The path set by India’s Union Budget 2017

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Highlights

  • The Union Budget 2017-18 stays the course of ‘Inclusive governance through inclusive economics’.
  • Fiscal prudence was maintained by keeping fiscal deficit target at 3.2%.
  • 5% reduction in corporate tax for SME firms (with turnover less than 50Cr) to 25% is expected to boost growth.
  • Credit carry over period for Minimum Alternate Tax (MAT) has been increased to 15 years.
  • Startups and venture funds now have 7 years tax holiday (up from 5 years)
  • The condition of 51% voting rights for startup founders, required for carry-forward of losses, has been relaxed.
  • 2Cr is the new threshold limit for audit of business entities for presumptive income (increased from 1Cr).
  • Foreign Portfolio Investor (FPI) Category I & II are now exempted from indirect transfer provision.
  • Individual Income Tax rate halved to 5% for the Rs. 2.5L to Rs.5L slab.
  • Additional income tax surcharge of 10% levied on individuals/HUFs in income bracket between Rs. 50L to Rs. 1Cr.
  • Annual Income of Individual Income Tax Education Cess Higher Education Cess
    Upto Rs 3 lakh (for senior citizens) Nil Nil Nil
    Rs 2.5-5 lakh 5% 2% 1%
    Rs 5-Rs 10 lakh 20% 2% 1%
    Above Rs 10 lakh 30% 2% 1%
    Above Rs 50 lakh 30% + 10% surcharge
    Above Rs 1 crore 30% + 15% surcharge
  • A bold and controversial step was taken in 2016 to increase number of Tax payers through demonetization and digitization.
  • Disinvestment of Govt ownership in public sector firms is being followed through the ETF route, with the success of the first CPSE fund.
  • The Government of India is now looking to dilute it’s ownership in Railway assets like IRCON, IRCTC and IRFC
  • The Government is looking to list Security Receipts issued by Securitization or restructuring Companies (under the SARFAESI Act).
  • The Government is looking to increase regulation of NBFCs above certain Networth by categorizing them as QIB’s.
  • Infrastructure status for real estate projects is now being limited to affordable housing.
  • Definition, in case of profit linked income tax deduction in real estate, changed from built-up area to carpet area.
  • Builders now get 1Yr tax holiday on notional rent income received.
  • Long term tax (benefits) calculation period has been reduced to 2 years from 3 years.

Opinion

 

The Finance Minister outlined this budget as TEC (Transform – Energise – Clean). With Sluggish economic growth (as seen by just 0.75% growth in exports and 7.4% fall in imports), coupled with low private investment and temporary disruption in business cycle due to demonetization, it was necessary for the government to boost investment cycle and growth while keeping fiscal deficit under check. And this is exactly what India’s Union Budget 2017-18 delivered.

The Finance Minister, Arun Jaitley, prudently increased capital spending by approximately 10% while still able to meet his fiscal deficit target of 3.2%. The new fiscal deficit target is 0.3% lower than last year’s fiscal deficit rate of 3.5% and stays on course with reducing fiscal deficit to 3% next year, as already proposed by the Government.

The corporate sector was expecting serious cut in taxes, which the budget did not deliver. However, there were some much needed tax breaks and rationalizing for the Micro, Small & Medium Enterprises (MSME). This should create more jobs and vendors, in line with the Government’s Make in India campaign, which receives constant support from all departments in the government.

Several steps were undertaken with the aim of incentivizing VCs and PEs to invest in MSMEs: (a) the Finance Minister provided exemption to Cat I & II Alternative Investment Funds (AIFs) from indirect transfer provision, (b) the budget also increased the scope of profit based tax on startup’s from 5 to 7 years, (c) the proposal to do away with FIPB board has improved ease of investments and business for foreign investors coming in through the Foreign Direct Investment route (d) concessional withholding tax of 5% on interest earned by Foreign entities has been extended till 30-Jun-2020.

The budget proposed security receipts of securitization or restructuring companies to be listed on exchanges, which will be a huge boost to banks reeling under pressure of non-performing Assets (NPA).

With an agenda to broaden the tax net, the budget aimed to (a) ban cash transactions above Rs 3 Lakhs, and (b) boost digital payments by reducing or abolishing customs and excise duty on manufacturing of POS card reader, micro ATM Finger Print/reader /Scanner etc.

The inclusive growth agenda of the government was evident through the allocation of funds under different schemes to increase rural and agricultural income. This included increased allocations for MNREGA, agricultural reforms (using Pradhan Mantri Fasal Bima Yojana, e-NAM , irrigation projects , increased allocation for agricultural credit etc.) and integration of fruits growers with agro units. The budget also aimed at creating better skilled youth by allocating funds towards rural youth projects such as SWAYAM, SANKALP, STRIVE etc.

This year was also the first time the Government merged the Railway and General budgets. Keeping in view the integrated infrastructure creation for future, a total amount of Rs. 2,41,387 Cr has been allocated for Transport Sector to speed up road, rail , airports and ports projects. The combining of Railway and General budgets also creates room for privatization and disinvestment in Indian Railways which is the eighth largest employer in the world and is considered by many to have an inefficient work force.

Keeping up with the Clean India agenda, the budget proposed a concessional rate of 10% tax on income arising out of sale of carbon credit. The budget also proposed an additional 20K MW solar power generation capacity in second phase of solar park. The budget also proposed to incentivize clean energy by reducing  Basic Customs Duty (BCD), Countervailing Duty (CVD) on parts/raw material used for manufacturing solar panels.

In summary, we see this budget as a continuation budget, it continues with the momentum the Government of India has generated over the last couple of years. However, one must not expect this to be all that the government does over the next fiscal. The current government has in the past, taken major steps outside of the budget – such as Operation Clean Money, which looks to identify and reduce tax evasion and Goods and Services Tax (GST), which tries to improve ease of business by amalgamating a large number of Central and State taxes into a single tax. Therefore, we expect the Union Budget 2017-18 to only be a guideline of the change initiatives expected this year.

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