CLIMATE CHANGED   TRANSFORMATIVE Finance Minister Arun Jaitley's first `real' Budget has broken the earlier narrative. Whether this break from tradition will lead to achhe din for some, or to growth that will become genuinely inclusive, is something that will be played out over the year. But the blueprint is of change, and India is set on a journey

Mar 01 2015 : The Economic Times (Mumbai)

CLIMATE CHANGED





TRANSFORMATIVE Finance Minister Arun Jaitley's first `real' Budget has broken the earlier narrative. Whether this break from tradition will lead to achhe din for some, or to growth that will become genuinely inclusive, is something that will be played out over the year. But the blueprint is of change, and India is set on a journey

A Recipe that will Transform the Country
This Budget isn't just about fixing problems.
It also changes the context to find the solutions
With this Budget, finance minister Arun Jaitley has dexterously reinforced the government's commitment to transform the nation by rejuvenating its existing fabric: bringing in ease of conducting business, transparency in policies and stability in the tax regime.
At the same time, the Budget also supports new initiatives that encompass incubation facilities for start-ups, technology-led innovations for f lagship programmes such as `Make in India' and `Innovate in India', along with purposeful programmes like the universal social security system and the anti-inflation monetary policy framework to tackle India's challenges. Underlying this agenda is a strong foundation of fiscal discipline and a clear commitment to lowering the fiscal deficit to 3% in three years.
The emphasis on accelerating infrastructure development and simplifying policies for public-private partnership (PPP) will boost investor confidence. Implementation of the goods and services tax (GST), rationalisation of corporate tax and infusion of greater predictability into the tax regime can catalyse corporate investment and attract foreign business.
The Budget's zeal to curb black money is a big step towards restoring confidence in ethical business in the country. This business in the country. This could also go a long way in enhancing the image of India across the world.
The Budget clearly supports new and innovative ways for the country to accelerate its growth journey. The pro posal to work towards creat ing a universal social secu rity system for all Indians, and support for all aspects of start-up businesses and self-employment activities -particularly in technology-driven areas -are two great examples.
The move to reduce withholding tax on royalty and fees for technical services -from 25% to 10% -is another great enabler of innovation, as it serves to make investments in cutting-edge technology affordable for enterprises.
But what makes this Budget exercise truly laudable is the manner in which it takes into account the need to not just `fix problems' with solutions but to also change the very context in which the country seeks to find the solutions to its challenges.
One way in which the Budget hopes to achieve this is through its focus on education and initiatives to re-skill India's youth and enhance their employability. Support for pension schemes for the masses and health insurance for the underprivileged further demonstrate India's commitment to inclusive growth.
And it is this focus on changing the invisible context that will help bring in the more visible, more tangible positive changes we all hope to see in the year ahead. The world will watch -with great hope and anticipation -the execution of these policies that will help realise the aspirations of this Budget.
Giveaways for the Rich, and Cutbacks for the Poor
Unwarranted claims cannot elide the fact that the vast majority of Indians has been cruelly ignored
After starting with the jibe, "We inherited a sentiment of doomand gloom," the finance minister quickly claimed that "we have turned around the economy dramatically, restoring macro-stability and creating the conditions for sustainable poverty elimination, job creation and durable double-digit economic growth."
Neither the jibe nor the claim was warranted.
Government has acknowledged the data on growth put out by its Central Statistics Office.That means that GDP growth in 2013-14 was 6.9% -far from the picture of doom and gloom painted by the FM. Besides, if GDP growth improved from 6.9% to 7.4% in 2014-15, that is also a far cry from the claim that "we have turned around the economy dramatically".
In fairness, Arun Jaitley should have acknowledged the work done by the previous government and the stable economic situation that his government inherited, and then proceeded to recall the work done by his government since May 2014. There was no justification at all to depart from the fiscal consolidation path announced by the UPA government and adopted by the NDA government. Just two weeks ago, Jaitley reiterated his commitment to fiscal consolidation. In more than one place, the Economic Survey released on February 27 reiterated this commitment. For reasons that are not clear to me, the target of 3% to be achieved in 2016-17 has been set back by a year.
Government has claimed that it has stretched the fiscal deficit from 3.6% to 3.9% in 2015-16 because it needs the additional funds to increase public investment and to provide for the likely burden of the implementation of the Seventh Pay Commission and GST. This claim is suspect. 0.3% of GDP will mean an additional borrowing of `37,500 crore.
