By Dezan Shira & Associates
Foreign observers could be forgiven for expecting fireworks from India’s 2017-2018 budget. India has one of the fastest growing economies in the world and has been dubbed the last BRIC standing.
Finance Minister Arun Jaitley, however, has rarely used the budget for bold initiative. Across Jaitley’s four budgets, the finance minister has instead attempted to find something for everyone.
This year’s budget is no different in that regard: tax relief for the middle class as well as SMEs; incentives and reforms to combat black money; assistance for sectors hurt by demonetization; a commitment to developing infrastructure.
If November’s shock demonetization caused foreign observers to worry about the unpredictability of the government, this budget reconfirms that India is committed to steady, piecemeal reform.
The budget is also known as India’s ‘annual financial statement’. Jaitley accordingly confirmed some encouraging statistics:
- The economy is forecast to be one of the fastest growing major economies in 2017;
- FDI grew 36 percent during the first half of 2016-17 in comparison to the same period in 2015-16;
- CPI-based inflation has declined from 6 percent in July 2016 to 3.4 percent in December 2016;
- The Current Account Deficit declined from approximately 1 percent of the GDP in 2015 to 0.3 percent of the GDP;
- Foreign exchange reserves reached US$361 billion in January 2017;
- Net borrowing was limited to US$520,000 (Rs 3.48 crore);
- The 2.3 percent revenue deficit forecast in the 2016-17 budget estimate was reduced to 2.1 percent for 2016-17 and 1.9 percent for 2017-18.
Jaitley also shared some key economic indicators that highlighted income disparity:
- 19.5 million of the individuals who filed tax returns earn between US$3710 to 7421 (Rs 2.5 lakh to 5 lakh) a year;
- 7.6 million of the individuals who filed tax returns earn more than US$7421 (Rs 5 lakh) a year;
- 172,000 of the individuals who filed tax returns earn more than US$74,211 (Rs 50 lakh) a year.
The government reiterated its commitment to improving the ease of doing business:
- The Foreign Investment Promotion Board (FIPB), responsible for vetting foreign direct investment proposals not in the automatic route, will be phased out this year;
- Further liberalization of FDI norms was also mentioned, although details were not provided;
- A payment regulatory board will be set up in the RBI to regulate electronic payments, and will replace the Board for Regulation and Supervision in Payments and Settlements System.
The budget also demonstrated a recommittment to this government’s anti-black money agenda:
- Authorities will ban cash transactions above US$4452 (Rs 3 lakh);
- The manufacture of point of sale machines are now exempt from countervailing duty, excise duty, and SAD;
- The limit for cash donations to political parties will be reduced from US$297 (Rs 20,000) to US$30 (Rs 2000);
- Donations to political parties above US$297 (Rs 20,000) can now only be made digitally or by check;
- The Reserve Bank of India (RBI) will introduce electoral bonds for donations.
The government also revived its long-held ambition to reform labor laws:
- Legislation to rationalize existing labor laws into four codes – wages, industrial relations, social security and welfare, and safety and working conditions – will be introduced in 2017.
Direct tax reform
The government attempted to encourage tax compliance with Income Tax changes for individuals:
- 5 percent tax for annual income between US$3710 to 7421 (Rs 2.5 lakh to 5 lakh);
- One page Income Tax Return proposed for individuals earning up to US$7421 (Rs 5 lakh);
- 10 percent surcharge on individual income above US$74,211 (Rs 50 lakh) and below US$150,000 (Rs 1 crore);
- 15 percent surcharge on individual income above US$150,000 (Rs 1 crore) to remain;
- All other taxpayer categories will get a US$185 (Rs 12,500) benefit;
- The government will not scrutinize the tax returns of first time filers;
- Withdrawals of up to 40 percent of National Pension Scheme savings at the time of retirement are now tax exempt.
The budget has provided tax breaks for small and medium sized enterprises (SMEs) in a cautious step towards reducing the corporate tax rate universally:
- The tax rate for SMEs with an annual turnover of up to US$7.42 million (Rs 50 crore) has been reduced to 25 percent from 30 percent.
- The presumptive tax for cashless turnover of up to up to US$300,000 (Rs 2 crore) will be reduced to 6 percent instead of 8 percent.
The startup community received some mild support from this budget:
- The continuous holding of 51 percent of voting rights has been relaxed on the condition that the holding remains with the original promoters;
- The profit linked deduction exemption that was available for three out of a startup’s first five years has been extended to three of the startup’s first seven years.
