Union Budget An analysis

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3 Union Budget An analysis 28 February, 2015 Confederation of Indian Industry 3

4 Copyright 2015 Confederation of Indian Industry (CII). All rights reserved. No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), in part or full in any manner whatsoever, or translated into any language, without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of the information and material presented in this document. Nonetheless, all information, estimates and opinions contained in this publication are subject to change without notice, and do not constitute professional advice in any manner. Neither CII nor any of its office bearers or analysts or employees accept or assume any responsibility or liability in respect of the information provided herein. However, any discrepancy, error, etc. found in this publication may please be brought to the notice of CII for appropriate correction. Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi , India, Tel: , Fax: ; info@cii.in; Web: Confederation of Indian Industry 4

5 Contents Chapter Title Page No. Foreword 1 Key Features of the Union Budget Key Budget Trends Analysis of the Budgetary Proposals Fiscal Trends Direct Taxes Indirect Taxes Sector & Industry Specific Analysis Annexure-Key Indicators: Economic Survey Confederation of Indian Industry 5

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7 FOREWORD A comprehensive and reform-oriented Budget Consolidating on the economic recovery that is now apparent across sectors, the Union Budget took several measures to build a more competitive economy. It outlines a comprehensive vision for citizens with strong focus on growth, investment, job creation and social security. A forward-looking, counter-cyclical, and pragmatic document, the Budget reassures investors and builds consumer confidence. CII is encouraged by the GDP growth target of per cent for , and fiscal consolidation at 3.9 per cent of GDP. The Budget would strengthen the investment cycle and build the savings pipeline while also channelising funds into much-needed infrastructure. The Finance Minister has placed strong emphasis on public sector role to enhance capital investments through a slew of measures, including extending fiscal deficit targets for a year, adding resources from public sector enterprises and creation of a National Investment and Infrastructure Fund. CII had recommended tweaking of Real Estate Investment Trusts and Infrastructure Investment Trusts, revamping of Public Private Partnership modalities, and placing large projects for bidding after obtaining all clearances. These are mentioned in the Budget and would help 'crowd in' private sector investments along with high priority accorded to ease of doing business. Implementation of a comprehensive GST by April 2016 would be a significant reform in the country s indirect tax structure and could boost GDP growth by up to 2 percentage points. The Finance Minister has suggested that the direct tax rate would be lowered from 30 per cent to 25 per cent over the next four years while tax exemptions are removed. This would bring Indian tax rates in line with those in other Asian countries, making it investment in India an attractive proposition. Currently, the effective tax rate is as low as 23 per cent, given the large number of exemptions, which also leave scope for litigation. CII welcomes Budget and expects it to usher in an era of greater tax certainty. Chandrajit Banerjee Director General Confederation of Indian Industry Confederation of Indian Industry 7

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9 Chapter 1 Key Features of the Union Budget Confederation of Indian Industry 9

10 Confederation of Indian Industry 10

11 Chapter 1 Key Features of the Union Budget Government has identified five major challenges to our economy namely agricultural income under stress, increasing investment in infrastructure, decline in manufacturing, resource crunch in view of higher devolution in taxes to states and maintaining fiscal discipline. According to the Union Budget, meeting these challenges would require the stepping up of the public spending to catalyze investment, promotion of Make in India programme to create jobs in manufacturing along with continued support to programmes with important national priorities such as agriculture, education, health, MGNREGA and rural infrastructure including roads. Fiscal Road Map Government remains committed to fiscal consolidation; fiscal discipline to continue Roadmap to achieve fiscal deficit of 3% of GDP in 3 years drawn up; with 3.9% in , 3.5% in , 3% in Disinvestment targets raised to Rs 69,500 crore through disinvestment in public sector undertakings (PSUs) and strategic sale of equities Disinvestment to include both disinvestment in loss making units and some strategic companies. Government committed to the process of rationalizing subsidies. Direct Transfer of Benefits to be extended further with a view to increase the number of beneficiaries from Rs.1 crore to Rs.10.3 crore. Agriculture More steps to address the two major factors critical to agricultural production namely soil and water proposed to improve soil health, Agriculture Ministry s organic farming scheme Paramparagat Krishi Vikas Yojana to be fully supported; Rs 5,300 crore allocated to support micro-irrigation, watershed development and the Pradhan Mantri Krishi Sinchai Yojana. States urged to chip in substantially in this vital sector. Focus on improving the quality and effectiveness of activities under MGNREGA. Rs 34,699 crore allocated for this purpose. To support the agriculture sector with the help of effective agriculture credit and focus on small and marginal farmers, the Finance Minister proposes to allocate Rs 25,000 crore in to the corpus of Rural Infrastructure Development Fund (RIDF) set up in NABARD; Rs15,000 crore for Long Term Rural Credit Fund; Rs45,000 crore for Short Term Co-operative Rural Credit Refinance Fund; and Rs15,000 crore for Short Term RRB Refinance Fund. Target of agricultural credit during the year set at Rs 8.5 lakh crore. 1

