China’s Stake May Shrink: What Indian Businesses Need to Know
The Indian government is reportedly planning to cap Chinese stake at 10% in electronics sector joint ventures (JVs) under PLI 2.0. This comes amid rising national security concerns and efforts to build self-reliance in electronics manufacturing.
This blog explores the tax, FDI, and compliance implications of the proposed cap and how it affects Indian manufacturers, JV partners, and investors.
What’s Changing in PLI 2.0?
- Under the Production-Linked Incentive (PLI) Scheme 2.0 for IT Hardware, the government is vetting foreign ownership in sensitive sectors.
- A 10% ownership ceiling is being considered specifically for Chinese firms in JVs registered in India.
- The move mirrors earlier FDI restrictions (Press Note 3 of 2020) mandating government approval for investments from bordering countries.
Legal Reference Points
- FDI Policy (DPIIT Circular, Oct 2020): Prior approval is mandatory for entities from countries sharing a land border with India.
- Income Tax Act, Section 9: Income accruing in India through a business connection (like JVs) is taxable.
- Section 47(viiad), Finance Bill 2025: Proposed exemption for capital gains on asset transfer during JV restructuring—subject to conditions.
- GST Registration Rules: Chinese entities holding stake may trigger registration requirements under place of supply rules.
Tax Implications for JV Entities
| Area | Implication |
|---|---|
| FDI Approval Delay | Slows fund infusion and project timelines |
| TP Audits | JV structures may invite transfer pricing scrutiny under Section 92 |
| Royalty & Fees | Cross-border tech transfers may attract withholding tax under Section 195 |
| Exit Tax | Lower stake may reduce exit tax risk but capital gains still apply |
A CA’s Perspective
“Indian promoters must rework JV agreements to reduce tax exposure and align with FEMA rules. Transfer pricing documentation is key when foreign entities are involved in R&D or brand licensing.”
— Rajeev Arora, CA & FEMA ConsultantCompliance Tips for Indian Partners
Use Rule 10A of FEMA (Non-debt Instruments) Rules, 2019 for compliance during equity infusion.
Revisit JV shareholding and board structure to ensure control remains with Indian promoters.
Prepare for increased scrutiny during I-T and GST assessments due to foreign linkage.
Monitor updates from DPIIT and MeitY (Ministry of Electronics & IT) on final PLI 2.0 guidelines.
Key Takeaways for Indian Businesses
- Chinese firms may face an FDI cap of 10% in electronics JVs under PLI 2.0.
- Tax and regulatory risk increases with foreign involvement in sensitive sectors.
- JV structuring, TP compliance, and FEMA rules must be proactively addressed.