquisitions and overseas listings. This, the proposal says, would give India Inc a level playing field vis-a-vis its foreign counterparts.
While the external affairs ministry agreed to the proposal, the Department of Revenue, under the finance ministry, objected to the idea. The department said these structures should not be encouraged, since these could be used to circumvent India's tax laws through treaty shopping - the practice of structuring a multinational business to take advantage of more favourable tax treaties available in certain jurisdictions.
In the first half of this financial year, the country's current account deficit (CAD) as a proportion of gross domestic product hit an all-time high of 4.6 per cent, against four per cent in the corresponding period the previous year.
These returns, known as primary income in the current account balance, were in the negative in the period, RBI data showed. These stood at (-) $10.5 billion in April-September, against (-) $7.6 billion in the corresponding period of 2011-12.
This meant India received less returns from its investments abroad ($5 billion), compared with the returns foreign companies received from their investments in India ($15.5 billion) in the first half of the current financial year.
The total current account deficit stood at $38.7 billion during the period, implying deficit in the primary income accounted for over 27 per cent of CAD.
CAD has become a major issue of concern and was flagged by Finance Minister P Chidambaram in the budget. In the post-budget interactions, he had said CAD is a greater worry than the Centre's fiscal deficit.