12 Need to create a National Agriculture Market for the benefit of farmers, which will also have the incidental benefit of moderating price rises. Government to work with the States, in NITI, for the creation of a Unified National Agriculture Market. Funding the unfunded To create a Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs. 20,000 crore and credit guarantee corpus of 3,000 crore, which will refinance Micro-Finance Institutions through the Pradhan Mantri Mudra Yojana. A Trade Receivables discounting System (TReDS) which will be an electronic platform for facilitating financing of trade receivables of MSMEs, to be established. In lending, SC/ST enterprises to get priority. Postal network with 1,54,000 points of presence spread across villages to be used for increasing access of the people to the formal financial system. From Jan Dhan to Jan Suraksha Government to work towards creating a functional social security system for all Indians, especially the poor and the under-privileged. Government proposes to launch the following: Pradhan Mantri Suraksha Bima Yojna which would cover accidental death risk of Rs 2 lakh for a premium of just Rs12 per year, Atal Pension Yojana, to provide a defined pension. Government to contribute 50% of the beneficiaries premium limited to Rs1,000 each year, for five years, in the new accounts opened before 31st December 2015 and a new scheme for providing Physical Aids and Assisted Living Devices for senior citizens, living below the poverty line. Pradhan Mantri Jeevan Jyoti Bima Yojana to cover both natural and accidental death risk of Rs 2 lakh at premium of Rs 330 per year for the age group of Unclaimed deposits of about Rs 3,000 crores in the PPF, and approximately Rs6,000 crores in the EPF corpus. to be appropriated to a corpus, to be used to subsidize the premiums on these social security schemes through creation of a Senior Citizen Welfare Fund in the Finance Bill. Infrastructure Sharp increase in outlays of roads and railways. Capital expenditure on public sector units raised. National Investment and Infrastructure Fund (NIIF), to be established with an annual flow of Rs20,000 crores. Tax free infrastructure bonds for the projects in the rail, road and irrigation sectors to be permitted. PPP mode of infrastructure development to be revisited and revitalized. Atal Innovation Mission (AIM) to be established in NITI to promote innovation. 2

13 Promotion Platform involving academicians, and drawing upon national and international experiences, to foster a culture of innovation, research and development. A sum of Rs150 crore will be earmarked for the purpose. (SETU) Self-Employment and Talent Utilization) to be established as Techno-financial, incubation and facilitation programme to support all aspects of start-up business. Rs 1000 crore to be set aside as initial amount in NITI. Ports in the public sector will be encouraged to corporatize and become companies under the Companies Act to attract investment and leverage the huge land resources. 5 new Ultra Mega Power Projects, each of 4000 MW, to be set up in the Plug-and-Play mode. Financial Market Public Debt Management Agency (PDMA), bringing both external and domestic borrowings under one roof, to be set up this year. Enabling legislation, amending the Government Securities Act and the RBI Act included in the Finance Bill, Forward Markets commission to be merged with SEBI. Section-6 of FEMA to be amended through Finance Bill to provide control on capital flows as equity will be exercised by Government in consultation with RBI. Proposal to create a Task Force to establish sector-neutral financial redressal agency that will address the grievance against all financial service providers. India Financial Code to be introduced soon in Parliament for consideration. Government to bring enabling legislation to allow employees to opt for EPF or New Pension Scheme. For employee s below a certain threshold of monthly income, contribution to EPF to be an option, without affecting employees contribution. NBFCs registered with RBI and having an asset size of Rs 500 crore and above may be considered for notification as Financial Institution in terms of the SARFAESI Act, Government proposes to introduce measures that will incentivize credit or debit card transactions, and dis-incentivise cash transactions. An autonomous Bank Board Bureau to be set up to improve the governance of public sector bank Investment Foreign investments in Alternate Investment Funds to be allowed. Distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments to be done away with. A project development company to facilitate setting up manufacturing hubs in CMLV countries, namely, Cambodia, Myanmar, Laos and Vietnam. Target of renewable energy capacity revised to MW till

14 A need for procurement law to contain malfeasance in public procurement. Malfeasance in public procurement law and an institutional structure consistent with the UNCITRAL model Proposal to introduce a public Contracts (resolution of disputes) Bill to streamline the institutional arrangements for resolution of such disputes. Proposal to introduce a regulatory reform Bill that will bring about a cogency of approach across various sectors of infrastructure. Monetising Gold Gold monetisation scheme, which would allow depositors of gold to earn interest on their metal accounts and the jewellers to obtain loans in their metal account, to be introduced. Sovereign Gold Bond, as an alternative to purchasing metal gold scheme, to be developed. Work to commence on developing an Indian gold coin, which will carry the Ashok Chakra on its face. Ease of Doing Business An expert committee to examine the possibility of preparing a draft legislation where the need for multiple prior permission can be replaced by a pre-existing regulatory mechanism. This will facilitate India s quest to emerge as an attractive investment destination. To address the concerns of IT industries for a more liberal system of raising global capital, incubation facilities in our Centres of Excellence, funding for seed capital and growth, and ease of Doing Business etc. would be addressed for creating hundreds of billion dollars in value. Comprehensive Bankruptcy Code of global standards to be brought in current fiscal. Skill India A national skill mission to consolidate skill initiatives spread across several ministries to be launched. The Mission will consolidate skill initiatives spread across several Ministries and allow us to standardize procedures and outcomes across our 31 Sector Skill Councils. Deen Dayal Upadhyay Gramin Kaushal Yojana with a corpus of Rs 1,500 crore to enhance the employability of rural youth launched. A student Financial Aid Authority to administer and monitor the front-end of all scholarship as well Educational Loan Schemes, through the Pradhan Mantri Vidya Lakshmi Karyakram. An IIT to be set up in Karnataka and Indian School of Mines, Dhanbad to be upgraded into a fullfledged IIT. New All India Institute of Medical Science (AIIMS) to be set up in J&K, Punjab, Tamil Nadu, Himachal Pradesh and Assam. Another AIIMS like institution to be set up in Bihar. A post graduate institute of Horticulture Research & Education is to be set up in Amritsar. Three new National Institute of Pharmaceuticals Education and Research to be set up in Maharashtra, Rajasthan & Chattisgarh and one institute of Science and Education Research is to be set up in Nagaland & Orissa each. 4

