Chinese investment restriction could be eased by up to 15%

Chinese investment restriction could be eased by up to 15%

Chinese investment in India could be considered to be eased by up to 15% in a bid to revive the gig economy, as per the proposal made by an eight-member group of ministers (GoM) headed by social justice minister Thaawar Chand Gehlot. According to the proposal, the lifting of restrictions on Chinese investment in India by up to 15% would generate employment in the country, maintaining a balance with geopolitical objectives. Also, this move would serve India’s own economic interests as well.

Apart from Gehlot, the other members of the GoM are tourism minister Prahlad Patel, skill development minister Mahendra Nath Pandey, ministers of state for home G Kishan Reddy and external affairs V Muraleedharan, among others.

Besides the proposal on Chinese investment on India, the GoM also suggested that international investors with less than 50% ‘ultimate Chinese beneficial ownership’ could be granted exemption from prior approval restrictions. The GoM also proposed a further clarification and modification of Press Note 3 that deals with opportunistic takeovers and acquisitions of Indian companies.

In the wake of the India-China military standoff in Ladakh after the Galwan Valley clash between the two countries, the Indian government took tough stance on Foreign Direct Investments (FDI), especially focusing on the Chinese companies, which are the major investors in the Indian economy, specially when it comes to startup funding. Chinese investors have funded 18 of India’s 30 unicorns. The major concerns behind these restriction was data security, platform control and the issues of propaganda, influence and sensorship.

Chinese investment startup funding

Top 10 Indian companies with Chinese investment:

  • Paytm
  • Snapdeal
  • Flipkart
  • Ola
  • Hike Messenger
  • Ibibo
  • Make My Trip
  • Zomato
  • Rapido
  • BigBasket

National Employment Fund

The GoM has proposed setting up a National Employment Fund under the cabinet committee on employment and skill development among its other recommendations in order to generate employment in the aftermath of the Cobid-19 pandemic that hammered the already crisis-hit Indian economy.

So far, the GoM has proposed 63 recommendations across 18 sectors to generate 188 million jobs. This requires an investment of Rs 14.55 lakh crore by the government and private sector combined. The report is under consideration now for further approval on the proposals.

According to the recommendations, the FDI rules should be liberalised, maintaining a balance between geopolitical aims of restricting Chinese takeover of Indian companies and the economic objectives of improving employment through the gig economy. The Chinese investment in the Indian startups is around $6 billion.

The GoM has also called for removal of long-term capital gains tax of 10% for PE/VC funds to attract more capital into gig economy companies. As per its assessment, this move could bring an investment of up to Rs 36,000 crore.

Three key changes proposed by GoM:

  • Removal of restrictions on Chinese investment in Indian companies if it’s less than 15%.
  • Exclude FDI with ultimate Chinese beneficial ownership less than 50% from prior approval requirement under Press Note 3.
  • Exempt FDI from Taiwan and Hong Kong if the investing entities certify that they are not majority owned or controlled by China.

Tax exemption

The GoM has also backed the idea of more tax exemptions where technology transfer is done benefiting the Indian companies. According to the proposal, the government should abolish the inter-ministerial board that acts as a gatekeeper for evaluating a startup’s credibility for tax exemptions under 80 IAC. Currently, only 266 out of 37,799 startups in India recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) are eligible for tax exemptions.

The GoM further recommended that there should be parity between the online and offline businesses in terms of mandatory goods and services tax (GST) registration based on their turnover slabs. It also called for allowing online sellers to avail GST composite schemes to simplify tax returns.

In order to solve the issue of tax disadvantages faced by domestic investors, the GoM advocated the need to create a conducive environment to mobilise domestic capital towards investment of risk capital. It proposed abolishment of the current long-term capital gains tax (LTCG) of 20% for equity investments in top DPIIT-recognised startups via collective investment vehicles (CIV).

Developed countries like the US, UK and other European Union countries don’t tax capital gains earned by foreign investors.

Startup listing

The GoM also proposed creating a seamless mechanism to allow the startups registered in India to list in secure and high liquidity stock in international stock exchanges.

As the GoM’s report has said, do not make listing in India mandatory before the startups can list abroad. In a bid to promote travel and tourism in India, the GoM has said the amount spent for this purpose may be exempted from the income tax until March 2022. However, that is subject to a certain limit.

Also Read: Moody’s revises India’s 2020 GDP forecast to -8.9% from -9.6%

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