Investment by a non resident in an Indian entity

India is seeing huge investments in the start up circle from Non resident groups including a number of Non Resident Indians. I happened to be in Bangalore attending a conference on start up investment when I met few non residents who were looking to invest in the Indian market but were not sure on the regulations and tax aspects of the same in India.

Since they were intending to be financial investor they were not too sure from the regulatory aspect as to what should they expect from the Company they are investing in. They were also not too sure about what would be the taxation on the repatriation of such money to them from the Indian company. Though not comprehensively, but I gave them a indicative list both from regulatory and tax point of view. 

Before making the investment

  • Approval – The Equity infusion is allowed under the Automatic Route or approval route based on the sector in which the investment is being made. Thus the investor needs to be sure of the sector and the rules around the sector.

At the time of making the investment

As soon as the investment is made into the Indian entity, the investor should check whether the following is being done with respect to his investment:

  • Intimation of Receipt –
    • The Indian Entity would be required to submit the intimation of receipt of share application within 30 days of receipt of consideration to the Reserve Bank (‘RBI’)
    • This intimation should be deposited along with the Foreign Inward Remittance Certificate (FIRC), Know Your Customer (KYC) of the person who has remitted the funds and to whom shares would be allotted
    • Shares would need to be issued to the person from whose account the money is being transferred.
    • There might be an instance where the remitter is different from the person to whom shares are allotted. However in that case an NOC is to be given by such remitter. However, RBI has recently started raising objections on the same and have stated that remittance has to be made by the entity itself to whom shares are to be allotted.
  • Allotment of shares

The share application received has to be allotted within 60 days of receipt, else any amount not allotted to be refunded to the investor within 60 days aswell.

  • Issuance of Shares

Within 30 days of allotment of shares, form FCGPR along with relevant documents to be submitted to RBI by the Indian Entity.

  • Issue of Shares as per pricing norms – The issue of shares would be subject to pricing guidelines, which state that the price of the share should not be less than the fair valuation of shares arrived by a Chartered Accountant through any accepted international method of valuation. 

While carrying the invesment 

Before the liquidation of the investment of the investor, the Indian entity might declare dividends. In lieu of being a shareholder, the foreign investor would also be eligible for receiving such dividends. Though the regulatory compliances for declaration of such dividends would be standard and might not effect the foreign investor, he should be aware of the taxation impact on such dividends: 

Dividend income 

  1. As per the Income Tax Act, dividend declared and paid by Indian Entity will not be taxable in the hands of investors in lieu of him being a non resident
  2. Instead, tax on dividend is collected from the company declaring such dividend. This tax is called Corporate Dividend Tax (“CDT”) and is levied @ 20.36% (approx.) of dividend distributed.
  3. CDT does not operate as a withholding tax, i.e. the same is not deducted from the dividend declared by the company. Of course, as the CDT is met out of distributable post-tax profits, it effectively results in a reduction of dividends actually distributed.
  4. As the dividends received by the foreign investor shall be exempt under the Indian Income Tax Act, the question of any taxation under the Double Taxation Avoidance Agreement (“DTAA”) does not arise. 

Though a strategic investor may have more sources to earn income (management consulting, business development etc), but a financial investor may not have other avenues of income till the time he is invested in India. 

At the time of liquidation of investment

All foreign investments are freely repatriable (net of applicable taxes). Thus from a regulatory perspective there will be no issue in repatriation of funds provided there is no agreement between the investor that the investment would be on non-repatriation basis. However the following would need to be looked at from a tax perspective/

  1. Treatment as Capital asset – on the assumption that the investment would be made in non listed securities, such investment would be treated as capital asset for the purpose of taxation and gains/ loss would be treated as capital gains/ loss
  2. Period of Investment – the taxability at the time of transfer of such capital asset would depend on the period of holding. If such asset is held for more than 3 years it would be long term capital asset and if for less than 3 years then short term capital asset
  3. Rate of Tax
  4. Under the domestic tax laws of India, capital gains (computed in a prescribed manner) on sale of shares of an Indian company by a non-resident, are taxed @ 10.815% if it is a longer term capital gain and 43.26 if it is short term capital gain.
  5. Further, we would also need to review the DTAA with the respective country to ascertain whether such capital is to be taxed in India or the other country. However most of the countries with whom India has a DTAA, gives the right of taxation to India
  6. Tax Credit

Taxes (if any) paid in India would be allowed as credit in country in which the person is resident.

Post discussing the above, the investor gave me a serious look and asked whether we can also help them understand the implications in case the investment is not doing well in India. I could just smile at them and mentioned that the discussion we had was primarily on the assumption that they would have done their diligence at the time of making the investment, but in case they would need help in terms of diligence as well, IBA might come handy.

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