15 The National Optical Fibre Network Programme (NOFNP) to be further speeded up by allowing willing states to execute on reimbursement of cost basis. Tourism Resources to be provided to start work on landscape restoration, signage and interpretation centres, parking, access for the differently abled, visitors amenities, including securities and toilets, illumination and plans for benefiting communities around them at various heritage sites. Visa on arrival to be increased to 150 countries in stages. Direct Taxes Tax free infrastructure bonds for the projects in the rail, road and irrigation sectors. Vision of putting in place a direct tax regime, which is internationally competitive on rates, without exemptions. Government to bring enabling legislation to allow employee to opt for EPF or New Pension Scheme. For employee s below a certain threshold of monthly income, contribution to EPF to be option, without affecting employees contribution. Objective of stable taxation policy and a non-adversarial tax administration. Fight against the scourge of black money to be taken forward. No change in rate of personal income tax. Proposal to reduce corporate tax from 30% to 25% over the next four years, starting from next financial year. Abolition of the wealth tax and replacement with additional surcharge of 2% on the super-rich with a taxable income of over Rs 1 crore. as against current rate of 10%. Rationalisation and removal of various tax exemptions and incentives to reduce tax disputes and improve administration. Exemption to individual tax payers to continue to facilitate savings. Evasion of tax in relation to foreign assets to have a punishment of rigorous imprisonment upto 10 years, be non-compoundable, have a penalty rate of 300% and the offender will not be permitted to approach the Settlement Commission. Non-filing of return/filing of return with inadequate disclosures to have a punishment of rigorous imprisonment upto 7 years. Undisclosed income from any foreign assets to be taxable at the maximum marginal rate. Mandatory filing of return in respect of foreign asset. PAN being made mandatory for any purchase or sale exceeding Rupees 1 lakh. Leverage of technology by CBDT and CBEC to access information from either s data bases. Tax pass through to be allowed to both category I and category II alternative investment funds. Rationalisation of capital gains regime for the sponsors exiting at the time of listing of the units of REITs and InvITs. 5

16 Rental income of REITs from their own assets to have pass through facility. Permanent Establishment (PE) norm to be modified to encourage fund managers to relocate to India. General Anti Avoidance Rule (GAAR) to be deferred by two years. GAAR to apply to investments made on or after , when implemented. Additional investment allowance 15%) and additional depreciation to new manufacturing units set up during the period to in notified backward areas of Andhra Pradesh and Telangana. Rate of Income-tax on royalty and fees for technical services reduced from 25% to 10% to facilitate technology inflow. Benefit of deduction for employment of new regular workmen to all business entities and eligibility threshold reduced. Balance of 50% of additional 20% for new plant and machinery installed and used for less than six months by a manufacturing unit or a unit engaged in generation and distribution of power is to be allowed immediately in the next year. Simplification of tax procedures. Monetary limit for a case to be heard by a single member bench of ITAT increase from Rs.5 lakh to Rs.15 lakh. Provision of indirect transfers in the Income-tax Act suitably cleaned up. Applicability of indirect transfer provisions to dividends paid by foreign companies to their shareholders to be addressed through a clarificatory circular. Domestic transfer pricing threshold limit increased from Rs.5 crore to Rs.20 crore. MAT rationalised for FIIs and members of an AOP. Tax Administration Reform Commission (TARC) recommendations to be appropriately implemented during the course of the year. Donation made to National Fund for Control of Drug Abuse (NFCDA) to be eligible for 100% deduction u/s 80G of Income-tax Act. Seized cash can be adjusted towards assessees tax liability. 100% deduction for contributions, other than by way of CSR contribution, to Swachh Bharat Kosh and Clean Ganga Fund. Limit of deduction of health insurance premium increased from Rs to Rs.25000, for senior citizens limit increased from Rs to Rs Senior citizens above the age of 80 years, who are not covered by health insurance, to be allowed deduction of Rs towards medical expenditures. Deduction limit of Rs with respect to specified decease of serious nature enhanced to Rs in case of senior citizen. Additional deduction of Rs allowed for differently abled persons. Limit on deduction on account of contribution to a pension fund and the new pension scheme increased from Rs.1 lakh to Rs.1.5 lakh. Additional deduction of Rs for contribution to the new pension scheme u/s 80CCD. 6