I looked into the numbers to see how the sum of `37,500 crore has been put to use. I found that Total Expenditure is projected to increase from `16,81,158 crore in RE 2014-15 to `17,77,477 crore in BE 2015-16. That is to be expected. However, the increase should have been reflected as increase in Plan Expenditure as well. Shockingly, Plan Expenditure is projected to decrease from `4,67,934 crore in RE 2014-15 to `4,65,277 crore in BE 2015-16. It appears to me that the additional borrowing of `37,500 crore will go entirely into increased Non-Plan Expenditure. The Budget speech has shown great concern for the corporates and the income-tax payers (3.5 crore). Given the BJP's leanings, that is understandable. What is worrying is that the vast majority of the people have been cruelly ignored. It is the majority -which does not fall under the category of corporate tax or incometax payers -which looks to the government for succour and relief. It is for this vast majority that social welfare programmes and schemes are devised and funds must be allocated.
What do we find in the Budget documents?
Allocations have been cut for crucial schemes compared to even the Revised Estimates of 2014-15. For example, under Scheduled Castes Sub Plan, the numbers (in crore) are `50,548 (BE 2014-215), `33,638 (RE 2014-15) and `30,850 (BE 2015-16). Similarly, under Tribal Sub Plan, the three corresponding numbers (in crore) are `32,386 (BE), n `20,535 (RE) and `19,979 (BE). There are similar s reductions for drinking water and sanitation, s health and family welfare, the Pradhan Mantri e Gram Sadak Yojana, the Prime Minister's y Employment Generation Programme, l Integrated Child Development Services, multi-sectoral development programmes for r minorities, culture, Project Tiger and so on.y These `cuts' are cruel and unjustified.s It is clear that the Budget -and the govern ment -leans in favour of the corporates. Few ? countries have corporate tax rates lower than s 30%. According to the finance minister, the efifective rate is 23%. He has promised them a 1% r reduction every year beginning 2016-17.d That is a `relief' of `20,000 crore every year (`80,000 crore in the fourth year) over four 8 years! Income-tax payers have got the benefit E of higher deductions. It is the non-income-tax E payer who has got the short end of the stick in r the form of higher excise duty and higher sere vice tax. I think the government's bias is clear.s Now, we must look to a vigorous and spirited ), debate in Parliament.
Good for India Inc, Even Better for Fisc
At last, a commitment to ease `doing business' along with a willingness to undertake fiscal discipline
Arun Jaitley has delivered with a path-breaking reformist effort. This continues the approach taken in his first Budget and maintains an emphasis on long-term planning. We saw the development and investment focus in the railway budget two days ago, and see the same goal orientation in the Union Budget. The overall themes are a commitment to fiscal discipline, measures to facilitate ease of doing business and, thereby, job creation, and a determined approach to simplify taxation.
Despite a tight fiscal space, the path of fiscal consolidation has been continued. While a benign external environment has no doubt played its part in the current fiscal, the government has shown a willingness to balance the fiscal discipline. One hopes that the fiscal consolidation path will be adhered to and met in the extended time frame. There is a concerted effort to improve the ease of doing business and to boost investment through support for corporates, infrastructure, small business and agri business.Many of the taxation proposals are geared towards simplification.
A reduction in the corporate tax rate, suitably balanced with the aim of rationalisation and removal of exemptions, and simplification by replacing wealth tax with a surcharge are commendable. Reducing the complexity of compli ance and a plethora of exemp tions have the potential to avoid disputes and will allow the government and citizens to focus on more productive use of their energy.
The proposed Mudra Bank and unified national agricul tural market can be expected to aid the growth and develop ment of SMEs and agri-based industries. This has been supported by measures to increase availability of finance, including by easing external flows, tightening evasion and an innovative approach to unlock physical savings and deploy them for productive investment.
The focus on development continues with Plan expenditure, higher expenditure on investment and through expanding and easing financing avenues to fund infrastructure projects. The proposed public debt management office will streamline the government's borrowing programme and will be watched.
For individual taxpayers and underprivileged sections of society, there is a vision on welfare and social development that is not delivered through subsidies alone. It aims to maximise impact of subsidies by curbing leakages where the Jan Dhan account platform will play a critical role. There is a focus on expanding the coverage of insurance and pension, and this is supported by the hike in individual exemption limits linked to an encouragement for creating long-term healthcare and social safety nets.
In summary, the focus on presenting a stable and predictable environment is clear. There is also a concerted effort to improve administration, encourage investments and enhance quality of life through a long-term investment and development-led approach.





