Indian 2011/12 Budget Good for Foreign Investment

Finance Minister Pranab Kumar Mukherjee presented the Union Budget for 2011/12 this past Monday. The budget focuses on finding a balance between controlling inflation and maintaining economic growth. Good news for foreign investors comes in the form of no drastic changes in taxation rates, no negative indications, and no major reform agenda.

Under the proposed budget, foreign investors in industries involved with infrastructure development can make US$20 billion in new investments in tax-free infrastructure bonds, which is double the current total limit. That also means renewable energy companies in sectors such as solar power will benefit, as the government pushes for more infrastructural development. Fertilizer production will also be handled as an infrastructure sub-sector.

Activity in agricultural farming, oil, and coal industries will continue to benefit from government subsidies.

Investors in the hybrid vehicles sector may benefit from a proposed exemption on imported parts, as well as a reduction of excise duty to 5 percent on completed hybrid vehicles and gasoline/diesel-to-hybrid conversion kits.

Customs excise duty is unchanged at 10 percent, although 130 new item categories once exempt (e.g., branded garments) will be brought under the tax net, with 240 more expected in the future transition to the Goods and Services Tax (GST). Excise duty on drugs, textiles, and medical equipment will rise slightly from 4 percent to 5 percent, and IT products (e.g., microprocessors) once exempt are now also subject to a 5 percent excise duty.

The Minimum Alternate Tax (MAT) increases slightly from 18 percent to 18.5 percent, which will affect developers invested in special economic zones.

The corporate tax surcharge imposed on foreign companies is reduced from 2.5 percent to 2 percent, and foreign investors can now participate in mutual fund equity schemes registered with the Securities and Exchange Board of India. The budget also calls for US$8.84 billion to be raised from the selling of stakes in state-owned enterprises, with the government maintaining at least 51 percent ownership and management control.

A service tax to be imposed on higher-end services such as air travel, hotels and restaurants will also include private hospitals, which will likely increase healthcare costs for individuals and firms. Only 14 percent of healthcare consumers are covered by insurance.

The ministry expects the 2011-12 economy to grow by 8.6 percent overall, with agriculture growing by 5.4 percent, industry 8.1 percent, and services by 9.3 percent. It also expects the 2012-2013 economy to grow 9 percent overall.

The budget is pending approval by the House before the new fiscal year.

---