India Economic Update
Milind S. Kothari
Managing Partner
BDO India

As the year is drawing to a close, India’s economic outlook looks promising. The business resumption measured by the Nomura India Business Resumption Index (NIBRI) rose to a record high of 109.9 benchmarked against a scale of 100 at the pre-pandemic level in February 2020.

The International Monetary Fund (IMF) maintained India's growth forecast for the fiscal 2021-22 at 9.5%. The Goods and Services Tax (GST) collection, a barometer of the economic activity, was at a 6-month high at the end of September. To top this, the GST collections during October were second highest at USD 17.33bn, ever since its introduction in July 2017. Amongst the alternative high-frequency indicators, the corporate bond issuance showed a rising trend, signalling business recovery with nearly USD 11bn of new fundraising in September. The stock indices continued to flourish as foreign portfolio investment also showed a significant rising trend. The core sector output crossed pre-pandemic levels, and India's forex reserves have now crossed an all-time high to USD 650bn. However, coal shortage (critical to electricity generation), high oil prices and supply disruptions could emerge as drags on growth, but experts expect the economy to remain steady.

Meanwhile, Finance Minister (FM), Ms Nirmala Sitharaman, foresees India's economy regaining the status of the fastest growing economy and attracting big-ticket global investments on the back of a strong recovery in macro and micro growth indicators. The corporate sector is sitting on healthy cash reserves, aided by stronger balance sheets post-COVID and is looking to step up its capital expenditure and investment plans. A cocktail of accommodative monetary policy, lower interest rates, reduced corporate tax rates and incentives such as production-linked incentive (PLI) scheme (further fuelled by global liquidity) and an upward commodities cycle is responsible for the optimism among companies.

In February this year, the FM had launched a much-touted disinvestment and privatisation program of public sector undertakings (PSUs) setting a lofty target of raising USD 23.30bn this fiscal. Alarmingly, till August 2021, the amount raised through this route was a dismal USD 1.1bn. However, the divestment program received a much-needed boost with Air-India, India's national air carrier returning to the fold of the original founding business group, the Tatas. The air carrier has bled the taxpayers nearly USD 15bn due to piling losses and therefore, the success of this divestment initiative ought to come as a major relief to the Government. The sale is also likely to inspire confidence that the Government can raise resources through non-tax measures. One more distinguishing feature that has enthused private players was the Government's decision to exit the company in entirety.

Flipping to the digital economy, cryptocurrency and its craze amongst investors has been engaging the attention of the regulators. Consequently, its recognition with a regulatory framework was not unexpected. In the last week of November, the Government listed the Cryptocurrency and Regulation of Official Digital Currency Bill for introduction during the winter session of the Parliament, which will seek to prohibit all private cryptocurrencies, but provide for certain exceptions to promote the underlying technology and its uses. The proposed bill will also provide a framework for the Reserve Bank of India (RBI) to create an official digital currency.

In a bold gesture, during the COP26-Glasgow, the Indian Prime Minister, Mr Narendra Modi, committed to achieving net-zero emissions by 2070. This commitment was bolstered by four near-term targets; by 2030, India would increase its non-fossil fuel energy capacity to 500 GW, increase the share of renewables in the energy mix to 50%, and reduce the emissions intensity of its economy by 45%. India has also committed to reducing emissions by one billion tonnes by 2030.

Later in November, the Prime Minister, in a significant policy reversal rolled back the three farm reform laws introduced in August 2020 that were primarily intended to address the larger interest of the farmer community. The repeal of the laws was in defence of a widespread farmer agitation, especially in the north of India. A sore point i.e., fixing the Minimum Selling Price (MSP) of essential farm produce, including its coverage continues to persist between the Government and the farmers.

At current levels, the economy seems super-charged to deliver growth, but doubts linger about the return of the devil in the form of another wave of infections riding on a new variant. The next couple of months remain crucial in delivering on the annual economic promise of decent GDP growth this year.