17 Payments to the beneficiaries including interest payment on deposit in Sukanya Samriddhi scheme to be fully exempt. Concession to individual tax-payers despite inadequate fiscal space. Yoga to be included within the ambit of charitable purpose under Section 2(15) of the Income-tax Act. To mitigate the problem being faced by many genuine charitable institutions, it is proposed to modify the ceiling on receipts from activities in the nature of trade, commerce or business to 20% of the total receipts from the existing ceiling of Rs.25 lakhs. Most provisions of Direct Taxes Code have already been included in the Income-tax Act, therefore, no great merit in going ahead with the Direct Taxes Code as it exists today. Indirect Tax Service tax rate plus education cess increased from 12.36% to 14% to facilitate transition to GST Increase in basic custom duty: o Metallurgical coke from 2.5% to 5%. o o Tariff rate on iron and steel and articles of iron and steel increased from 10% to 15% but there is no change in the effective rate Tariff rate on commercial vehicles increased from 10% to 40%. However effective rate has increased from 10% to 20% on the commercial vehicles imported other than in CKD condition. Basic custom duty on digital still image video camera with certain specification reduced to nil. Excise duty on rails for manufacture of railway or tram way track construction material exempted retrospectively from to , if no CENVAT credit of duty paid on such rails is availed. Service-tax to be levied on service provided by way of access to amusement facility, entertainment events or concerts, pageants, non recognised sporting events etc. Service-tax exemption: Services of pre-conditioning, pre-cooling, ripening etc. of fruits and vegetables. Life insurance service provided by way of Varishtha Pension Bima Yojana. All ambulance services provided to patients. Admission to museum, zoo, national park, wild life sanctuary and tiger reserve. Transport of goods for export by road from factory to land customs station. Enabling provision made to exclude all services provided by the Government or local authority to a business entity from the negative list. Service-tax exemption to construction, erection, commissioning or installation of original works pertaining to an airport or port withdrawn. Transportation of agricultural produce to remain exempt from Service-tax. Artificial heart exempt from basic custom duty of 5% and CVD. Excise duty exemption for captively consumed intermediate compound coming into existence during the manufacture of agarbathi. 7

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19 Chapter 2 Key Budget Trends 9

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21 Chapter 2 Key Budget Trends Fiscal commitment reiterated but timeline to meet 3% target extended by a year (RE) (BE) (T) (T) T: Target Deficits as a percent of GDP continue to decline (RE) (BE) Fiscal Deficit (as % of GDP) Primary Deficit (as % of GDP) Revenue Deficit (as % of GDP) 11

22 434, , , , , , ,232 1,014,724 1,126,294 1,141,575 Centre s net revenue receipts expected to moderate in ,200,000 1,000, , , , , (RE) (BE) Revenue receipts (Rs. Crore)- LHS Revenue receipts (as % of GDP)- RHS Sources of Revenue: contributions of each segment remain unchanged BE BE Borrowings and other liabilities 24% Corporation Tax 21% Borrowings and other liabilities 24% Corporation Tax 20% Non Debt Capital Reciepts 3% Non Tax Revenue 10% Service Tax and others 10% Union Excise Duties 10% Income Tax 13% Customs 9% Non Debt Capital Reciepts 4% Non Tax Revenue 10% Service Tax and others 9% Union Excise Duties 10% Income Tax 14% Customs 9% Tax-GDP ratio to inch-up (RE) (BE) Gross Tax revenue (as % of GDP) Non-tax revenue (as % of GDP) 12

23 40,000 22,144 40,000 13,894 30,000 25,890 25,841 31,350 0 Rs. Crore 55,814 63,425 69, ,396 Rs. Crore 419, , , , , , ,608 Total debt receipts to increase marginally (RE) (BE) Total debt receipts Market loans Debt-servicing to increase sharply (RE) (BE) Total Interest Payments as a % of Revenue Receipts Disinvestment targets moves up (RE) (BE) Disinvestment Target (Rs Crore) Disinvestment Actual (Rs Crore) 13

24 583, , ,956 1,024,487 1,108,749 1,304,365 1,410,372 1,559,447 1,681,158 1,777,477 Sources of Expenditure: Share of states in tax increases, correspondingly plan assistance shrinks Plan Assistance for State & UT Plans 15% Central Plan 11% Non plan Assistance to states and UT 3% States Share of Taxes and Duties 18% BE Interest Payments 20% Subsidies 12% Defence Services Other Non 10% Plan Expenditu re 11% Central Plan 11% Non plan Assistance to states and UT 5% Plan Assistance for State & UT Plans 9% BE States Share of Taxes and Duties 23% Interest Payments 20% Subsidies 10% Defence Services 11% Other Non Plan Expenditure 11% Expenditure-GDP ratio shrinks 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , , (RE) Total expenditure (Rs. Crore)- LHS Total expenditure (as % of GDP)- RHS (BE) Plan and non-plan exp. (as % of GDP) decline (RE) Plan expenditure (as % of GDP) Non-plan expenditure (as % of GDP) (BE) 14

25 198, , , , , ,649 Rs. Crore 470, , , ,317 Bigger increase in plan capital exp. as % of total exp., as compared to non-plan exp (RE) (BE) Total capital non-plan exp (as % of total exp) Total capital plan exp (as % of total exp) Net transfers of resources to states increase significantly (RE) (BE) Drastic change in resource allocation to States BE BE Central Assistance 42% Devolution of State share of Taxes 49% Non-Plan Grants and Loans 13% Central Assistance 24% Devolution of State share of Taxes 63% Non-Plan Grants and Loans 9% 15

