India's Union Budget 2018-19, presented by the Finance Minister on 1 February 2018, reaffirms the government's focus on keeping the Indian economy on an inclusive growth path with an emphasis on social sector, infrastructure and agricultural development. This was the government's last full-year budget before the General Elections in 2019 and came on the back of significant structural reforms in the last 12-15 months including demonetisation, introduction of GST and a comprehensive insolvency legislation aimed at resolving the twin balance sheet problem that has been ailing the Indian banking and corporate sectors. While the economy experienced a slow-down post the demonetisation undertaken in November 2016, manufacturing and export sectors have picked up since then. Moreover, while demonetisaton resulted in 10 million new income taxpayers, the introduction of GST has witnessed an increase of 50 per cent in the number of indirect taxpayers. Consequently, India is expected to close out fiscal year 2017-18 with a GDP growth rate of 6.75 per cent. The world′s largest government-funded healthcare programme has been announced in this year's Budget (providing annual insurance cover of up to Rs 0.5 million per family per year aimed at benefitting 100 million families). This is expected to throw up opportunities for private sector (including foreign) participation in the development of healthcare infrastructure. On the tax and regulatory front, the proposals have been marginal especially for the foreign investor segment. Some of the notable proposed changes are a reduction in the corporate tax rate for certain companies, introduction of capital gains tax on long-term gains and changes to the definition of a “business connection” to align it with the OECD 'agency' concept. A positive amendment in the corporate tax regime is reduction in the corporate tax rate from 30 per cent to 25 per cent for MSMEs (i.e. companies with a turnover of less than Rs 2500 million). This amendment benefits almost 99 per cent of the tax paying corporations in India. The balance 1 per cent constituted by large corporations continue to be under the 30 per cent corporate tax rate but as per available tax statistics, majority of these large corporations end up with an (ETR) of 24 per cent on account of various tax incentives /exemptions under the existing tax regime. The amendment, therefore, seeks to benefit the small corporations which end up paying higher taxes, without any adverse impact or prejudice against the large corporations. One of the most talked about and debated Budget proposals is the re-introduction of tax on long-term capital gains ('LTCG') arising from on-market transfers of listed equity shares, a tax which was done away with in 2004-05. Premised on the rationale of fiscal prudence (by stemming erosion of tax base) and levelling the playing field between equity assets and other financial / real assets, this tax on LTCG is proposed to be levied at a concessional rate of 10 per cent on gains exceeding Rs 0.1 million. Further, capital gains earned up to January 31, 2018 have been grandfathered; so only incremental gains post January 31 arising from transfers after March 31, 2018 would be brought under the tax net. While the Indian stock markets have reacted adversely to this proposal (as evidenced by an estimated market capitalisation erosion of Rs 10 trillion post the Budget announcements), the sell-off was also part of a wider correction in global stock indices. Notwithstanding the imposition of LTCG tax, equity as an asset class will likely continue to be attractive for institutional and high net worth individual investors. As far as foreign institutional investors are concerned, some of them are already exploring possibilities of investing in the Indian equity market through countries like France and Netherlands, whose tax treaties with India could mitigate the Indian LTCG tax incidence, subject of course, to meeting substance tests, given the introduction of general anti avoidance rules under Indian tax law last year. In recent years, the government of India has enacted several provisions in line with OECD's Base Erosion and Profit Shifting Action Plans (“BEPS”). Like the UK, India is also a signatory to the Multilateral Instrument (MLI) issued by the OECD. In line with India's commitment to BEPS, the Budget proposes to widen the scope of 'Business Connection' test (i.e. equivalent to a Permanent Establishment 'PE' test in tax treaties) through two amendments, which could significantly impact taxability of business profits earned by non-residents from India. The first amendment seeks to widen the scope of dependent agent to include persons who play a principal role leading to conclusion of contracts by a non-resident. The existing provisions cover under the ambit only persons who had the authority to conclude contracts in India on behalf of non-residents. Consequently, non-resident entities could mitigate Indian tax incidence by signing off or concluding contracts outside India although key functions like contract negotiation were being performed by the Indian agent. The proposed amendment is also aligned with the modified PE rule as per the MLI, to which both India and UK are signatories. However, until such time that the MLI becomes effective for India and UK, entities that are tax resident in UK should continue to be eligible for the beneficial provisions of the prevailing India-UK tax treaty. The second amendment is introduction of 'Significant Economic presence' (SEP) test. By virtue of this test, a non-resident entity engaged in any transaction in India including provision or download of data/ software or solicitation of business through digital interaction with users, would come under the Indian tax net. This will particularly impact non-resident entities engaged in digital businesses since such entities are not required to be physically present in India through a PE or dependent agent to earn revenue and hence, are currently not required to pay tax in India in the absence of a 'business connection'. However, since the existing MLI provisions and tax treaties do not provide for the SEP test for determination of PE, the proposed amendment is likely to impact only those foreign investors who are resident in a jurisdiction which does not have a tax treaty with India. In other cases, such as UK, business entities shall continue to be governed by the existing treaty provisions. In an endeavor to promote development of world class financial infrastructure in India, the Government proposes to provide tax incentives (e.g. exemption from capital gains tax, reduced minimum alternate tax rate of 9 per cent) for transactions undertaken by a non-resident in any International Financial Services Centre (IFSC). In order to boost the government's 'Make in India' programme and promote local manufacture, customs duty has been raised selectively resulting in increased landed cost of imports in sectors such as automobiles, food processing and telecommunications. On the compliance side, tax registration i.e. obtaining Permanent Account Number (PAN) will become mandatory for any entity (including non-resident entities) which enters into a financial transaction in India aggregating to Rs 0.25 mn or more in a financial year. Further, any person competent to act on behalf of such entities (such as the Managing Director, Director, Partner, CEO, Principal officer etc.) will also be required to apply for allotment of PAN. This will increase compliances for foreign investors who do not have a PE in India but may enter into financial transactions in India. To conclude, an impact assessment of the tax proposals mooted by the Indian Union Budget 2018, should maintain current status quo for UK investors. From an overall perspective, it is a well-balanced all-inclusive budget with focus on rural economy and long-term economic growth. With the International Monetary Fund forecasting a 7.4 per cent growth rate for India in the current year 2018 (as against China's 6.8 per cent), India is well on its way to becoming the fifth-largest economy in the world.