It must address issues like the inverted duty structure and retrospective taxation
Backed by campaigns to boost the Indian economy, the industry and investors have very high expectations from Budget FY16, especially given the pro-business steps taken by the new government. The economic activity at present is highly influenced by the reforms expected from the Narendra Modi-led government and a major advantage is that investor sentiment has grown optimistic. Business confidence is also high, as the industry expects real reforms from the government which has already made its vision clear with the announcement of Skill India and Make in India initiatives.
In order to galvanise the policies into action, a key sector which requires focus from the government in this budget is electronics manufacturing. Manufacturing has been at the core of India’s economic growth but the journey for domestic hardware manufacturing continues to be strenuous. Electronics is the second-largest import item for India and imports continue to exceed domestic production. It could become the largest if oil prices continue to head south. Indian manufacturing has failed to keep pace with its global counterparts and continues to struggle with extremely low domestic production. The roots of the problem lie in India succumbing to WTO pressure for bringing zero duty for imports. The local industry could not compete and China created jobs based on the demand for phones and other products from India.
While the industry has been optimistic about the government’s grand plans of manufacturing in India, there are many challenges that still exist in reality and prevent large manufacturers from setting up base here. The high cost of finance, power, soaring transaction costs, tax structure, the weak rupee and a poor supply-chain are realities the Indian government cannot evade. In order to overcome these challenges, there are crucial corrective steps which should be included in this budget. Firstly, the inverted duty structure should be completely corrected as domestically-produced goods cost more than imported ones which is a major deterrent for manufacturing in India. This can be revised by rationalising the special additional duty (SAD). Secondly, deemed export status should be given for ITA products manufactured in India.
Demand in the Indian market can also be created by strictly implementing the policy of buying only products manufactured in India by all Central government bodies, including PSUs, and this can be extended to all state governments to ramp up demand. Secondly, accelerated depreciation should be introduced on IT hardware products. India has a large domestic market and hence it is essential that we draw investments into India. Domestic manufacturing industry has the potential to not just create enormous employment opportunities for our country but will also be extremely necessary to maintain a good balance of trade.
For India to become a manufacturing hub, another factor that will be instrumental in the near future is the entrepreneurial growth in the country. In the context of the Indian market, entrepreneurship-led economic growth will act as a crucial catalyst to not just boost innovation but also create employment. The R10,000-crore fund for start-ups announced by the government is a welcome step for entrepreneurs and SMEs but the real test lies in its implementation.
Globally, it is well accepted that innovative start-ups are the real growth engine for creating employment and economic growth in a nation. Countries like the US, the UK and Israel have transformed their economies by taking necessary steps to create a vibrant entrepreneurship ecosystem. Most recently, Singapore is attracting more and more Indian start-ups by offering a very attractive policy environment. On the other hand, we are losing out on the talent as we create taxation policies that are serious impediments to start-ups’ growth.
India is probably the only country which does not encourage angel investing. Tax provisions like Section 56 (2) (viia) & (viib) are serious roadblocks for entrepreneurial growth given the way they treat the valuation and tax treatment of genuine angel groups. The government should immediately correct this as India is losing out on start-ups to Singapore by the dozen since the latter’s new policies were introduced. Another aspect that requires attention is the tax structure for angel investors. Countries like the US, the UK and Singapore offer serious incentives to angel groups. India, as a start, can introduce tax credits to angel investors through recognised angel groups, with sunset provisions of the benefit expiring in, say, 5 years. This is bound to boost investor confidence and support the angel investor community.
The other areas requiring attention are the swift implementation of the GST and the removal of retrospective taxation. GST implementation has been long due and this should be rolled out by bringing on board all state governments and strengthening the tax regime. The PM has done a terrific job in bringing India into focus with new initiatives that have strengthened investor confidence. The Indian business environment also at present looks attractive with a pro-business government and its vision. Budget FY16 will test the government on whether it will sustain the momentum that has been achieved and keep up the market confidence.
By Ajai Chowdhry
The author is founder, HCL