26 53,495 67, , , , , , , , ,811 Rs. Crore Expenditures on defence and interest rise while those on subsidies fall 500, , , , , , , , ,000 50, (RE) (BE) Non-plan expenditure- RHS 608, , , , ,747 1,106,1201,213,2241,312,200 Interest payments- LHS 192, , , , , , , ,145 Total subsidies- LHS 123, , , , , , , ,811 Defence expenditure- LHS 73,305 90,669 87, , , , , ,139 1,400,000 1,200,000 1,000, , , , ,000 0 Subsidies decline at an overall level (RE) (BE) 300, , , , ,000 50,000 0 Total subsidies (Rs. Crore) Subsidies as % of GDP Subsidies as % of total expenditure 16

27 Rs. Crore Rs. Crore Petroleum subsidies decline substantially, while others maintain status quo 270, , , , , ,000 90,000 60,000 30, Total Subsidies- LHS 129, , , , , , , ,811 Food subsidy- RHS 43,751 58,443 63,844 72,822 85,000 92, , ,419 Fertilizer subsidy- RHS 76,603 61,264 62,301 70,013 65,613 67,339 70,967 72,969 Petroleum subsidy- RHS 2,852 14,951 38,371 68,484 96,880 85,378 60,270 30,000 Other subsidy (incl interest subsidy)- RHS (RE) (BE) 6,127 5,842 8,805 6,622 9,586 9,915 12,779 16, , , ,000 80,000 60,000 40,000 20,000 0 Infrastructure spending to increase by ~20% 140, , ,000 80,000 60,000 40,000 20,000 Total Spending on Infrastructure (A+B) Cenral Plan Outlay (Budget Support) On Infrastructure (A) Central Assistance to Stats and Uts on Infrastructure (B) (RE) (RE) (BE) 63,703 80,300 89, , , , , , ,333 42,523 50,299 61,871 72,406 76,384 77,387 88,259 87, ,408 21,180 30,001 27,509 28,963 32,485 27,110 27,820 27,925 19,926 17

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29 Chapter 3 Analysis of the Budgetary Proposals 19

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31 Chapter 3 Analysis of the Budgetary Proposals The Union Budget has delineated a new vision for the economy by charting out a bold, reformist path which would stimulate demand, boost investment, lift growth and generate employment across sectors. There has been much anticipation in the industry and investor circles that the Budget would build further on the pro-business steps taken by the government in the recent past. And the big picture reading from the Budget statement shows that the policy makers are moving in the right direction on delivering on this expectation. The Finance Minister has rightly identified fiscal discipline as a key focus area in the Budget and a panacea for improving investor sentiment. Our fiscal deficit has been contained at 4.1% of GDP for the current year and the government has renewed its commitment to bring it down to 3 per cent within the next three years. While tracking fiscal consolidation, the Budget has not deviated from the path of promoting inclusive growth. Commendable initiatives have been taken in critical sectors such as agriculture, MSMEs, manufacturing and services for all round development of the economy. What is being seen as a major mood elevator is that a clear effort has been made to recast the tax system. The message that comes across is that the FM is committed to remove the regulatory hurdles to investment and promote a stable, predictable and non-adversarial tax regime. CII particularly welcomes the proposed reduction of corporate tax rate, deferral of GAAR, clarity on retrospective tax, changes in transfer pricing norms, reduction on tax on royalty, abolition of wealth tax, among others. The government has also revamped the tax structure for individuals with the aim to put more money to their pockets. Measures such as higher deduction for health insurance, transport allowance, deduction on investment in pension funds, schemes on gold would improve financial savings of households. This is a land mark budget which demonstrates that the government is firmly committed to changing the governance and regulatory infrastructure. In the following sections, CII analyses the major provisions of the Budget and their implications across sectors. Agriculture With a view to provide an impetus to growth in agriculture, the Budget has proposed the following: A. Soil and Water health Management Soil Health Management - Support to Agri-Ministries organic farming scheme Paramparagat Krishi vikas yojna. There has been heavy degradation in soil health due to non-judicious use of inputs and this is impacting the productivity of crops. The support provided for proper soil health management, in the Budget, through the Paramparagat Krishi Vikas Yojana, will have a positive impact on agriculture productivity as well as reduce cost of cultivation for farmers by use of right inputs at the right time. Water Management - Allocation of Rs 5300 crore to micro irrigation; 21

