By Rohit Kapur
India Country Manager, Dezan Shira & Associates
Finance Minister, Arun Jaitley has presented his third Union Budget for the fiscal year 2016-17. He started his speech by saying that, inspite of headwinds faced on account of a slowing global economy, Indian GDP growth is amongst the highest in the world at 7.6 percent. Affirming that the economy is on the right track, Jaitley cited the Consumer Price Index (CPI) which shows inflation down to just 5.4 percent from a pervious high of 9.4 percent. With inflation under control, the central Reserve Bank of India (RBI) is likely to reduce the lending rates and thus give an impetus to production and consumption.
Building upon positive indicators, India’s budget unveils an ambitious transformative agenda with nine distinct pillars. These include:
(i) Agriculture and Farmers’ Welfare: with focus on doubling farmers’ income in the next five years;
(ii) Rural Sector: with emphasis on rural employment and infrastructure;
(iii) Social Sector Including Healthcare: to cover all citizens under welfare and health services;
(iv) Education, Skills and Job Creation: to make India a knowledge base and productive society;
(v) Infrastructure and Investment: to enhance efficiency and quality of life;
(vi) Financial Sector Reforms: to bring transparency and stability;
(vii) Governance and Ease of Doing Business: to enable the people to realize their full potential;
(viii) Fiscal Discipline: prudent management of government finances and delivery of benefits to the needy; and
(ix) Tax Reforms: to reduce compliance burden with faith in the citizenry.
A slew of programs under each one of these pillars have been announced. The general consensus is that this is a well thought out budget with the effective focus on uplifting the poor and improving the quality of life for 85 percent of India’s population currently living in rural areas or working in the farming sector. This is evident from the staggering amounts allocated to rural development – US $13.29 billion (Rs 87765 crores) – and for capital expenditure on infrastructure, primarily on rural roads and railways – US $33.52 billion (Rs 2,21,246 Crores) – for the year 2016-17.
In the second part of his speech, Jaitley acknowledged the role of taxpayers in nation building. He argued that each rupee of tax contributes to the government’s efforts to provide better infrastructure, rural revival and social well-being. He went on to indicate that taxation is a major tool available to the government for removing poverty and inequality from the society.
The thrust of his tax proposals this year fall in nine categories:-
(1) Relief to small tax payers.
(2) Measures to boost growth and employment generation.
(3) Incentivizing domestic value addition to help the Make in India campaign.
(4) Measures for moving towards a pensioned society.
(5) Measures for promoting affordable housing.
(6) Additional resource mobilization for agriculture, rural economy and clean environment.
(7) Reducing litigation and providing certainty in taxation.
(8) Simplification and rationalization of taxation.
(9) Use of Technology for creating accountability.
The tax proposals are conceived with the intention to provide benefits, deductions and exemptions to the small tax payers, and to impose additional taxes on the rich. Subsidies which were once available to the entire population are now intended to be focused towards the poor and the underprivileged. Many measures have been announced under each of the above nine initiatives which are well conceived.
The net impact of the tax proposals is projected at a net gain of US $2.97 billion (Rs 19,610 crores).
The reforms planned for the farm and rural sector are ambitious and proceeding in the right direction. Uplifting this sector will put money in the pockets of the farmers and rural poor. In turn, this will increase their spending power and lead to increased consumption. The government expects that the industry, which is presently languishing, will receive a boost through improved capacity utilization and expansion in industrial production.
The Concerns Are:
- Each year the budget lays out ambitious development and investment plans but implementation falls woefully short of the targets. Allocated funds remain unutilized and lapse.
- The delivery mechanisms of benefits and subsidies to the farmers and rural poor are subject leaks due to corruption. A bill for covering targeted delivery of financial aid and other subsidies, benefits and services, through the Aadhar framework, is intended to be tabled in Parliament in an effort to stem outflows. This will be a transformative piece of legislation which will benefit the poor and vulnerable.
- Concerns remain about the resources to fund these ambitious programs. Especially since the tax measures are going to yield only an additional US $ 2.97 billion (Rs 19610 crores) and Jaitley has resolved to keep the Fiscal Deficit pegged at 3.5 percent of the GDP. However, he has put a foot in this doorway by fielding a school of thought which argues that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the government to deal with dynamic situations. There is also a suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion respectively.
PROPOSED CHANGES/REFORMS IN FDI AND RELATED POLICIES
- Foreign investment will be allowed in the insurance and pension sectors in the automatic route up to 49 percent – subject to the extant guidelines on Indian management and control to be verified by the regulators.
- 100 percent FDI in Asset Reconstruction Companies (ARCs) will be permitted through the automatic route. Foreign Portfolio Investors (FPIs) will be allowed up to 100 percent of each tranche in securities receipts issued by ARCs – subject to sectoral caps.
- Investment limits for foreign entities in Indian stock exchanges will be enhanced from 5 to 15 percent (on par with domestic institutions). This will enhance global competitiveness of Indian stock exchanges and accelerate adoption of best-in-class technology and global market practices.
- The existing 24 percent limit for investment by FPIs in Central Public Sector Enterprises, other than Banks, listed in stock exchanges, will be increased to 49 percent to obviate the need for prior approval from the government for increasing the FPI investment.
- The basket of eligible FDI instruments will be expanded to include hybrid instruments subject to certain conditions.
- FDI will be allowed beyond the 18 specified Non-Banking Financial Company (NBFC) activities in the automatic route in other activities which are regulated by financial sector regulators.
- With a view to promote Make in India and following the practices in developed countries, foreign investors will be accorded Residency Status subject to certain conditions. Currently, these investors are granted business visa only up to 5 years at a time.
- In order to ensure effective implementation of Bilateral Investment Treaties signed by India with other countries, it is proposed to introduce a Centre State Investment Agreement. This will ensure fulfilment of the obligations of the state governments under these treaties. States which opt to sign these agreements will be seen as more attractive destinations by foreign investors.
All these decisions will facilitate ease of doing business for foreign investors and their domestic recipients.
The government intends to simplify the Companies Act of 2013 by introducing amendments to the Bill. The intention also is to allow incorporation of companies in one day.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
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