When a business, organization, or individual from one country invests in the assets or stock of a business or organization based in another country, this is referred to as Foreign Direct Investment(FDI). Globalization has improved the process of foreign investments, encouraging large corporations or powerful people to expand and invest.
In general, FDI takes place when an investor creates a foreign business operation or acquires foreign business assets in a foreign company. So FDI is distinct from portfolio investments, in which a shareholder merely buys shares of firms with foreign headquarters.
FDI is essential for advancing India’s economy, technological development, and job creation. India has recently received significant foreign direct investment in a number of areas due to its booming market and friendly business environment.
The majority of investors choose to place their money in developing nations rather than industrialized ones because the latter does not offer excessive incentives or deductions. However, they concentrate on developing nations since they offer substantial returns, a stable environment, and a variety of incentives to investors.
Even though FDI is crucial for a nation’s economy to flourish, it is crucial to restrict FDI in India. As a result, our nation has passed a number of laws and rules to control FDI in India.
The following are the regulatory framework for FDI in India .
When they make a profit or receive income from a particular investment, investors in India are required to pay tax on that investment. As a result, the Indian Income Tax Act of 1961 includes specific provisions for the imposition of a tax on foreign investment income.
According to Section 115AB of the Income Tax Act, 1961 deals with Tax on income from units purchased in foreign currency or capital gains arising from their transfer.
Further the foreigners are mostly invested in the following instruments .
The Tax consequences of equity shares are the following,
Taxation of dividend income in the hands of the non resident investor in India
The non-resident investor in India is not required to pay taxes on dividend income that an Indian company has already paid dividend distribution tax on. However, depending on the local tax regulations of those nations, such dividends may be taxed in the country where the non-resident investor resides. It has frequently been noticed that the credit for DDT paid by an Indian entity may or may not be available when such a dividend is taxable in the nation of domicile.
Tax Deduction of Dividend in computing taxable income
When calculating the Indian firm’s taxable income, dividend payments made by the Indian company are not permitted as a tax deduction. Instead, this payout is subject to payout Distribution Tax (“DDT”), which has an effective tax rate of 20.36 percent of the dividend amount.
Tax on Conversion of CCD into equity shares
According to Indian domestic tax law provisions, conversion of compulsorily convertible debentures into equity shares is not subject to taxation in India.
Cost of acquisition of equity shares acquired on Conversion of CCD/Preference shares
The cost of acquiring such shares for the purpose of calculating capital gains shall be treated as the proportional cost of the corresponding CCD /Preference Shares if equity shares were purchased by the non-resident upon conversion of CCD /Preference Shares.
Tax on Sale of Equity Shares
Transfers of equity shares in India are subject to capital gains tax. The effect of foreign currency fluctuation on capital gains is eliminated by a special taxation mechanism for shares of an Indian company that are purchased by non-residents in foreign currency, but there is no benefit in regards to indexation of the cost of acquisition of such shares.
India’s economy is still largely driven by foreign investment. In order to encourage ease of doing business and draw in more foreign money, the regulatory framework controlling foreign investment has undergone considerable modifications. The Indian government has demonstrated its commitment to fostering a favorable environment for foreign investors by its measures to liberalize FDI standards, raise sectoral ceilings, and streamline the approval procedure.
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