Budget 2016-17: Short Notes and Observations

National Investment Grid

To promote private investment in different states, the Department of Industrial Policy and Promotion (DIPP) has initiated a national investment grid, which will map business opportunities in different states so that the private sector can be encouraged to invest, provided states are made an equal partner in it. The grid will not only have the details of the upcoming projects along with the existing ones, but will also list the land available with the central government, public sector undertakings, and the states.

Simplification of Income-tax Act

The government had already accepted and acted on many recommendations of the Tax Administration Reform Committee. Now, the FM has proposed to accept several recommendations made by the Justice Easwar Committee formed to simplify the Income-tax Act. The Budget proposes that if non-residents provide alternative documents to PAN Card, a higher withholding tax would not apply. Additional options were made available to banking companies and financial institutions, including non-banking financial companies, for reversal of input tax credits on non-taxable services.

Tax Exemption to Regulators

Services provided by financial sector regulators have been exempted from service tax liability from April 1. SEBI, IRDAI & PFRDA were not included in the negative list of services for taxation purposes, which made the first two liable to pay service tax at 14% each and pension fund regulator at 3.5%. The exemption has come as a relief for the regulators who reportedly received notices from the revenue department seeking details for assessment of service tax liability from 2012 onwards.

SAT Members, Benches Go Up

Securities Appellate Tribunal (SAT), which hears and disposes of appeals against orders passed by the likes of SEBI, IRDA and PFRDA, will have more members and benches. The FM in his Budget speech said the SEBI Act will be amended in FY17 for this purpose. At present, SAT has only one bench which sits in Mumbai. Justice JP Devadhar is the presiding officer and its other two members are Jog Singh and CKG Nair. SAT is a quasi judicial body.

New Derivatives in Commodity Trading

The FM’s announcement that SEBI would develop new derivatives products in the commodity markets has sparked hopes among stakeholders that options and indices trading will see the light of the day soon, greatly raising average daily turnover from just under Rs. 30,000 crore.

Currently, only futures trading is allowed in products like gold, silver, copper, crude, natural gas, sugar, edible oil seeds, chana, etc. Options and indices trading could raise turnover manifold and encourage more institutional participation over time.

Big projects for power and roads

The government will offer ultra mega power projects worth a total of Rs. 1.5 lakh crore in the current and next fiscal year. In addition, the highways sector will offer projects worth nearly Rs. 1.5 lakh crore in the new fiscal year.

Coal cess doubled

The clean energy cess on coal, now called the clean environment tax, has been doubled to Rs. 400 per tonne. This will raise the price of power by about 20 paisa per unit, which will be passed on to consumers. It will also raise costs for other consumers like the steel sector, along with narrowing the gap between thermal and solar power. This helps make green energy projects more viable.

Amendment in the Companies Act

The government proposed amending the Companies Act to make it easier to start and run a business. If that goes through in the Budget session, companies can be registered in a day. The amendments are aimed at removing impediments to doing business and providing an enabling environment for start-ups. Entrepreneurs and start-up investors for long have been urging for just such a thing.

Tax breaks for the Newbies

The FM proposed 100% tax exemption on profits made in any three of a start-up’s first five years, for ventures set up between April 2016 and March 2019. Investment holding period in unlisted firms was reduced to 2 years from 3 years for availing exemption from capital gains tax. Also, capital gains will not be taxed on investments by individuals in notified start-ups, in which they hold majority shares.

For Women, Students and Dalits

The govt plans to allocate Rs. 500 crore to establish start-up hubs for women and aspiring entrepreneurs from the backward classes, and Rs. 1,700 crore to set up 1,500 skilling institutes to train youngsters both for jobs and to start their own businesses. It also proposed to provide entrepreneurship education and training in 2,200 colleges, 300 schools, 500 industrial training institutes and 50 vocational training centres through massive open online courses, or MOOCs.

Govt Moving Away from Guarantees?

Dealing with bankruptcies is a difficult task, more so when it comes to financial services companies. The government is moving on that now. It would come up with a resolution mechanism for banks, insurance firms and finance companies. This, along with the Bankruptcy Code of 2015, would provide a comprehensive mechanism. Does it indicate a slow government withdrawal from providing guarantees? We shall discuss it later in our CGS documents.

