India Regulatory Brief

A weekly roundup of India’s legal and regulatory news. 

India Regulatory Brief: E-Business Continues to Prosper, Parliament Passes Bill to Increase Insurance FDI Cap

16 March 2015

Online Wholesalers Take the Lion’s Share in India E-Business Report

According to an e-business report release by brokerage firm Jefferies India Pvt. Ltd on March 12, 45 percent of India’s online market is now controlled by wholesalers and 35 percent by pure-play online sellers.

The report refers to online portals such as Amazon, SnapDeal and Flipkart, all of which serve as a platform for different types of vendors. Approximately 60 percent of those surveyed reported 100 percent growth in online sales, with another 20 percent showing sales growth between 30 – 100 percent.

Despite such growth, challenges still remain. The Indian government does not permit foreign direct investment (FDI) in online retail and restricts e-commerce FDI to 51 percent. Although it increased its market size in India in 2014, Amazon still incurred an overall loss in the country. There is therefore still cause for caution in India’s e-commerce market, but this latest report shows that the industry is moving in the right direction.

Assocham Best Performing States Index Released

Assocham’s recent comparative report on the Best Performing States highlights key destinations for investors.  Investigating nine different classifications – economy, power, electricity, roads, health, education, income, equality, and industrial development – Assocham found Tamil Nadu ranked among the best performing states (BPS) in every category barring education. Ranked a surprising second among the BPS, Kerala also performed well.

Odisha and West Bengal ranked among the BPS in three categories, notably highlighting their advanced infrastructure with an extensive road system and electricity access – an attractive feature for investors, particularly those in manufacturing. Assocham President Rana Kapoor highlighted both states still need to improve market access, including policy on land acquisition in order to capitalize on these strengths.

Gujarat, Tamil Nadu, Maharashtra, Karnataka, Rajasthan, Uttar Pradesh and Madhya Pradesh were among the BPS in industrial development. Assam, Bihar, Kerala, Odisha, Uttar Pradesh, Tamil Nadu and West Bengal all excelled in road connectivity.

Indian Parliament Passes Bill to Increase Insurance FDI Cap

The Indian Parliament has approved a bill that will increase the foreign direct investment (FDI) limit in insurance from 26 percent to 49 percent.

The Insurance Laws (Amendment) Bill 2015 replaces previous ordinance from last year and could result in investment inflow of US$1 billion-$3 billion. Global insurers like Alliance and Standard Life are expected to be enticed into joining the Indian market by increasing their shares in local insurance units. Currently, only a small portion of Indians have insurance coverage for life or health and most of the industry that does exist is dominated by the state-run Life Insurance Corporation of India. India’s life insurance industry grew rapidly until 2008-09, but has since been stagnating.

An additional change in the amendment Bill is that global reinsurance companies will now be able to set up in India for the first time. This industry is also dominated by a state-run – General Insurance Corporation of India. With foreign branches now able to set up in India, companies like Berkshire Hathaway, Inc. could find it easier to reinsurance their Indian assets.

Falling Prices of Crude oil to boost profits at OMCs

India’s three state-owned oil marketing companies (OMCs) have been predicted improved performance figures from the beginning of the next fiscal year.

With crude prices stabilizing in the fourth quarter at approximately US $60 per barrel, companies will see an increase in their gross refining margins (GRMs).  This in turn will improve OMCs who were hit hard by high inventory losses and dropping GRMs in the third quarter.

Hurt by the sharply falling prices of crude oil and consequent discrepancies between purchase and sale costs on refined petroleum products, OMCs could now see their profits increase by 20 to 30 percent.

Cost of fuel and loss (the cost of fuels used in the logistics of running refineries), coupled with falling inventory losses, reduced borrowing requirements and improved marketing margins, have all contributed to the projected financials.

It is estimated that India’s OMCs, India oil Corp. Ltd, Bharat Petroleum Crop. Ltd and Hindustan Petroleum Corp. Ltd, could continue to enjoy this upswing well into 2017.

Assocham proposes ‘Chinese Manufacturing Zone’ in Uttar Pradesh

Assocham, India’s industry lobby body, has announced it is working to submit a proposal to Chief Minister Akhilesh Yadav requesting the establishment of a Chinese Manufacturing Zone. It will be the first of its kind in India.

50 Chinese firms are said to support the proposal with a further 100 companies potentially onboard. Assocham has announced wildly optimistic investment projections for the Zone – around one lakh crore – which is to be located in Uttar Pradesh, a state close to Delhi.

Assocham’s secretary general DS Rawat has claimed the investment would significantly improve the state’s infrastructure with the building of townships, hospitals and schools, as well as employing 30,000 to 40,000 people.

In his State Budget announced in February, Akhilesh Yadav committed 21,296 crore rupees to improving its roads, bridges and transport links in an effort to attract further FDI, particularly from Chinese companies.

Though the Manufacturing Zone will require land and tax rebates granted from the Indian government, Assocham hoped the initiative will redress the balance of India and China’s bilateral trade, which it argues currently favors China.

Assocham will be consulting the Chinese ambassador on the proposal and are also prepared to negotiate meetings between Uttar Pradesh’s government officials and Chinese firms. Whether this proposal will make concrete progress in the coming year seems unlikely.