Tax Regime Gets Closer to GST

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Tax Regime Gets Closer to GST

Deepshikha Sikarwar





THE BUDGET lays the ground for the new levy that will replace multiple central and states taxes as Finance Minister Arun Jaitley reiterates his promise for rolling out GST from April 1, 2016

Finance Minister Arun Jaitley may have avoided giving definite milestone for imple mentation of various components of goods and services tax (GST), but his Budget for 2015-16 clearly laid the ground for the new levy that will replace multiple central and states taxes.
Jaitley also reiterated his promise for rolling out GST from April 1, 2016, ending any further doubts about the timelines for this ambitious tax reform.
Increase in service tax rate, subsuming education cess with excise duty and pruning items on the exempted list of items are among the important steps in the progression towards GST.
Though a significant increase in service tax to 14% --16% if 2% Swachh Bharat cess is imposed on all services -from 12% may pinch the aam aadmi in the immediate term, it prepares him for higher incidence of tax on services under the GST regime. Going by the increase in service tax rate, the case for government opting for a high 16% GST rate (8% for states and 8% for the centre) or even higher has strengthened.
Businesses would also face some pain in the intervening period until the GST is implemented due to divergence in excise duty and service tax rates as it could lead to a pile of input tax credit. But, this pain may short-lived, for a year, as the government has promised to launch GST by April next year.
GST seeks to subsume a plethora of state-level and central taxes into one and thereby reduce effective taxation of goods and also create a seamless national market in the country. It was to be rolled out starting April 1, 2010, but got delayed as some states were reluctant to give assent to the plan for fear of losing tax revenue. The Narendra Modi-led NDA government has tabled a constitutional amendment bill in Parliament to pave the way for GST.
While raising the tax rate, the government has also opted for a cleanup of exemptions, not just in service tax but also in excise duty. The negative or exempted list has been pruned and exemptions cut in line with the thinking that the base of services taxation needs to be widened.
A similar philosophy has been adopted in excise duty, where rationalisation has been focused on reducing exemptions as well as ad dressing the issue of inverted duty structure. Steps have been taken to incentivise manufacturing. Special additional duty has been exempted for most electronics goods, and halved to 2% for a number of chemical products in line with the Make in India phi losophy. In line with making India an easier place to do business, the Budget has unveiled a number of facilitation measures such as acceptance of digital invoices and quick registration.
Tax experts term the Budget as a mixed bag and seek more clarity on timelines for implementation of GST."On the indirect taxes front, the Budget proposals are a mixed bag. Proposals towards widening of the tax base by pruning exemptions, abolition of the education cess and rationalisation of the tax rates take the current tax regime a step closer to GST," said R Muralidharan, senior director at Deloitte in India .
Govt Services in Tax Net
New items could figure in the govern ment's service tax list such as the auc tion of spectrum and mining rights or the leasing of government land and buildings as the budget has substantially pruned the negative list, which details those areas that are exempt.
But the Centre could still notify them as exempted government services after the passage of the finance bill. The budget move is in line with the proposed goods and services tax regime that hinges on low rates but a wide base.
The finance bill seeks to incorporate definitions of "government" and "service" and make an enabling provision to exclude all services provided by the government or local authorities to a business entity from the negative list.
Spectrum sales and coal auctions have yielded a windfall for the Centre and the states, respectively. The government could generate more money from such exercises by imposing service tax on auctions going forward since the right to use mines and spectrum constitute part of services offered by government.
Tax experts sought clarity on the amendment as it could have broad impact. "Expansion of service tax to include to any government services provided to business entities as against only support services could have wide ramifications and amount collected through spectrum and coal block allocation could also be subjected to service tax," said Pratik Jain, partner, KPMG.