M & A Tracker
Rajesh Thakkar
Partner and Leader

M&A Tax and Regulatory

Deal Advisory Services

M&A in India

Between October 2021 to November 2021, around 147 M&A deals were announced of which 105 M&A deals were completed. The aggregate value of deals announced is USD 5,269.35mn; dominated by 113 domestic deals (USD 3,597.60mn) followed by 34 cross border deals (USD 1,671.75mn)

In terms of sectors (considering only closed deals), the Industrials sector saw the maximum deal value, with deals worth USD 780.51mn followed by the Financials sector with deals worth USD 273.69mn and the Materials sector with deals worth USD 227.99mn.

Significant Deals completed between October 2021 to November 2021

Target Company
REC Solar Holdings AS
Acquiring Company
Reliance New Energy Solar Limited
Deal Value (in mn USD)
  • Reliance New Energy Solar Limited (Reliance) acquired REC Solar Holdings AS from China National Bluestar (Group) Co. Ltd. for USD 771mn (INR 57.57bn)
  • The transaction is in line with Reliance’s strategy of investing in new and advanced technologies and operating capabilities aimed at achieving Reliance’s goal of enabling 100 GW clean and green energy before the end of this decade
  • The investment would further accelerate path-breaking technological developments and the introduction of new products in the sector
  • Post transaction, REC Solar Holdings operates as a wholly owned subsidiary of Reliance
Target Company
PNB Metlife India Insurance Company Limited
Acquiring Company
MetLife Inc.
Deal Value (in mn USD)
  • Metlife Inc. entered into agreement to acquire 15.27% stake in PNB Metlife India Insurance Company Limited (PNB Metlife) for a cash consideration of USD 256.92mn (INR 19.06bn) from I G E India Private Limited and Elpro International Limited. The transaction is subject to regulatory approvals
  • Post transaction, Metlife Inc. will hold 47.32% stake in PNB Metlife
  • This marks the first foreign partner increasing its stake in a joint venture insurance company in India, post the government allowing 74% foreign direct investment in the Indian insurance sector
Target Company
NatSteel Holdings Pte Ltd.
Acquiring Company
TopTip Holding Pte Ltd.
Deal Value (in mn USD)
  • Tata Steel Limited divested its entire stake in NatSteel Holdings Pte Ltd. (NatSteel) to TopTip Holding Pte Ltd. for a total consideration of USD 172.05mn (INR 12.75bn)
  • The wires business of NatSteel in Thailand has been retained by Tata Steel Limited as part of the downstream wires portfolio
Target Company
Infostar LLC
Acquiring Company
Tech Mahindra Limited
Deal Value (in mn USD)
Information Technology
  • Tech Mahindra Limited (Tech Mahindra) acquired Infostar LLC for a total consideration of USD 105mn (INR 7.86bn)
  • The acquisition would bolster Tech Mahindra’s digital engineering capabilities to effectively utilise data strategy and address machine learning challenges
  • It would further enhance Tech Mahindra’s capability to provide end-to-end product quality assurance across hardware, software, and data layers to strengthen the company’s positioning as a leading digital transformation enabler in the engineering space
  • The acquisition is in line with its strategy to strengthen digital capabilities and provide enhanced and comprehensive transformation services to its customers globally
  • Post transaction, Infostar LLC operates as wholly owned subsidiary of Tech Mahindra

Significant deals announced between September 2021 to November 2021 but not completed