India Regulatory Brief: New ‘Black Money’ Standards, Changes to Corporate Income Tax

2 March 2015

New Indian ‘Black Money’ Standards

In his budget speech on January 28, Finance Minister Arun Jaitley announced legislation aimed squarely at curbing India’s ‘black money’ problem. If approved, penalties will be harsher in India than in many other countries.

Retaining undisclosed income abroad and evading tax on foreign assets could lead to imprisonment for up to ten years.  The penalty for concealing income or assets will be levied at 300 percent of tax and offenders will not be permitted to approach the Settlement Commission.

Income from undisclosed foreign assets will also be taxed at the maximum margin rate of 30 percent with no exemptions or deductions. Regardless of taxable income, it will be mandatory for the owners and beneficiaries of foreign assets to file tax returns. This is aimed at preventing benami transactions abroad; a form of money laundering in India where properties are bought by a second party in order to hide the real beneficiary.

Black money has been a longstanding problem in India. The nation ranked third in the world for money illegally moved overseas in 2011, behind China and Russia, according to a 2013 report by Global Financial Integrity.

Industry body Assocham expressed concern that this new scrutiny should not make tax compliance cumbersome for SMEs or Indian professionals abroad nor should it be left to the discretion of assessing officers. Though the proposals are a bold move, they are unlikely to be implemented in 2015.

Corporate and Wealth Tax Changes

Also in his budget speech on January 28, Arun Jaitley announced plans to cut the corporate tax rate and introduce a single national goods & services tax (GST). The changes are intended to stimulate India’s sluggish growth rate, which has dropped from 10.3 percent in 2010 to 5.5 percent in 2014.

Jaitely is committed to cutting corporate tax to 25 percent over the next four years. It is currently set at 33.99 percent, which is notably higher than Asia’s average corporate tax rate of 21.91 percent in 2014.

India’s high corporate tax has discouraged foreign investors, while tax excessive exemptions means the effective collection rate is just 23 percent. Jaitley’s reforms should remedy these issues by optimizing taxation yield.

The GST will also replace the complex system of local duties and should be introduced by April 1, 2016. It will streamline the current system, simplifying the process for tax collectors and businesses alike.

India Poised to Increase Infrastructure Investment

On February 26, the Indian government announced plans to invest US$137 billion in the country’s outdated rail network. To be implemented over the next five years, the plan will see investment increase by approximately half in 2015, raising the overall amount to US$16.15 billion.

Updating India’s railways is an essential part of the incumbent BJP party’s plans to improve India’s infrastructure. Last year, the government raised the foreign direct investment (FDI) cap in the sector from 0 percent to 100 percent, signaling a massive change in direction in how India’s rail networks will be developed.

Despite having the world’s fourth largest rail network, the development of India’s railways has lagged behind that of other large economies, particular its neighbor China, which now has more than six times as much track. In a statement, Railway Minister Suresh Prabhu said that India’s railways “have to undergo a transformation” and that the new budget will “set the direction of a long and difficult road of reform”.

India Regulatory Brief: India Ease of Doing Business Rankings, States Seek Mining Ordinance Concessions

16 February, 2015

Government to Rank States on Ease of Doing Business

The Indian government is set to begin ranking states on the ease of doing business. The initiative will encourage state relaxation of dated legislation and establish a means for the federal government to identify poor performers.

The states will be ranked on the basis of: setting up and exiting business, registration of property, labor compliance, infrastructure availability, finance and tax issues and inspection reforms.

The move is in line with the Modi government’s competitive federalism’ agenda and will facilitative favorable reform for foreign investors.

India’s Mineral-rich States Seek Mining Ordinance Concessions

Mineral-rich states have sought to relax new guidelines from the Mines and Minerals Development and Regulation Amendment Ordinance. Though the Ordinance was designed to address emergent problems in India’s mining industry, states have faced difficulties implementing its provisions.

Goa and Karnataka are amongst the states urging improved state discretion and have accused central government of encroaching on state powers. Goa has called for a ten year extension to the lease period which is currently set at 50 years, while Karnataka’s Mines Minister, T.B. Jayachandra, is pressing to remove the 30 million tonnes annual production cap which was set by the Supreme Court.

Jayachandra also suggested there would be difficulties granting mineral concessions through auction for resources that are on private and ‘patta’ land. He proposed that interim measures be taken to ease the process for granting these concessions, warning that existing demand and mineral reserves could encourage illegal mining.

Odisha is demanding that suggestions are taken from individual states before the MMDR’s implementation guidelines are decided, as well as petitioning the allocation of minerals in Odisha to Posco, a Korean owned steel plant. Meanwhile, Andhra Pradesh wants to remove limestone from notified minerals and amend Mineral Concession Rule, and Madhya Pradesh is requesting the transfer of mining leases for captive use on acquisition of the primary industry.

Bankruptcy Panel Report Seeks Changes in Companies Act

Last week, a government panel suggested changes in laws for developing an effective corporate insolvency regime to improve India’s ease of doing business rank.

The T K Viswanathan committee, constituted by the finance ministry, released a report suggesting changes in various pieces of legislation to ensure early detection and resolution of financial stress in companies and protect stakeholder interests. The report is the first step in the Center reform of the bankruptcy law.

However, the panel noted that developing an insolvency code would require more time due to the multiplicity of laws and adjudicatory forums governing insolvency matters in India. Nevertheless, sources in the finance ministry did not rule out tabling a code in the coming Budget session of Parliament.

Originally published on the India Briefing. 

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