India insights Insights The Indian economy newsletter The Indian economy newsletter - Budget special February 2016 March 2016 KPMG.com/in I
Contents CEO s perspective ` CEO's perspective 01 Budget sectoral impacts 02 Budget at a glance 04 Richard Rekhy CEO, KPMG in India Budget 2016-17 is all about the bigger picture, ushering optimism and providing growth impetus to the economy. It spells a transformative agenda for the country with focus on nine key pillars. In his Budget speech, the Finance Minister clearly stated that India has been hailed as a bright spot amidst the slowing global economy by International Monetary Fund. 1 To continue the growth momentum, this Budget is resilient and promptly addresses the pain-points of the economy, reaffirming India s ambition towards economic progress. The Finance Minister s commitment to fiscal deficit target of 3.9 per cent for FY15-16 and 3.5 per cent for FY16-17 has been sacrosanct and all Budget announcements have been derived keeping this in mind.¹ Sector-wise, agriculture, rural, social sector and infrastructure have clearly emerged as winners. On one hand, renewed focus on farming and rural economy can help address the rising distress, create gainful employment and build domestic demand; on the other, increased public expenditure towards rural road projects and a commitment towards 100 per cent village electrification by 1 May 2018 can help create an infrastructure for sustainable and inclusive growth. 1 Taking steps to further enhance ease of doing business, a number of administrative reforms have been introduced to fast-track company incorporation process, reduce unwarranted litigation and strengthen dispute resolution mechanism. All these reforms aim at providing a simplified and stable tax regime. Foreign Direct Investment (FDI) in several sectors including insurance and pension, Asset Reconstruction Companies (ARC), stock exchanges have been further liberalised. Hundred per cent foreign investments have been permitted in marketing of food products produced and manufactured in India.¹ This can bring in more investments into the food processing sector. The government has stuck to its earlier commitment of infusing INR25,000 crore into Public Sector Undertaking (PSU) banks in FY2016-17, under the Indradhanush plan. 1 To some this has been disapproving. However, the underlying issues in the banking sector are deeprooted and need comprehensive action on all fronts, not limited to capital infusion. The proposed road map for consolidation of PSU banks is a step ahead in this direction. As a test case the government has started the process of transforming a key bank, where it would reduce its stake to below 50 per cent. 2 Major tax breakthroughs involve a new tax amnesty scheme to improve tax compliance, lowering of corporate tax rate for new manufacturing companies that have been setup post 1 March 2016 to 25 per cent, a 29 per cent tax rate for smaller companies and tax exemption in three out of five initial years of operation for start-ups.¹ Largely the Budget makes a case to address the uncertainties clouding the mainstay sectors of Indian economy. Simplification of tax regulations, increasing rural demand for goods and services, attracting foreign investment, aiding Indian corporates in their expansion plan, laying ground for an export conducive environment have been the key drivers of the Budget policy. Though crucial reforms such as land acquisitions and Goods and Service Tax (GST) have not really seen the light of the day, many key proposals that were announced are aimed at making India a friendlier investment destination. Overall, sentiments are high, as this truly transformative Budget sets the stage for a sustained inclusive and equitable growth. The government is committed to providing a stable, nonadversarial tax regime and has accordingly deferred the applicability of the ambiguous Place of Effective Management (POEM) provisions. The target date for enforcement of General Anti- Avoidance Rule (GAAR) continues to be 1 April 2017. Foreign investors embroiled in tax litigation arising from retrospective amendments in the past can avail a one time settlement by paying only the tax arrears with waiver of interest and penalty liability. 1
Budget sectoral impact ` Real Estate 1 Budget 2016-17 was a mixed bag for the real estate sector. Targetted reforms in Real Estate Investment Trust (REITs)/ Infrastructure Investment Trust (InvITs), affordable housing, and additional tax benefits for first time home buyers are expected to support growth in the real estate sector. However, the Budget was silent on some other key demands such as removal of Minimum Alternate Tax (MAT) on Special Economic Zones (SEZs), exemption of service tax to Joint Financial Services 1 Budget 2016-17 has taken a balanced approach towards the insurance sector providing some relief to all the stakeholders (India consumers, private/ global insurance companies and public sector general insurance companies). New products are proposed for health and crop insurance and while specific features and premium for the products are awaited, this is an important step towards increasing the health insurance and crop insurance penetration in India. Further the allowance of FDI up to 49 per cent under automatic route in insurance also makes Development Agreements (JDAs) and developer s agreements, clarification on taxation of JDAs, allowing developers to raise funds through External Commercial Borrowings (ECBs) etc. With removal of Dividend Distribution Tax (DDT) on REITs Special Purpose Vehicle (SPV), the REITs structure of India is now at par with global regulations. REITs take-off is expected to improve liquidity situation in the real estate sector. the process easier for global insurance companies looking at taking/increasing stake in insurance companies in India Other key reforms in the financial services space include the creation of code on resolution of financial firms to help banks deal with bankruptcy cases, complete pass through of ARC, recapitalisation of PSU banks, and formation of Bank Board Bureau to aid governance of public sector banks. All the proposals aim at making India an attractive business destination. Defence Level playing field has been provided on indigenously manufactured supplies vis-à-vis imported supplies by removing customs duty exemptions available to Government of India, on imports. Widening of scope of excise and customs duty exemptions to Maintenance, Repair and Operations (MROs) can help the sector. Technology The proposals contained in the Budget 2016-17 indicates positive signals for the sector. A strong emphasis is laid on driving efficiency and effectiveness across the nine pillars mentioned in the Budget with the use of technology. 2