32 Water shed programs and Pradhan Mantri Gram Sichai yojna to provide more crop per drop. Another Rs 3000 crore may be added later during the year. Approximately 41% of cropped area is still un-irrigated. Hence, providing impetus to irrigation through micro irrigation will significantly increase water-use efficiency and productivity which in turn will boost growth for the micro irrigation industry B. Agriculture Credit A target of Rs 8.5 lakh crore to banks set for FY A corpus of Rs 25,000 crore created for the Rural Infrastructure development fund set up by NABARD. Simultaneously, Rs 15,000 crore set aside for long term rural credit fund and Rs 45,000 crore allocated for short term cooperative rural credit refinance fund According to NSSO 70th round data, as much as 40% of the finances of farmers still comes from informal sources. Usurious moneylenders account for a 26% share of total agricultural credit. Increasing the flow of institutional credit to agriculture will improve the credit access for farmers leading to easier access to quality inputs and technology thus benefitting the industry as well. C. Agricultural Marketing Creation of a Unified National Agricultural Market CII has long been advocating the need for providing farmers the freedom to sell directly to private buyers beyond market yards. Creation of a National Unified Agricultural Market will provide for the establishment of private market yards/private markets which will enable farmers to operate through the market mechanism and in turn will ensure better returns. For the private sector, as intermediaries will be reduced, cost to the consumers will go down, thereby benefitting the end users as well. D. Food Processing Service Tax exemption extended to certain pre cold storage services in relation to fruits and vegetables This will substantially incentivize value addition and would result in reduction of post-harvest losses from which the industry has been suffering. Under section 80JJAA of the Income-tax Act, the eligibility threshold of minimum 100 workmen is proposed is to be reduced to 50. Food Processing Units employing more than 100 people are eligible for additional 30% deduction as per this section. Owing to the seasonal nature of the food processing units, as the main raw materials fruits and vegetables are generally available for 3-4 months only and a large workforce cannot be employed, this step will encourage smaller units also to avail of this deduction. Investment, Infrastructure and Industry A. Infrastructure With a view to incentivize investment in infrastructure, the Budget has proposed a number of welcome measures which would kick-start investment in infrastructure. Some measures announced for the infrastructure sector are as under: Total Investment in Infrastructure to be raised to INR 1.25 Lakh Crores, out of which INR 70,000 Crore is proposed in this Budget 22

33 Infrastructure Sector has significant economic multiplier and hence this announcement is a boost for the entire economy. Higher public sector investment would enable greater crowding in of private investment. INR 25,000 Crores to be invested in Rural Infrastructure Development Fund (RIDF) under NABARD. A very welcome initiative and provide fillip to the continuation with the PURA (Providing Urban Amenities in Rural Areas) Scheme INR Crores to be invested in Roads Sector to sanction 1 Lakh Kilometers, in addition to the existing 1 Lakh Kilometers. A significant announcement if we are to achieve the ambitious target of 30 KM construction of Roads & Highway per day. Inflow of annual INR 20,000 Crores in National Infrastructure & Investment Fund. Besides, tax free infrastructure bonds including Roads Sector have also been announced. This would be a very positive move as it would enable such entity to raise debt, which, in turn could be reinvested as equity and thereby provide the much required liquidity. PPP Model to be revitalized and realigned with the Sovereign bearing major portion of risk. This is indeed a welcome initiative as Industry has always felt that there needs to a balanced risk allocation mechanism and Government has to take responsibility for projects stuck across sectors in various stages due to impending sovereign clearances. Major Ports to be incentivized to be corporatized and converted in to companies This was a long pending Industry demand and can help make the public Sector Ports more competitive, thereby promoting transparency & accountability. Besides, it would also help leverage the huge amount of unutilized land asset with public sector ports. Investment of INR Crores in Housing & Urban Development This move would go a long way in promoting affordable housing, especially to achieve the stated goal of Housing for All by Investment of INR 1200 Crores to Dholera SIR and Shendra-Bidkin Corridor in DMIC to set up basic infrastructure This is one of the much awaited Industrial Corridor and this initial move would stimulate greater private investment. Rental income from Real Estate Investment Trusts (REITs) would be eligible for pass through facility REITs was announced last year and this incentive would help in making this instrument more popular and stimulate greater private investment. Pre-existing Regulatory Mechanism and Policies instead of numerous permissions This Plug and Play mechanism would go a long way in providing a strong impetus to execution of Infrastructure Projects in the country Proposal to introduce a Regulatory Reform Law that will bring about a cogency of approach across various sectors of infrastructure to tackle the lack of common approach and philosophy in the regulatory arrangements prevailing with different sectors. 23

34 This announcement would serve as an important milestone in streamlining the regulatory framework in the infrastructure sector of the economy, provide greater transparency and hence attract more private investment (including foreign) for the Sector. It has been one of the most eagerly awaited announcement by the Industry. B. Energy The Government proposes to set up five ultra megapower projects (UMPPs) of 4000 MW each in the plug and play mode with all clearances and linkages in place before the projects are awarded. This will unlock investments of Rs 1 lakh crore This will clearly benefit the industry as UMPPS are an established model. However, implementation had been hobbled by a host of problems, ranging from fuel supplies and land acquisition to tariff issues. The plug and play solution will address these issues and boost private sector investments The second unit of the Kudankulam nuclear power station (1000 MW capacity) will be commissioned in the year This is a positive development as more power will be available to industries in states including Tamil Nadu, Pondicherry and Andhra Pradesh. In addition, this reiterates India s commitment to developing nuclear power stations and will send out the right signals to companies like GE, Hitachi, Toshiba, etc. which supply nuclear power stations. The Government is targeting the electrification of 20,000 villages by 2022 This will provide investment opportunities to the industry in the areas of strengthening the transmission and distribution system and developing innovative decentralized energy solutions. New and Renewable Energy The Ministry has set a target of putting in place 175,000 MW of renewable energy (100,000 MW of solar, 60,000 MW of wind, 10,000 MW of biomass and 5000 MWs of Small hydropower) by The Government is committed to making development processes as green as possible given the growing environmental concerns Electrification of the remaining 20,000 villages including off-grid solar power by 2020 This will give a boost to the deployment of offgrid energy solutions including solar/biomass hybrid models Proposal to increase the Clean Energy Cess from Rs 100 per tonne to Rs 200 per tonne to promote development of clean environment initiatives. This will enable more resources for developing clean energy. However, the increase in cess will lead to an increase in the price of coal and a rise in generation cost. This may be passed on to the consumers and translated into an increase in the cost of power generation per unit. C. Manufacturing Given that reviving manufacturing is one of the biggest challenge before the government, the Budget proposes the following to provide an impetus to manufacturing: Measures to address CENVAT credit accumulation 24

