Given the government’s focus on achieving a double-digit growth rate combined with ease of doing business and ‘Make in India’ initiatives, Indian industry had high expectations from finance minister Arun Jaitley.
The FM started by outlining the nine points of the Budget, all of which were strategically and directionally positive with focus on economic reform. The theme was largely rural and socioeconomic with thrust on agriculture, infrastructure, eduation, job creation and tax reforms. The FM stayed with the headline number of 3.5 per cent for fiscal deficit, despite raising rural and infrastructure spend.
On the tax policy front, there was a clear intent statement and promise to offer a stable and predictable tax structure, framework for dispute resolution, voluntary disclosure to come out clean on black money and e-governance.
Key policy measures
In line with the ‘Make in India’ plan of the government, several policy measures have been introduced to give impetus to entrepreneurship, creation of skilled labour and employment.
On the education front, to make India a knowledge based and productive society, a regulatory framework will be provided to 10 public and 10 private institutions for making them world-class education and research institutes. Again, 62 new Navodaya Vidyalayas will be opened to focus on quality of education.
To tax transactions in the digital space, the Budget has provided for an ‘equalisation levy’ of 6 per cent on the consideration received by a non-resident not having permanent establishment in India
Second, with recognition of micro, small and medium enterprises (MSMEs) as major employment providers, the Budget proposed constitution of a national SC/ ST hub in partnership with industry associations to provide professional support. Further, the FM announced a Rs 500 crore fund to promote entrepreneurship among SC/ ST and women.
Third, the FM announced 100% FDI in marketing of food products manufactured and produced in India.
Key tax measures:
Some of the top industry demands in relation to tax reforms were a simplified and stable tax regime with a more competitive corporate tax rate, abolition of Minimum Alternate Tax (MAT), reduction of dividend distribution tax (DDT) rate and more tax incentives for startups.
The government has indicated its commitment towards a stable tax regime, systematic dispute resolution and one-time settlement of cases emanating from retrospective tax amendments. This is a welcome measure and will boost investor confidence, if implemented effectively.
The FM announced a final plan to phase out exemptions and reduce corporate tax rates, continuing the earlier road map laid down by the Central Board of Direct Taxes. This includes reduction in the rate of accelerated depreciation and providing a sunset clause for certain tax incentives which include exemptions to special economic zones (SEZ) and weighted deduction for expenditure on research and skill development.
Second, as the benefits from phasing out exemptions are available to the government only gradually, the plan on reduction of corporate tax rates proposed are two fold – one for new manufacturing companies incorporated after 31.3.2016 subject to specified conditions and second, to small enterprises with turnover not exceeding Rs 5 crore.
Third, to strengthen the 'Make in India' and employment generation initiatives, the deduction under Section 80JJAA available to manufacturing setups has been extended to all assessees subject to audit. Further, the turnover limit for the scheme of presumptive taxation has been increased to Rs 2 crore. This frees a large number of MSMEs from the burden of maintaining books of account and audit.
Fourth, taking forward the PM’s initiative on Startup India, the budget proposes a tax waiver on profits for three out of five years for startups set up from April 2016 to March 2019. Further, capital gains tax exemption, subject to prescribed conditions, has been notified for startups as promised.
The government has indicated its commitment towards a stable tax regime, systematic dispute resolution and one-time settlement of cases emanating from retrospective tax amendments. This is a welcome measure and will boost investor confidence
For foreign companies, the residency rule basis place of effective management is proposed to be deferred by one year. The government is sticking to its plan for introducing General Anti Avoidance Rules (GAAR) in 2017. In line with the base erosion and profit sharing action plan, the Budget has proposed revised standards for transfer pricing reporting and documentation for companies with a consolidated revenue of more than Euro 750 million.
Also, to tax transactions in the digital space, the Budget has provided for an ‘equalisation levy’ of 6 per cent on the consideration for specified services received by a non-resident not having permanent establishment in India, from a resident in India. The Budget also provides for a 10 per cent tax on the royalty income from exploitation of patents developed and registered in India by a resident.
Promoting consumer spend
On the personal tax side, though income tax slabs remain unchanged, the FM raised the ceiling of tax rebate by Rs 3,000 for income up to Rs 5 lakh. Further, the deduction u/s 80GG is proposed to be increased from Rs 24,000 to Rs 60,000 for individuals paying rent but not receiving HRA. To promote affordable housing, deduction for additional interest of Rs 50,000 p.a. has been provided for loans up to Rs 35 lakh sanctioned in year 2016-17 for first time home buyers provided the cost of the house does not exceed Rs 50 lakh.
On the other hand, to meet the fiscal deficit the FM is counting on the ability of the rich to share the tax burden and has, therefore, additionally levied a tax on dividend at 10 per cent where the dividend received is in excess of Rs 10 lakh and increased the surcharge on the super rich to 15 per cent. The service tax rate now stands at 15 per cent with the introduction of Krishi Kalyan cess of 0.5 per cent. The price of cars and tobacco is set to go up with levy of infrastructure cess and increase in excise duty. Further, there is a proposed increase in excise duty on branded readymade garments.
This Budget, therefore, seeks to provide a structural framework with key focus on long-term growth. The emphasis on rural India with increased infrastructure spending is likely to be positive for consumer companies in the medium to long term. Overall, this has been a balanced budget promising to keep India on a high growth trajectory amidst a slowing global economy.
The author is partner, BMR Advisors. With inputs fromArti Venugopal, director, BMR Advisors.