Budget sectoral impact Consumer Markets 1 The provisions in the Budget are expected to shift the focus of consumer goods companies again towards the rural market. The intent of proposals has been largely positive except the additional excise duty on unmanufactured tobacco and cigarettes. The move to create a unified agricultural market e-platform can benefit food-based Fast Moving Consumer Goods (FMCG) companies, as this is expected to make procurement processes easier and more transparent. In addition, the permission Energy and Natural Resources 1 The Budget overall has a positive approach towards the sector except the adverse impact of increase in national environment cess (doubled to INR400 per ton). The Budget refrained from big bang measures and focused on consolidation to achieve energy security for the country. Proposals to put in place a comprehensive generation plan over next 15 to 20 years for nuclear power brings this important resource to mainstream focus apart from renewables. This is a for 100 per cent FDI in marketing of food products is expected to bring in more investments into the food processing sector. The reduction in withholding tax rate may reduce compliance burden for consumer goods companies (especially in case of e-commerce companies), as they typically operate through dealers, distributors and agents. For small retailers, the increase in the threshold limit for presumptive taxation is expected to reduce the compliance burden. good move as it would remove India s fascination with single fuel and bring a holistic view required to achieve energy security. Permitting calibrated market pricing for new discoveries/exploration for deep-water and difficult gas basins is positive as that has been a long standing demand of industry, given the current low oil price scenario. The corpus allocated for recapitalising PSUs may be insufficient. However, government has committed to raise more money if required. Transport and Logistics The Budget 2016-17 has a clear focus on developing highways, railways and rural roads infrastructure. The implementation of the Sagarmala project along with the government s focus on developing national waterways as a mode of transport, indicates its focus on the maritime sector. Further announcements to develop underused airstrips and airports would help drive the aviation sector. The allocation of funds in infrastructure is thus likely to propel the transport, warehousing and logistics businesses rapidly over the medium-term. 3
Budget at a glance 29 Feb 1. Fiscal mathematics 1 y Fiscal deficit in FY2015-16 and FY2016-17 retained at 3.9 per cent and 3.5 per cent respectively. y Expenditure pegged at INR5.50 lakh crore under planned, increase of 15.3 per cent, non-planned expenditure kept at INR14.28 lakh crore. y Committee to review the implementation of the Fiscal Responsibility and Budget Management Act (FRBM). 2. Financial sector reforms to re-instate stability 1 y A comprehensive code on resolution of financial firms to be introduced. y Amendments in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) to enable the sponsor of an Asset Reconstruction Companies (ARCs) to hold up to 100 per cent stake. y Allocation of INR25,000 crore towards recapitalisation of public sector banks. y Amount sanctioned under Pradhan Mantri Mudra Yojana increased to INR1,80,000 crore. 3. Clarity on adversarial tax regime 1 B. Reforms in taxation y Change in customs and excise duty rates on certain inputs to reduce costs and improve competitiveness of domestic industry. y General Anti-Avoidance Rules (GAAR) implementation from 1 April 2017. y Determination of residency of foreign company on the basis of POEM is proposed to be deferred by one year. 4. Continued focus on Make in India 1 A. Thrust to infrastructure y Total outlay for infrastructure is INR2,21,246 crore. y Amendments to be made in Motor Vehicles Act to open up the road transport sector in the passenger segment. y Public Utilities Bill (resolution of disputes) to be introduced during FY2016-17. y Guidelines for renegotiation of Public Private Partnership (PPP) concession agreements to be issued. y New credit rating system for infrastructure projects to be introduced. y Corporate tax rates lowered from 30 per cent to 29 per cent for small companies and 25 per cent for new manufacturing companies. y Hundred per cent deduction of profits for three out of five years for start-up's set-up during April 2016 to March 2019. Minimum Alternative Tax (MAT) will apply in such cases. y Long-term capital gains on unlisted companies reduced to two years. 5. Governance and ease of doing business 1 y Comprehensive review and rationalisation of autonomous body. y Automation facilities to be provided in 3 lakh fair price shops by March 2017. y Amendments in Companies Act to improve environment for start-ups. y New amnesty scheme for domestic tax payers to report undisclosed income. y Eleven new benches of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) to be setup. Special emphasis on sectors such as agriculture, irrigation, social sector including health, women and child development, welfare of Scheduled Castes and Scheduled Tribes, minorities, infrastructure. Plan/non-plan classification to be done away with from FY2017-18. Every new scheme sanctioned to have a sunset date and outcome review. 4
Budget at a glance 6. Reforms in FDI 1 8. Rural sector 1 y Reforms in FDI policy in the areas of insurance and pension, asset reconstruction companies, stock exchanges. y Hundred per cent FDI to be allowed through Foreign Investment Promotion Board (FIPB) in marketing of food products produced and manufactured in India. yallocation for rural sector is INR87,765 crore y Hundred per cent village electrification by 1 May 2018. y A new 'Digital Literacy Mission' for rural India to cover around 6 crore additional household within the next three years. y A new policy for management of government investment in public sector enterprises. 7. Agriculture and farmers' welfare 1 y Allocation for agriculture and farmers welfare is INR35,984 crore. y Pradhan Mantri Krishi Sinchai Yojana to be implemented in mission mode; 28.5 lakh hectares to be brought under irrigation. y Implementation of 89 irrigation projects under Accelerated Irrigation Benefits Program (AIBP) to be fast tracked. y Allocation under Pradhan Mantri Fasal Bima Yojana INR5,500 crore. 9. Skill development 1 y Nearly INR1,804 crore allocated for skill development. yaround 1500 multi-skill training institutes to be setup across the country. y Entrepreneurship education and training through massive open online courses. 5
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