35 This is an excellent move which releases working capital for industry without affecting government revenue. This will spur investments and help achieve Make in India goals. Service tax exemption for effluent treatment plants This is in the direction of zero effect on the environment and will eventually improve the image of the chemicals industry. Removal of SAD on actual user condition for electronics industry The electronics manufacturing industry was expecting a number of measures for making industry competitive in the zero duty regime. In the budget speech, however, the FM has announced only removal of SAD on actual user condition. This would help in containing the CENVAT overflow. Exclusion of populated PCB from SAD removal is a step towards encouraging Make in India. (Note: List of 22 items on which BCD has been lowered is yet to be seen whether it includes any electronic item) Banking and Financial Sector Recognising the need for increased financial inclusion, improved insurance penetration and the need for expanding the penetration of bond market for providing long term finance and addressing the challenges in the banking sector, the following enabling provisions have been proposed in the Budget A. Banking Creation of a Micro Units Development Refinance Agency (MUDRA) Bank with a corpus of Rs 20,000 crore, and Credit Guarantee Corpus of Rs 3,000 crore. MUDRA Bank will refinance Micro-Finance Institutions through the Pradhan Mantri Mudra Yojana. Setting up of MUDRA bank to refinance Micro-Finance Institutions (MFIs) through the Pradhan Mantri Mudra Yojana would provide an impetus to small business units through provision of finance. The initiative will also encourage entrepreneurship in the country and promote self-employment significantly. Setting up an autonomous bank Board Bureau In order to improve the governance of Public Sector banks, the Government intends to set up an autonomous bank Board Bureau. The Bureau will search and select heads of Public Sector banks and help them in developing differentiated strategies and capital raising plans through innovative financial methods and instruments. This would be an interim step towards establishing a holding and investment Company for Banks. This would help lay down a roadmap for bringing necessary reforms in the governance framework of Public Sector Banks. The measure would also help the Public Sector Banks to meet Basel III capital requirements and enhance their systemic resilience as well as operational efficiencies. B. NBFCs Access of SARFAESI Act to NBFCs To bring parity in regulation of Non-Banking Financial Companies (NBFCs) with other financial institutions in matters relating to recovery, it is proposed that NBFCs registered with RBI and having an asset size of Rs 500 crore and above will be considered for notifications as Financial Institution in terms of the SARFAESI Act,

36 Given the similar nature of services provided by NBFCs and banks, the measure provides the much needed level playing field to systemically important NBFCs vis-à-vis banks to ensure better recovery of assets. C. Financial Inclusion Jan Dhan, Aadhar and Mobile (JAM) Trinity to implement direct transfer of benefits. The Jan Dhan, Aadhar and Mobile (JAM) Trinity will provide an efficient mechanism to implement Government s programme on direct benefit transfer in a leakage-proof, well-targeted and cashless manner. Utilization of the Postal network for expanding financial inclusion The Government is committed to increasing the access of people to the formal financial system. In this context, it is proposed to utilize the vast Postal network with nearly 1,54,000 points of presence spread across villages of the country. With its wide presence across the country, the Postal Department is expected to utilize its proposed Payments Bank venture for further success of the Pradhan Mantri Jan Dhan Yojana. D. Insurance From Jan Dhan to Jan Suraksha- Encouraged by the success of the Pradhan Mantri Jan Dhan Yojana, the budget has proposed to work towards creating a universal social security system for all Indians, especially the poor and the under-privileged. The schemes announced are Pradhan Mantri Suraksha Bima Yojna will cover accidental death risk of Rs 2 lakh for a premium of just Rs 12 per year. Atal Pension Yojana, which will provide a defined pension, depending on the contribution and its period. To encourage people to join this scheme, the Government will contribute 50% of the beneficiaries premium limited to Rs 1,000 each year, for five years, in the new accounts opened before 31st December, Pradhan Mantri Jeevan Jyoti Bima Yojana covers both natural and accidental death risk of Rs 2 lakhs. The premium will be Rs 330 per year, or less than one rupee per day, for the age group With the success of Pradhan Mantri Jan Dhan Yojana, the next steps announced in the Budget are expected to ensure better and efficient delivery of social welfare schemes (on insurance and pension) and make the financial inclusion agenda more holistic and sustainable. The government proposes to utilize Jan Dhan platform, to encompass various social security schemes. This would ensure direct transfer of benefits to the targeted beneficiaries. E. Promoting Cashless Transactions The Budget proposes to introduce several measures that will incentivize credit or debit card transactions, and disincentivise cash transactions. The successful implementation of Pradhan Mantri Jan-Dhan Yojana along with the entry of Payment Banks would provide the necessary platform for reducing India s overwhelming preference for physical cash and create a milieu for moving towards a cashless society. F. Insurance & Pensions Flexibility on choice of options for social schemes - provident fund and health insurance With respect to the Employees Provident Fund (EPF), the employee needs to be provided two options. Firstly, the employee may opt for EPF or the New Pension Scheme (NPS). Secondly, for employees below a certain threshold of monthly income, contribution to EPF should be optional, 26