The real estate sector also received some support within the budget:
- Developers will be allowed to keep their unsold inventory, without attracting any income tax liability, for up to one year after receiving the completion certificate for their housing projects;
- Tax payment on notional rental income on completed residential projects deferred by one year after receiving completion certificate;
- Government to introduce more financial instruments for parking capital gains to save tax.
The government made another foray back into the Minimum Alternative Tax (MAT) miasma:
- The time limit to claim an MAT credit was extended from 10 years to 15 years.
The government has sought to align transfer pricing with OCED guidelines:
- A secondary adjustment for the financial year beginning April 1, 2016 is now possible for a primary adjustment that does not exceed US$150,000 (Rs 1 crore);
- Secondary adjustments can take the form of constructive dividends, constructive equity contributions, or constructive loans.
Indirect tax reform
The government has not changed any major indirect tax laws because of the forthcoming Goods and Services Tax (GST).
The budget focused on providing relief for the rural economy and agriculture sector:
- Increasing rural and agriculture sector support by 24 percent to US$27.75 billion (Rs 1.87 trillion);
- Increasing the coverage of the National Agricultural Market (e-NAM) from 250 markets to 585;
- A new Dairy Processing and Infrastructure Development Fund;
- Allocating US$1.34 billion (Rs 9000 crore) allocated for crop insurance;
- The national rural job guarantee scheme MNREGA was allocated US$7.12 billion (Rs 48,000 crore);
- An initiative to provide electrification for all rural areas by 2018;
- US$3.41 billion (Rs 23,000 crore) in investment for rural housing;
- A new model law on contract farming was proposed under agricultural marketing reforms.
The real estate sector also received support from the government:
- Housing sector accorded infrastructure status;
- The National Housing Bank will refinance individual loans worth US$2.98 billion (Rs 20,000 crore) in 2017-18;
- The affordable housing program was extended to five years;
- A reduction of holding period—from 3 years to 2 years—to qualify for a long-term capital gains (LTCG) status;
- A new tax deduction on interest paid on rented-out properties that are bought on loan;
- A tax deduction for individuals paying a rent above US$745 (Rs 50,000) per month.
The budget remained focused on the phase-by-phase (connectivity, renewable energy, logistics) development of infrastructure:
- Increase in capital spending of 25.4 percent planned;
- A new integrated infrastructure planning paradigm comprising roads, railways, waterways, and civil aviation with a provision of US$35.95 billion (Rs 2.41 trillion) for the overall transportation sector;
- National highways allocation increased to US$9.68 billion (Rs 64,900 crore) from US$8.65 billion (Rs 57,976 crore) in 2016;
- The second phase of solar power development will aim to generate 20,000 MW;
- Airports in tier-II cities will be opened up to PPP investment;
- The Railway Ministry will be allocated US$19.54 billion (Rs 1.31 trillion) for capital and development expenditure;
- Indian Railways will list its Indian Railway Catering and Tourism Corporation, Indian Railway Finance Corporation, and Ircon International Ltd. subsidiaries;
- A US$14.92 billion (Rs 1 trillion) railway safety fund will be created.
Digitalization was a key theme as the government seeks to support its vision of a cashless economy:
- A US$1.49 billion (Rs 10,000 crore) investment to lay fiber optic network covering 150,000 villages under the BharatNet project;
- Investment for high-speed broadband coverage across 150,000 gram panchayats with hotspots and access to digital services at low tariffs;
- Installation of 1 million Aadhaar-enabled point-of-sale (POS) machines by March, which will be increased to 2 million by September;
- Two new referral schemes to promote digital payments on the Bharat Interface for Money (BHIM) app with consumers and merchants;
The budget sought to encourage the electronics manufacturing industry:
- A US$111.19 million (Rs 745 crore) investment for incentive programs like the modified special incentive package scheme (M-SIPS) and Electronic Development Fund (EDF).
The budget also paid some attention to the growing medical devices industry:
- New rules to be devised to reduce cost of medical devices.
Consult a professional
In addition to the above reforms and initiatives, the government announced a number of procedural reforms that affect individuals and businesses. These procedural reforms affect FDI, direct taxes, indirect taxes, and service taxes, among other issues. Businesspeople should carefully review these reforms to understand how these reforms affect their business, ideally with professional guidance from trusted advisors.
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