Indian 2020 Budget Incentivises Foreign Investment.

Christian Lütkehaus of Pinsent Masons, the law firm behind Out-Law, said: "The new Indian annual budget contains a range of tax reforms that will be welcomed by foreign businesses and fund managers, and ambitious plans to modernise transport infrastructure and boost the renewable energy sector in India will also provide for some interesting investment opportunities."

India's annual budget was outlined on Saturday by finance minister Nirmala Sitharaman. 

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The tax changes announced include plans to grant a tax exemption to sovereign wealth funds in respect of their interest, dividend and capital gains income from investments made in infrastructure in India before the 31 March 2024. The exemption will only apply if the investment is held for at least three years. The Indian government has the power to extend the exemption to other sectors too under the Finance Bill 2020.

A further change will see new power generation companies benefit from a reduced corporate tax rate of 15%. The move comes after the Indian government last year announced that newly incorporated domestic companies in the manufacturing sector would benefit from a 15% corporate tax rate where they start manufacturing by 31 March 2023. The corporate tax rate was also dropped from 30% to 22% for existing manufacturers.

"In order to attract investment in the power sector, it has been proposed to extend the concessional corporate tax rate of 15% to new domestic companies engaged in the generation of electricity," according to an official summary of the budget announcement.

In her budget speech, Sitharaman also announced plans to remove the dividend distribution tax (DDT) payable on the distribution of dividends. The Indian Ministry of Finance said the measure "will further make India an attractive destination for [foreign direct] investment".

The Indian Ministry of Finance said: "Currently, companies are required to pay dividend distribution tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess, in addition to the tax payable by the company on its profits. In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, the finance minister has proposed to remove DDT, and adopt the classical system of dividend taxation, under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate."

Vinayak Kapur of Pinsent Masons confirmed that abolishing DDT will provide a significant benefit to foreign multinationals and equity investors with interests in India. "Not only will the change reduce a foreign investor's dividend related tax liability from effectively 20.56% to the level provided under the applicable tax treaty, which is anywhere between 5% to 15%, it also solves the problem of non-availability of DDT credit in most foreign investors' home countries," he said.

The budget announcement also contained further information about India's national infrastructure pipeline (NIP), an initiative confirmed by the government late last year aimed at improving the "physical quality of life" in the country. The NIP will consist of more than 6,500 projects and cost more INR 10 trillion ($140bn) to deliver between 2020 and 2025.

Sitharaman said INR 220bn ($3bn) has already been allocated to NIP projects. Improvements to the road and rail network in India are central to the plans. The construction of thousands of kilometres of new roads linking major economic hubs is envisaged, as are new coastal and port roads. The electrification of 27,000km of rail tracks also form part of the plans. Public private partnerships are proposed to deliver the re-development of train stations and operation of 150 passenger trains.

Plans to build 100 new airports in India by 2024 were also set out in the budget announcement. The intention is for the new airports to provide better links into smaller cities in India under the government's UDAN scheme.

The annual budget also contains incentives for foreign investment in India's bond market. The government said the foreign portfolio investment limit in corporate bonds would be increased from 9% to 15%.