Diaspora and entrepreneurs welcome scope for OPCs and simplified rules to avoid double taxation.
A massive spending boost in India’s annual budget statement for 2021-22, along with the focus on “wellness and wealth” as described by Indian Prime Minister Narendra Modi, has brought cheers all around from investors as well as the public – and that includes millions of non-resident Indians (NRIs) too.
With a proposal to increase healthcare spending to $30.2 billion to help improve public health systems against the backdrop of the coronavirus pandemic and fund the world’s biggest vaccination drive to immunise 1.3 billion people, Indian Finance Minister Nirmala Sitharaman has set capital expenditure for 2021-22 at Rs5.54 trillion, 35 per cent more than the previous year's budget estimate. “All of us decided to give impetus to the economy and that impetus, we thought, would be qualitatively spent and give necessary demand push if we choose to spend big on infrastructure,” Sitharaman told reporters after the presentation of the budget in parliament.
But it was two specific announcements that brought special cheer from NRIs and expat Indian entrepreneurs – one was the bold move to permit one-person companies (OPCs) for NRIs, the other being legislation that will put an end to double taxation for Indian expats returning to the country.
“I propose to incentivise the incorporation of OPC by allowing OPCs to grow without any restrictions on paid-up capital and turnover. Allowing their conversion into any type of company any time. Reducing the residency limit for Indian citizens to 120 days from 180 days. This will be a big boost to start-ups,” Sitharaman said.
As the name suggests, a One-Person Company or OPC is a company incorporated by a single person/ individual, and countries where this concept has been legalised include the UK, Turkey and China. As per the Indian Companies Act of 2013, the OPC is a separate legal entity and this will need to register for perpetual succession. In case of an OPC, the liability to make loan repayments availed by the OPC falls on the OPC only unlike a sole proprietorship. The OPC's legal status will also give an edge while taking loans from any of the banks as against the sole proprietorship. In July 2013, the Reserve Bank of India directed that all scheduled commercial banks in India promote the financing of priority sectors like agriculture and small-scale industries – and those are sectors where setting up OPCs is being seen as lucrative for investors. OPCs have also become increasingly popular in other sectors like construction, electricity, mining and quarry. The host of the advantages the OPC will reap includes freedom from burdensome legal compliances such as financial statements inclusions, board meetings, quorums, mandatory rotation of an auditor and so on.
Another key takeaway for NRIs from the budget on Monday was that it brought about more clarity on how NRI income will be taxed in the coming year. According to tax consultants and experts, this will be made possible through better procedures and proposed amendments to existing legislation. “The government is to notify rules to eliminate double tax for NRIs on foreign retirement funds,” wrote Dixit Jain, managing director at The Tax Experts DMCC. “This will give much needed clarity on how the retirement funds, especially annuity schemes, will be taxed.”
According to the Indian Finance Minister, when non-resident Indians return to the country, they face issues with respect to their accrued incomes in their foreign retirement accounts. “This is usually due to a mismatch in taxation periods. They also face difficulties in getting credit for Indian taxes in foreign jurisdictions. I propose to notify rules for removing their hardship of double taxation,” Sitharaman said during her 110-minute-long budget speech.
According to the memorandum explaining the provisions of Finance Bill 2021, a mismatch was recorded in the year of taxability of withdrawal from retirement funds that were opened while residing in foreign countries. Currently, the withdrawal may be taxed on receipt basis in foreign countries, while on an accrual basis in India.
In order to address the mismatch in the taxation of income from the notified overseas retirement fund, the government has proposed a new section 89A to the Income-tax Act, 1961. After the amendment, the income of such “specified person” from the “specified account” will be taxed in the manner and in the year as prescribed by the Central Government. The expression “specified person” will be defined as the person who is residing in India but opened the “specified account” while resident in that foreign country. The finance ministry has proposed to define “specified account” as an account maintained by NRIs in a foreign nation for retirement benefits. The income from such an account is not taxable on an accrual basis and is taxed by the foreign country at the time of withdrawal or redemption. The amendment will take effect from April 1, 2022, and will accordingly apply to the assessment year 2022-23 and subsequent assessment years.
The presentation of the Union budget comes against the unprecedented backdrop of the COVID-19 economic crisis, and its footprint was evident all over the financial statement – from boosting healthcare infrastructure to shoring up revenue collection.
“The huge increase in health expenditure by 137 per cent, support for domestic agri-manufacturers through increase in custom duties and a big push for infrastructure will help revive the economy, which is forecasted to witness a V-shaped recovery with 9.72 per cent growth in 2021. The growth recovery path will facilitate robust revenue collection in medium-term and lead the economy to a sustainable path in the long-term,” said Gargi Rao, economic research analyst at GlobalData.
“For capital creation, a special purpose vehicle will be launched by the government for asset monetization, which will bring in more revenues. For senior citizens, a compliance burden relief is proposed to raise the purchasing power and drive demand. The budget proposed to amend the insurance act to introduce additional FDI to insurance companies from the existing 49 per cent to 74 per cent. The government’s decision of strategic disinvestment in LIC IPO in FY22 along with BPCL, CONCOR and SCI in 2021-22 will lead to the reduction in debt and spur the development of the capital market in India. Setting up of bad banks will reduce the burden of NPA for banks and NBFC’s. With regards to agriculture and manufacturing sectors, the 1.5 times increase in minimum support price for all commodities comes as a relief to farmers. In addition, increase in import duties for agricultural products will protect domestic industries and give a boost to ‘Make in India’ initiatives,” she said.
With the Indian government planning to borrow an additional $1.1. billion to bridge the budget deficit, the funding would go a long way in boosting the “V-shaped” recovery after the Covid-induced contraction, forecasting GDP growth to hit 11 per cent in the 2021-22 financial year.
“This budget provides every opportunity for our economy to raise and capture the pace that it needs for sustainable growth,” Sitharaman told parliament.
“The huge government borrowing in the next two months will widen the fiscal deficit for 2021-22 and will put India on a faster recovery path and attain its status as the fastest growing economy in the world in 2021,” said Rao.