Target Company
Air India Limited
Acquiring Company
Talace Private Limited
Deal Value (in mn USD)
  • Talace Private Limited, a subsidiary of Tata Sons, is acquiring Air India Limited from the Government of India for USD 2,406.10mn (INR 180bn)
  • The total consideration of USD 2,406.10mn (INR 180bn), includes USD 360.92mn (INR 27bn) in cash, while the remaining USD 2045.18mn (INR 153bn) will be paid as debt
  • As part of the deal, Talace will have to retain around 12,000 existing employees of Air India during the first year of operation
  • With this transaction, the Tata group will get ownership of iconic brands like Air India, Indian Airlines, and the Maharajah
  • Post the transaction, Air India Limited will operate as a wholly owned subsidiary of Talace Private Limited
Target Company
Sterling and Wilson Solar Limited
Acquiring Company
Reliance New Energy Solar Limited
Deal Value (in mn USD)
  • Reliance New Energy Solar Limited (Reliance) entered into definitive agreements to acquire a 65.90% stake in Sterling and Wilson Solar Limited (Sterling) from Shapoorji Pallonji and Company Private Limited (Shapoorji Pallonji & Co.) and Khurshed Daruvala for USD 624.72mn (INR 46.88bn) through a share purchase agreement followed by an open offer
  • The buyers will acquire 29,333,333 Equity Shares representing a 15.46% stake at a price of INR 375 (~ USD 5) each for a total consideration of INR 10.99bn through preferential allotment
  • The buyers will further acquire 46,544,001 Equity Shares representing a 24.54% stake at a price of INR 375 (~ USD 5) each for a total consideration of INR 17.45bn (~USD 233.53) from Shapoorji Pallonji & Co. and Khurshed Daruvala, through the share purchase agreement
  • Resultant to this, the buyers made an open offer to acquire 49,137,420 Equity Shares representing a 25.90% stake at a price of INR 375 (~ USD 5) per share for INR 18.42bn (~ USD 246.52) from public shareholders of Sterling in the transaction
  • The transaction is subject to customary regulatory and other approvals and closing conditions
  • Post transaction, Reliance will hold 125,014,754 Equity Shares representing a 65.90% stake in Sterling and Khurshed Daruvala will continue to be Chairman of the Board of Sterling
Feature Story
Jiger Saiya
Partner & Leader/ Tax & Regulatory Services

Global consensus on taxation of the Digital Economy: An Indian perspective

Given the increase in digital business in most globally integrated economies, addressing the tax challenges was the first action plan identified under OECD’s Base Erosion and Profit Shifting Project (BEPS), during its inception in 2013. However, only in October 2021, after reaching an agreement between 136 countries, the OECD announced a sweeping overhaul of the international tax system to tackle these tax challenges. A two-pillar solution to address the tax issues has been proposed:

  • Pillar One: Pillar One seeks to allocate profits and consequently taxes to market jurisdictions, as against the conventional practice of taxing multi-national enterprises only in their country of residence and in some cases, source.
  • Pillar Two: Pillar Two seeks to impose a global minimum tax framework by introducing:
    • a) Imposition of a top-up tax by the country of the parent company, being the differential between the global minimum tax (currently agreed at 15%) and the tax paid by its overseas group company in its jurisdiction or deny the deduction of such low taxed income. While the OECD has proposed a threshold of EUR 750mn (~USD 840mn) for such taxes, countries will be free to decide on the threshold applicable to their residents
    • b) Imposition of limited source taxation on certain related-party payments, which are subject to tax below the minimum rate. The rate proposed for such limited source taxation is 9%.

The proposed rules are likely to come into effect from 2023. The thresholds have been kept at higher levels to begin with and shall be lowered subsequently, implying a wider coverage of taxpayers within the Two-Pillar measures.

India has always been advocating to implement nexus-based taxation rules. Services provided by non-residents have been regarded to be taxable in India on a gross basis under the domestic tax law. India introduced unilateral measures - Equalization Levy in 2016; aimed at taxing advertisement income for non-resident companies and expanding the scope of such Equalization Levy to non-resident e-commerce operators. With effect from April 2021, the Significant Economic Presence (SEP) based taxation regime was implemented under the domestic tax regime.

The Hon’ble Finance Minister of India has welcomed this global development and stated that the agreement helps address tax challenges arising from digitalisation of the economy, and in dealing with base erosion and profit shifting issues.

The thresholds prescribed for triggering the current digital levies in India are too low; for instance, for e-commerce transactions, the threshold for applicability is EUR 0.23mn (~USD 0.26mn). It is thus perceived that if the BEPS recommendations are introduced in its current form, a sizeable amount of companies that are otherwise subjected to tax under the current regime, might be out of the tax net in the future. The other challenge is the rate at which taxes are recovered. Presently, in the case of non-resident e-commerce operators, the Equalization Levy is recovered at 2% of turnover. Once the Pillar One recommendations are adopted, India may realise lower taxes from the same taxpayer.

On the other hand, the taxes collected by the Indian revenue authorities seem lower in the context of the Indian consumer base availing of e-commerce services and is significantly lesser compared to the taxes garnered by EU regions under their digital services tax regime. While an introspection may be useful for this anomaly, it would be interesting to assess whether India would be able to garner more taxes once the Two Pillar solution is implemented in India, which is likely to be well structured and in line with global standards.

