India Regulatory Brief: New Service Tax Effective June 1, FDI Rules Relaxed for NRIs

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New Service Tax Rate Effective June 1

The Central Board of Direct Taxes (CBDT) confirmed that the new 14 percent service tax rate will take effect on June 1, replacing the current 12.36 percent rate. Although the new service tax rate was recently passed in the in the Finance Act, 2015, the CBDT had not confirmed its implementation date until last week. Business affected by service tax should make plans to accommodate the new rate from June 1. Finance Minister Arun Jaitley first announced the new service tax rate in India’s budget for FY 2015-16; authorities expect the new rate to ease the transition to the new Goods and Services Tax (GST) that will take effect in April 2016.

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FDI Regulations Relaxed for NRIs, PIOs and OCIs

The Union Cabinet on 21 May relaxed foreign direct investment (FDI) rules for Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs). The government broadened the definition of NRIs, who are Indian citizens, to include PIOs and OCIs, who are not Indian citizens. This redefinition will allow PIOs and OCIs to avail of economic, financial and educational opportunities the government previously only granted to its citizens based abroad.

In addition, the government amended Schedule 4 of the Foreign Exchange Management Act (Fema) to treat non-repatriable investments by NRIs, which now includes PIOs and OCIs, as domestic. As such, these investments will not be subject to FDI rules and restrictions. The reforms are designed to increase investment in the country from the vast Indian diaspora; however, critics note that restricting this new scheme to only non-repatriable investments will likely limit its attractiveness.

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Stage Set for Modi’s Bangladesh Visit

Last weekend, government officials from India and Bangladesh participated in the sixth round of the “India-Bangladesh Friendship Dialogue”. Following landmark land and maritime boundary agreements between the countries, the participants of the track two dialogue outlined the next steps their respective governments should take to increase economic and security cooperation. High-ranking officials from both countries identified improved transportation, private sector collaboration in industry and services, as well as joint financing and marketing for high-end products and services as the primary goals for the bilateral economic relationship. The dialogue came weeks ahead of Indian Prime Minister Narendra Modi’s planned June visit to Bangladesh.

The trip will complement Modi’s “Neighborhood First” policy, which is designed to improve relations between India and its neighbors. Local media are reporting that Modi wants to improve transport connectivity between the countries during the trip. A new bus service between India and Bangladesh has already been agreed; however, local media claim that the Indian government is also interested an agreement to ease car and truck travel between India and Bangladesh, Bhutan and Nepal. Any such agreement would increase trade and investment between the countries and facilitate economic development in India’s West Bengal state and Northeast region.


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