NBFCs Get Much Needed Sop

Non-banking finance companies to get tax rebate for all actual provisions made towards bad and doubtful debts subject to a cap of 5% of the gross total income. For NBFCs reeling under accumulated bad assets and tighter provisioning norms — RBI has asked them to recognise bad loans within 90 days from March 2018 — it is a welcome step.

More Bonds on the Way

The infrastructure sector, seen as a key driver of the country’s economy, will get Rs. 31,300 crore from debt investors in the coming fiscal year with state-owned companies such a National Highways Authority of India, IREDA, Power Finance Corporation, Rural Electrification Corporation and Nabard raising funds through such offerings.

Towards Better Tax compliance of MNCs

MNCs would be required to submit the profits they make, no. of employees they hire & taxes they pay in each country they operate. This could mean that many companies could end with transfer pricing demands and later litigation if the Indian tax authorities decide to take action based on the information they receive. As we discussed in our CGS modules earlier, the government has introduced a framework for Base Erosion and Profit Shifting (BEPS), a global pact to check tax avoidance by MNCs. BEPS will cover companies with revenue of over €750 mn or Rs. 5,250 crore. Also, MNCs with huge R&D facilities in India but which register the patents generated from here in other countries, could come under lens. A new 6% tax on ad revenues of MNCs being paid from India is a dampener for e-commerce.

Ending Tax adventurism

The government has sought to end tax adventurism. It has taken away discretionary powers of the tax officer as each misdemeanour is now categorised and a penalty is defined. The reduction of penalty rates to 50% to 200% against 100% to 300% will give respite to companies alleged to have evaded taxes. Transparency is welcome. Strengthening the dispute resolution mechanism and VDIS will reduce tax payer disputes.

Tax budget for service providers goes up

Two new cesses queer the pitch for service providers as well as automobile sector. A new 0.5% Krishi Kalyan Cess proposed on all taxable services will take the rate of service tax to 15% (Swachh Bharat Cess of 0.5% + 14 service tax rate). Saving grace with this new cess, which seeks to fund agri sector initiatives, is that it would be available as credit. Infra cess of 2.5% on select diesel vehicles and higher 4% on SUVs and bigger sedans spoils the party for auto sector.

Service tax relief for patients

The services of general insurance business provided under ‘Niramaya’ Health Insurance scheme launched by National Trust for the Welfare of Persons with autism, cerebral palsy, mental retardation and multiple disabilities in collaboration with private/public insurance companies are being exempted from the 14% service tax they were earlier subject to. This will make healthcare affordable to the poor.

The exemption kicks in from April 2016. The Budget also has a proposal to remove the customs duty on Braille paper from 10% at present.

Expected Revenue from Spectrum

Government estimates revenue of Rs. 98,994.93 crore from spectrum auctions, licence fee and one-time spectrum charges in the year ending March 2017. This is going to be a 76% jump from the revised estimates of 2015-16. A huge upfront payment is expected from next round of auctions, likely in June. At base prices, the government may garner about Rs. 5.44 lakh crore, of which at least 25% is expected in the next fiscal year. However, if the amount does not come, Jaitley’s math can go haywire.

Subsidy Bill

Government has budgeted total subsidies at Rs. 2.5 lakh crore for FY17, lower than revised estimate of Rs. 2.58 lakh crore for FY16. Subsidy is lower under all the key heads — food, fertiliser and petroleum products. There is thus risk of spike in subsidy if crude and commodity prices harden. Food subsidy also looks to be underprovided at Rs. 1.34 lakh crore compared with Rs. 1.39 lakh crore in current year given that its reach is to be expanded.

Aadhaar – Single-Platform Social Security Delivery

A social security platform will be developed using Aadhaar to accurately target beneficiaries. Even a new health protection plan providing health cover of up to Rs. 1 lakh per family could be rolled out on this platform. A top-up package will be provided to those aged 60 years and above.

No More Chulhas

The government has Massive Plan for Subsidised LPG Connection. About 1.5 crore BPL households will get LPG connections for women members at an outgo of Rs. 2,000 crore. While there may be increase in subsidy because of better availability, the indirect benefit of savings on healthcare cost due to burning wood chulha should cover the cost.