By Prashant Kapoor, Leader, India- Europe Corridor, KPMG in India and Lata Daswani, Partner, India- Europe Corridor, KPMG in India
The Union Budget 2025 created quite a wave of optimism for foreign investors & multinational enterprises, eager to invest or scale their presence in India. Largely comprising of investor friendly reforms along with a few long-term promises to fulfill some of the remaining expectations, the budget painted an intriguing picture for the foreign investors. Here are key highlights from the budget, that are set to impact global businesses positively.
1. Tax reforms and simplified compliances
The government's taken a significant leap in terms of simplifying & rationalizing quite a few tax provisions apart from committing to release the new tax bill in a week’s time. By bringing tax certainty to transfer pricing, IFSC-related tax exemptions and expanding the scope of safe harbour rules for international transactions, the budget intends to ease the compliance burden significantly. Foreign investors can now look forward to navigating the Indian tax environment with much more clarity and conviction.
2. Ease of doing business
Committing to a light-touch regulatory framework and rolling out revamped KYC norms, India is all set to become an investor friendly business destination. This initiative is likely to attract foreign investors who have been shying away from investing in India due to regulatory restrictions and complex compliance requirements.
3. Export Oriented purchases incentivized
The significant economic presence (SEP) provisions will no longer be applicable to nonresident Indians on their purchases in India, which are meant for exports only. This exemption will incentivize India’s exports while continuing to strengthen the country’s foreign exchange reserves.
4. Tax certainty on transfer pricing – Three Year Block for Arm's Length Pricing
Introducing a block of three years for determining arm's length pricing in continuing transactions brings much-needed stability for foreign investors, especially those which engage in big volume of related party transactions. Companies engaged in long-term contracts can breathe easier, knowing there's predictability in transfer pricing, thereby reducing litigation substantially.
5. Capital gains tax rationalization for Sovereign and Pension Funds
Sovereign wealth funds and pension funds are now eligible for long-term capital gains exemption, even from unlisted securities previously deemed short-term. This shift will attract long-term global investors, injecting substantial capital into Indian economy.
6. Tax exemption on offshore derivative instruments issued by non-banking units in International Financial Services Center (IFSC)
Beyond offshore banking units, non-banking units set up as Foreign Portfolio Investors (FPIs) in the International Financial Services Centre (IFSC) will now enjoy tax exemptions on income earned from issuing offshore derivative instruments. With this move, investment banks looking to offer offshore derivative instruments to their global investors will be encouraged to set up their presence as FPIs in IFSC, which is likely to be a potential global hub for financial services business in the long term.
7. FDI limit in Insurance sector raised from 74% to 100%
Global insurance providers are now welcome to put in 100% Foreign Direct Investment (FDI) in India as against the previous limit of 74%. This courageous move will positively impact the insurance sector in terms of fresh capital, healthy competition and innovative products, ultimately benefiting the consumers.
8. Impetus to Cross border trade facilitation
The Budget has introduced significant trade facilitation measures to provide tax certainty and streamline compliance, thereby inviting more foreign investments in to India. Key measures include a fixed timeline for customs assessments and voluntary amendments to import-export documentation. Further, production-based schemes for industries like footwear, leather, and toys will provide much needed impetus to domestic manufacturing, reducing dependence on imports, and strengthening India's position as a sought-after international manufacturing hub.
9. New Direct tax Bill to be released
Manufacturers across the globe had expected reduction in corporate tax rates or some additional incentives in this budget, but the Government has chosen to take a longer term view by announcing the release of the new direct tax bill, which is likely to cater to the remaining expectations of all taxpayers, apart from being a simpler law and an investor-friendly framework.
10. Bilateral Investment Treaties (BIT) to be revamped
The finance minister has made a commitment to put in place a framework to revamp bilateral investment treaties as another investor friendly measure for foreign investors. This commitment will encourage international investors to look at India as a favorable investment destination.
11. Long term strategy for Green Growth
Considering the sense of urgency for India to prepare itself to face climate change and deep global focus on sustainable businesses, there was an expectation from the budget to incentivize green growth. However, this year’s budget had a diluted focus on green growth with no new incentives or tax breaks. Globally, all eyes are on the new Direct tax bill, with foreign investors expecting the government to launch green growth initiatives and provide sustainable business opportunities in coming years.
In summary, this year’s budget has attempted to roll out a red carpet for foreign investors, inviting them to set up their businesses in India as a long-term strategy. Proactive measures to simplify tax laws, dilute compliance burdens, and invite 100% FDI in insurance show the Government’s commitment to making India a global business hub. With a long-term view for foreign investors, especially considering the extension of many sunset clauses, announcement of various investor-friendly initiatives and expansion of IFSC offerings, the Budget this year presents a compelling business case for foreign investors to consider India as a strategic investment destination.
(Disclaimer: Views expressed are the authors’ own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