OECD’s prime ask from countries who have introduced interim unilateral measures is the withdrawal of these measures, once the Two-Pillar solution is implemented in entirety. It would also be interesting to observe whether India repeals the unilateral measures completely or continues to tax businesses in some form, which are covered under the present regime but are likely to be excluded under the Two Pillar solution.

In summary, with all its structural challenges, the digital tax levies are here to stay globally, and India being a vocal advocate in enabling taxing rights to the market economy, is likely to implement the recommendations in entirety.

Guest Column
Divyang Thakker
Tax Head
Dow Chemicals in India

The Global Tax Deal – Ushering in a new era in International Tax

It has been close to couple of decades now, that the government of various economies seem to believe that they are not getting their fair share of taxes. The developed economies have also been complaining of smaller nations taking undue advantage of the free tax competition and attracting investment inflows by offering extremely lucrative corporate tax rates. Multinational Enterprises (MNEs) benefited as they could manage the effective tax rate (ETR) and over the last few years, the ETR for MNEs has seen a substantial decline; digitalisation of economies is cited as the major reason for this reduction.

The OECD nations have been actively collaborating to ensure that they fight against tax evasion by putting a stop to tax avoidance practices such as bank secrecy and tax havens. Through the recent tax deal, the OECD looks to resolve the issue relating to profit allocation amongst nations. It is anticipated that the deal, will reallocate profits of more than USD 125bn from about 100 of the world’s largest and most profitable MNEs, to other countries worldwide. The objective is to ensure that MNEs pay a fair share of tax wherever they operate and generate profits, and not where they wish to.

What is the tax deal all about?

The tax deal attempts to provide a solution containing two action items (known as Two Pillars). Pillar One proposes to re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. Pillar One is proposed to apply to MNEs with global sales above EUR 20bn (USD 22.5bn) and profitability above 10%. Pillar Two proposes to introduce a global minimum corporate tax rate of 15%. This new minimum tax rate will be made applicable to MNEs with revenue above EUR 750mn (USD 840mn).

Impact of the deal on MNEs

It has been a practice for most MNEs to have intermediate holding companies (generally situated in tax-friendly jurisdictions) that invest in various operational entities in several jurisdictions. The purpose is to obtain operational efficiencies and ring-fence the regional profits by establishing an investment hub company as the tax arising, if any, is only incidental. The tax deal may now require these MNEs to pay additional taxes in the hands of entities in the investing jurisdiction, which was hitherto considered to be a pass-through entity. Apart from the additional tax, these MNEs could have to deal with added tax compliances arising from the deal. The impact may not be restricted to companies engaged in Information Technology (IT) and Information Technology enabled Services (ITeS), but also extend to larger brick and mortar companies that have digital sales. Several companies contemplating outbound investments may have to hold back their current plans and get back to the drawing board to analyse the tax impact of their proposed structures.

While Pillar One seems to benefit the smaller nations since the proposal emphasises on ‘activity test’ rather than ‘presence test’, Pillar Two may have some adverse impact since the investment flow to these nations (which was resulting in developmental activities) may now be restricted.

Impact on MNEs with India presence

The deal may have a considerable impact on India based MNEs as most of the IT and ITeS majors have sizeable operations in India. As the corporate tax rate in India aligns with the global rates and the Indian tax systems phase out the exemptions and tax holidays, it will be important for India based MNEs to consult tax experts before they finalise any expansion plans.

While the OECD deal, as of now, is only applicable to around 100 multinationals (based on size), this is set to create tax complications for other companies and entities that are present in the jurisdictions that are understood to be tax havens.

Overall, the OECD’s intentions from the global tax deal seem to be good; unintended implications on global business may not be ruled out. Since the deal is expected to be implemented from 2023, the next year could see several steps by MNEs across the globe to tackle the impact arising from the deal. It is expected that the OECD will lay down well-defined rules and a complete roadmap on the implementation of both pillars so that MNEs get clarity on the way forward.

Expert Reel

Over 130 countries and jurisdictions, representing more than 90% of global GDP, joined a new agreement to reform the international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. Click below to hear Lawrence Speer joined by Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD as they discuss the new tax deal.


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