37 without affecting or reducing the employer s contribution. With respect to ESI, the employee should have the option of choosing either ESI or a Health Insurance product, recognized by the Insurance Regulatory Development Authority (IRDA). The Government intends to bring a legislation in this regard, after stakeholder consultation. This would provide greater flexibility to individuals in making choice for their contribution in provident fund and health insurance schemes as per their preference in terms of the corresponding benefit offered by these different schemes. Increase in limit of tax deduction on health insurance The limit of deduction in respect of health insurance premium would be increased from Rs 15,000 to Rs 25,000.For senior citizens the limit will go up to Rs 30,000 from the existing Rs 20,000.For very senior citizens of the age of 80 years or more, who are not covered by health insurance, the deduction of Rs 30,000 towards expenditure incurred on their treatment will be allowed. This would provide the much needed push to the health insurance sector and increase demand from individuals to meet their healthcare expenditure adequately. Increase in limit of tax deduction for contribution to pension fund. The Budget proposes to increase the limit of deduction u/s 80CCC of the Income-tax Act on account of contribution to a pension fund of LIC or IRDA approved insurer from Rs 1 lakh to Rs 1.5 lakh. This will provide individuals the benefit to make greater contribution to pension funds and would increase long term household savings in the economy. Increase in limit of tax deduction for contribution to National Pension Scheme (NPS) The Budget proposes to increase the limit of deduction u/s 80CCD of the Income-tax Act on account of contribution by the employee to National Pension Scheme (NPS) from Rs 1 lakh to Rs 1.50 lakh. It is also proposed to provide a deduction of upto Rs 50,000 over and above the limit of Rs 1.50 lakh in respect of contributions made to NPS. The additional tax benefit for making contribution to the New Pension Scheme will substantially increase the coverage of the scheme and promote old age income security. This is also expected to increase the long term savings in the economy. Self-declaration of non-deduction of tax on maturity proceeds of life insurance policy The Budget proposes to amend the provisions of section 197A of the Income-tax Act so as to provide the facility of filing self-declaration of non-deduction of tax by the recipients of taxable maturity proceeds of life insurance policy. The facility of filing self-declaration for non-deduction of tax by the recipients of taxable maturity proceeds of life insurance policy will help the policy holders and make the tax compliance process easier. G. Financial Markets Tax Pass Through status to Category I & II Alternative Investment Funds (AIFs). Tax pass through is to be allowed to both Category-I and Category-II AIFs, so that tax is levied on the investors in these Funds and not on the Funds per se. This may step up the ability of these Funds to mobilise more resources and make higher investments in small and medium enterprises, infrastructure and social projects as also provide the much required private equity to new ventures and start-ups. This will further eliminate any uncertainty in tax consequences and will obviate needless litigation between the funds and the revenue authorities and 27

38 reduce cost of compliance. It can be looked at as an opportunity loss of tax revenue that could flow from the revival of market for AIFs under a tax pass through regime. REITs and InvITs: Tax Pass through status to rental income of REITs earned from its own assets. It is proposed to provide that in the Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), the sponsor will be given the same treatment on offloading of units at the time of listing as would have been available to him if he had offloaded his shareholding of special purpose vehicle (SPV) at the stage of direct listing. This will put more money in the hands of the investors and will also avoid double taxation of the income generated by REITs. This will help to make REITs more financially viable for Indian markets and further push introduction of real estate investment trusts (REITs) in the Indian market. This would give much needed relief to the real estate sector, which is facing liquidity crunch and delay in completion of existing projects. H. Bonds: To make available the long term funds for infra financing the budget has made following provisions. Applicability of reduced rate of tax at 5% in respect of income of foreign investors (FIIs and QFIs) from corporate bonds and government securities, from to The continuation of reduced rate of withholding tax on FIIs and QFIs investment in corporate bonds and Government securities may enhance the investments by foreign investors and thus allow our bond markets to develop and deepen. To permit Tax-Free Infrastructure Bonds for the projects in the rail, roads and irrigation sector This may benefit companies in these sectors as they will be able to raise money for funding their projects. This may also provide an impetus to retail investors to invest in such bonds. The Government intends to establish National Investment and Infrastructure Fund (NIIF), and find monies to ensure an annual flow of INR20,000 crore to it. NIIF may give an extra investment option for investors and allow them to participate in the growth of the country and also assure them of stable returns. The capital pumped into the IRFC and NHB may allow them to fund their development projects. This may also facilitate reduction in Government s Deficit as the money may be market funded. This will enable the Trust to raise debt, and in turn, invest as equity, in infrastructure finance companies such as the IRFC and NHB. The infrastructure finance companies can then leverage this extra equity, many folds. Investment Manager not to be reckoned as Permanent Establishment. To modify the Permanent Establishment (PE) norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds resulting in adverse tax consequences. Till now, presence of fund managers in India could be crucial for the success of investments made by foreign private equity funds, FIIs and other foreign investors directly into Indian companies or into domestic fund vehicles. However, there was always an apprehension that presence of fund managers in India could be construed as a Permanent Establishment ( PE ) in India of the foreign investors. This gave rise to apprehension that the foreign investor could be taxed on the capital gains earned on sale of the investments in India even where such gain may be exempt under the applicable DTAA on the alleged ground that the investment formed part of the business property (capital asset) of the foreign investor s PE in India. 28