tax

After a long spell of no activity on the foreign direct investment (FDI) policy front, there has been a flurry of recent activity by India’s Union Government. Significant changes have been announced to the FDI regime across the retail, domestic aviation, broadcasting and power industries.

Red letter day for the retail industry
The government has announced that foreign companies can now invest up to 51% in the ‘multi-brand product retail’ format, although it has been left to the various states to decide whether they will actually allow this. The government had tried to usher in FDI in multi-brand retail previously but faced stiff resistance from both opposition party members and allies. Nevertheless, Indian and foreign companies including Bharti Enterprises, Future Group, Carrefour, Tesco and Walmart, have welcomed the recent news.

The rules on brand ownership and the requirement to source 30% of products locally from micro, small and medium-sized enterprises have been relaxed for companies seeking FDI in single-brand product retailing. Swedish furniture giant IKEA was among those foreign companies that had wanted the government to ease the rules relating to sourcing.

Emotions soar 
The Indian airline industry has also been given a welcome boost with the government allowing FDI of up to 49% in existing domestic carriers by foreign airline companies. A high tax structure on Aviation Turbine Fuel (ATF) and a steep rise in airport charges had left most of the industry’s players feeling bleak after a cumulative loss of approximately US$2.4bn last year. The industry clearly needed a helping hand on the policy front.

This announcement will be a morale booster for Kingfisher airlines in particular, which saw losses in excess of US$460m in the last financial year. Companies such as British Airways, Gulf Air and Middle Eastern Airlines have been eagerly waiting for the government to allow them to be part of the Indian airline story. Investment will require government approval, with foreign companies requiring clearance from the Foreign Investment Promotion Board and Home Ministry.

Know-how and technology
The cabinet also approved a decision to increase the FDI limit in the direct-to-home segment from 49% to 74%. Any investment beyond 49% will require government approval. The industry has welcomed the move saying that the increased investment limit will go a long way towards achieving the government’s target of 100% digitalisation by 2014.

The final major decision was to allow FDI of 49% in power trading companies. This is again a welcome step that will allow the power trading markets to mature by permitting foreign companies to bring in capital, as well as know-how and technology.

 Comparison between Earlier Limits/Entry Route and New Limits/ Entry Route:

 Cherry Bansal is one of Birchtree Global’s Indian partner firms.  She provides tax consulting services for clients in India.