There are more reasons why high net worth individuals should consider investing into India now that the country's government has presented a reform-slanted budget to lawmakers, authors of this article say.

The landslide election in May this year of Narendra Modi’s BJP party has already cheered investors convinced that the country will be taken on a more reformist, pro-market direction after a period of sub-par growth. A vital issue is the state of public finances. And with budgets, there are always discussions about taxes and rates. What should high net worth individuals in India, or living abroad and with links, think about the direction of policy? Megha Ramani of Nishith Desai & Associates and Sanjvee Shah of Taylor Wessing, the law firm, write on what they see as the key issues. The views are their own and not necessarily fully endorsed by this publication’s editors.

“India has won! Good days are ahead” tweeted Narendra Modi, India’s prime minister designate on 16 May, as election results made it clear that his government would lead the nation. The new government assumed office on 26 May, well aware that its electorate and the global community expected it to re-start the “India growth story” after a dismal period of low growth, high inflation and investor disillusionment, attributed to poor policy formulation and implementation of its predecessor.

In that context and with barely 45 days since assuming power, it would be fair to call the new government’s budget, presented on 10 July, a reform-oriented, pro-investor budget with a long-term focus rather than short-term quick-fixes. The Finance (No.2) Bill 2014 was passed with changes to clarify certain budget proposals by the Lower House of the Indian Parliament on 25 July and by the Upper House on 31 July. The finance bill received presidential assent on 6 August 2014 and has been enacted as Finance (No.2) Act, 2014.

In the budget, the government indicated that its key goals were two-fold: First, to kick start economic recovery through a focus on infrastructure investment; and second, to drive home its commitment to reducing tax litigation and making the tax administration regime less adversarial.

Whilst the Lower House was considering the finance bill, the finance minister assured the House that his budget was proposed with a view towards job creation, reviving investor sentiment and boosting economic growth. He statement that consumers “want to buy products, they don’t buy taxes” reflects the consistent stand of the government that being pro-poor and pro-business is not a contradiction in terms.

The budget indicated that the government was willing to listen to the demands of its electorate and that it would adopt a considered approach. In a bid to give an impetus to infrastructure financing, the budget announced that real estate investment trusts and infrastructure investment Trusts (together, REITs) are eligible for a tax pass-through status, albeit partial.

For high net worth individuals with assets or potential heirs in India, it may come as a relief that the introduction of estate duty or inheritance tax does not appear to figure in the “urgent to-do” list of the government (in so far as this budget has set the policy tone). While high net worth individuals as an investor class have not been granted special attention by the Budget, they have also not been removed from claiming tax benefits available to eligible investor classes as a whole. To that extent, this budget has signalled that high net worth individuals are welcome to participate in the growth and development of India and in return, will have to pay a fair (but not punitive) share of tax.

The budget also contained certain measures to minimize tax litigation. For instance, it has clarified that that gains derived by foreign portfolio investors from transfer of Indian securities will be taxed as capital gains and not business income. This measure should help to clarify the position on characterisation of income which has seen much litigation in the past. The ability to obtain an advance tax ruling has been extended, the scope of the Settlement Commission for settling income tax disputes has been expanded and taxpayer-friendly transfer pricing provisions have been introduced. The government has also decided to set up a high-level committee to regularly liaise with industry groups to achieve greater clarity on tax laws.

Although in the budget it was stated that all new cases relating to the indirect taxation of share transfers will be considered by a high level special government committee, with the assurance of no further retrospective measures, this proposal was a source of disappointment. Readers may recall that the indirect taxation of offshore transfers involving shares in Indian companies was introduced in 2012 as a retrospective amendment. It was a legislative measure to counteract the Supreme Court's pro-taxpayer decision in the Vodafone case involving a $2 billion tax demand. It was widely hoped that the government would revoke indirect tax on share transfers altogether. The government’s proposal in the budget has not put to rest the ambiguity on the scope and application of this tax and how it will be considered in the context of existing cases.

Commentators and advisors were hopeful that the government would announce a deferral of the introduction of the general anti-avoidance rule by at least a year from the current effective date of 1 April 2015 and the publication of detailed guidance to deal with ambiguities in the GAAR provisions. Unfortunately, these issues were not addressed in the budget. However, while the Upper House was considering the bill last week, the finance minister stated that the government may reconsider the date from which it is proposed that GAAR will take effect and may also consider if certain fine-tuning adjustments may be appropriate.

Despite certain missed opportunities, it does seem that the new government is committed to bringing about a positive change. The ministry has been pared down to an efficient minimum and the prime minister has brought in a CEO-like approach to governance. With the government having the political mandate it requires to bring in tough discipline, there is optimism and confidence for the way forward.

The first budget of Modi's government shows signs of steps in the right direction, with some indications that the government has the intention to introduce measures to make it easier for Indian residents and foreigners to drive the Indian economy ahead. The proposed changes to bring greater clarity to the Indian tax regime are most welcome but we will have to watch this space to see how the government deals with any changes to the proposed introduction of GAAR and how new cases concerning the indirect taxation of share transfers are decided, to ascertain whether this provides sufficient safeguards and comfort to investors with an appetite to make Indian investments in the future.