A Budget that announces blockbuster schemes and major reform initiatives easily captures the imagination of the nation. However, one that takes cognisance of the difficulties and challenges and seeks to build on inherent strengths with a clear forward-looking vision should be regarded as a block-builder Budget. Such a Budget aims to lay a firm and enduring foundation for social and economic growth, and overall development.
This year’s Budget has outlined the government’s priorities of providing additional resources to vulnerable sections and rural areas, and creating social and physical infrastructure. The focus on these priorities, along with the nine-pillar transformative agenda, will provide the necessary support to ensure that the Indian economy achieves new heights, notwithstanding headwinds that arise due to global factors.
The Budget has emphasised upliftment of the rural and social sectors—healthcare, educational skills and job creation—to make India a knowledge-based productive economy. The total expenditure on agriculture is proposed to be close to R36,000 crore. A new 0.5% Krishi Kalyan Cess (KKC) to fund agriculture and the welfare of farmers is proposed on all taxable services. Other measures are a focus on irrigation, optimal utilisation of water resources, conservation of groundwater and soil fertility, and increasing connectivity from farms to markets. These initiatives, along with assistance to farmers during calamities and timely flow of adequate credit to farmers, are expected to significantly improve food security for the nation and income security for farmers.
Other reforms for the rural sector are improved pace of road connectivity to villages, electrification, and improving sanitation and cleanliness. Separately, 100% FDI under the approval route is proposed in the marketing of food products produced and manufactured in India as a forward integration measure for the agricultural sector.
Infrastructure development is one of the mainstays of this Budget. Clubbed with capital expenditure in railways, investments in the infrastructure sector will exceed Rs 2.2 lakh crore, and this will be complemented by other measures to remove bottlenecks, such as abolition of the permit raj and setting up of a dispute redressal system.
The finance minister stuck to the fiscal targets for consolidation in spite of pressure to undertake greater expenditure, given macro factors and stress on the economy. This makes the Budget well-grounded, and enhances the credibility of the government, which brings in stability for India bond markets.
To provide a fillip to the economy and attract investments, one major topic of this government manifesto is ease of doing business. Reforms proposed in the tax regime are noteworthy and continue to support the theme of a stable, simple and non-adversarial tax framework both for direct and indirect tax.
Then there are stability in tax rates and slabs for corporates and individuals. The Budget maintains peak rates for excise and customs duty, and base rates for service tax. The imposition of KKC will make the effective rate of service tax 15%—in line with the agenda to increase rates for GST implementation. Input tax credit of KKC will be available for payment of this cess. A 10% tax has been proposed for non-corporate resident taxpayers who receive a dividend income exceeding Rs 10 lakh.
The commitment to lower tax rates is manifested in the proposal to lower rates for manufacturing start-ups that do not seek to avail of incentives. Eligible start-ups have been given an option to claim tax deduction for three out of five initial years; but the MAT will continue to apply. Capital gains exemption will be provided on the sale of residential property by an individual or a Hindu Undivided Family for investment in a start-up. There is a provision to provide long-term capital gains exemption on investments up to R50 lakh in notified units of the government’s feeder fund for start-ups. The MSME sector will benefit from an increase in the threshold limit for presumptive taxation, which will also be extended to professionals. In order to encourage indigenous R&D activities, a concessional taxation regime for income from patents is proposed, whereby patent-related income will be taxed at 10%.
To promote Make in India, amendments have been made to rates of customs duty and central excise duty in sectors like IT hardware, capital goods, defence production, textiles, chemicals & petrochemicals and MRO, while phasing out tax incentives.
An infrastructure cess on motor vehicles is proposed to deal with the pollution and traffic situation in cities. The government aims to open up the passenger road transport sector, which will provide more flexible business options for investments in public transport.
Proposals supporting financial sector reforms include provision of a pass-through status for securitisation trusts and asset reconstruction companies (ARCs), along with changes to policy permitting 100% FDI in ARCs. The Budget has allocated R25,000 crore for recapitalisation of public sector banks. Exemption from the DDT on dividend paid by SPVs to a business trust will eliminate the last tax hurdle for setting up real estate investment trusts in India.
Clarifications on non-applicability of MAT provisions to foreign companies having no business presence in India and a beneficial rate of 10% on long-term capital gains on the sale of private company shares by a non-resident are noteworthy. Investors in AIFs have been allowed to avail of the benefit of tax treaties for withholding tax purposes. There are proposals to create a framework for an electronic interface between taxpayers and tax authorities. Withholding tax provisions have been rationalised for relief to small taxpayers and the requirement of a PAN to avail of a lower withholding tax rate has been dropped, subject to provision of alternative documentation.
The subjectivity element in the levy of penalty has been curtailed and a new graded penalty system, along with a provision for remission of penalty in certain situations, will be introduced. Special windows for settlement of pending tax disputes are also proposed; this can significantly reduce pendency in tax litigation. These windows will also provide immunity from prosecution. A limited period compliance window for domestic taxpayers to declare black money is also proposed.
The Budget has introduced country-by-country reporting. The digital economy poses new tax challenges and, as a safeguard, an equalisation levy of 6% on consideration paid for specified services is proposed. Place of Effective Management-based residency rules will be effective from April 1, 2016; they provide a clear transition mechanism for dealing with procedural requirements. Other BEPS recommendations may be incorporated later.
The policy initiatives of this Budget and the pillars lay down a strong and comprehensive structural foundation that will accelerate the growth of Indian economy. Other ongoing reforms and legislative amendments proposed with respect to FEMA, visa rules, corporate law, the insurance and banking sector, GST, insolvency and bankruptcy law, direct subsidies, Aadhaar platform, PPPs, etc, are essential to reinforce the pillars that will take the Indian economy to greater heights.
Mukherjee is leader, Strategy Growth & Brand, Malik is director, M&A Tax, PwC India