GAAR on Hold for 2 Years, DTC Abandoned

Mar 01 2015 : The Economic Times (Mumbai)

GAAR on Hold for 2 Years, DTC Abandoned

Vikas Dhoot

New Delhi





SENSIBLE MOVE DTC won't be pursued as most of its ideas incorporated in I-T Act

Staying true to Prime Minister Narendra Modi's commitment to global investors of fostering a stable and predictable tax regime to replace the era of tax terrorism unleashed by the previous UPA government, finance minister Arun Jaitley said the General Anti-Avoidance Rules (GAAR) will be deferred for two more years and investments made till March 2017 will be exempted when they are implemented.
Laying another major uncertainty to rest for taxpayers, the finance minister said the Direct Taxes Code, in the making for many years, won't be pursued any further as most of its ideas have been incorporated in the Income Tax Act.
"There is no great merit in going ahead with the Direct Tax Code as it exists today," he said, citing the well-evolved jurisprudence on existing income tax laws.
The finance minister hinted that General Anti-Avoidance Rules wasn't desirable at a time when reviving the investment cycle is critical. "There are certain contentious issues relating to GAAR which need to be resolved," the minister said, declaring that it will only apply `prospectively' from April 1, 2017. GAAR is aimed at curbing tax avoidance.
Industry experts appreciated the moves as sensible. Siemens' managing director and CEO Sunil Mathur said the move to defer GAAR and reduce corporate taxes will boost industry confidence.
"Investors now have time to prepare themselves for General Anti Avoidance Rules. Though we hoped for it to be postponed by five years, this is acceptable if the government cleans up tax administration in the meanwhile," said Daksha Baxi, executive director at law firm Khaitan & Co.





Taking Sting Out of Retro Tax

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Taking Sting Out of Retro Tax

Hema Ramakrishnan





SILVER LINING: While Vodafone case continues, foreign investors can draw comfort as tax will be charged only on certain offshore deals where the underlying asset and value derived are in India

British mobile giant Vodafone hasn't been bailed out, with Finance Minister Arun Jaitley maintaining status quo on taxing past offshore deals. However, foreign investors can draw comfort as tax will be charged in India only on certain offshore deals where the underlying asset and the value derived thereon are in India.The Budget offers clarity on the conditions under which tax will be charged when Indian assets change hands between offshore entities. Here, Jaitley has done well to accept the recommendations of the Parthasarathi Shome panel, set up by the previous UPA government.
A US company, for example, holds global assets in various countries including India. The sale of the US company will attract tax in India only when the value of the Indian assets in its total assets is 50% or more. However, if the value is less than Rs 10 crore, then the sale will be tax free. The law says the Indian entity will have to provide information on offshore deals if they directly or indirectly change the ownership structure of the Indian company. Failure to do so will attract penalties.
"The clarification on indirect transfers is fair and reasonable as it will only impact any change in strategic interest, and not minority stakes. Moreover, the law is clear that indirect transfers through participatory notes and other indirect investments through off-shore funds will not be charged to tax", says Sudhir Kapadia, partner and national tax leader, E&Y.
Capital gains will be exempt when the transfer of shares of a foreign company deriving its value substantially from the shares of an Indian company is under a scheme of amalgamation or demerger.
However, the festering dispute with Vodafone or similar cases will not end with the Budget clarification. Vodafone had bought 67% of Hutchison Essar in February 2007 from the target company's Hong Kongbased parent. The actual payment was received by a Cayman Islands-based Hutchison group company; hence the parties to the deal held no tax was liable to be paid in India. This interpretation was contested by the I-T department. The Supreme Court ruled in Vodafone's favour, but Pranab Mukherjee's 2012 Budget changed the language of law. A retrospective clarification on the intent of tax law was meant to remove any un certainty or ambiguity. But that stays.
"While the threshold for `substantial' investment is accepted at 50%, the ex emption for small investors is only avail able for holding less than 5%. Moreover, while foreign mergers and demergers have been granted exemption from indirect transfers, there is a reporting requirement and penal consequences on failure to do so on the Indian company. In portfolio investment structures, the Indian firms may not be privy to the information on change in shareholding at the investor level. Therefore, the penal provisions are draconian," says Shefali Goradia, partner BMR Associates.





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Strong Medicine for State-run Banks

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Strong Medicine for State-run Banks

Sangita Mehta





TIME TO DELIVER Poor lending practices of the past and constant political meddling have resulted in many of them performing below potential, leading to a surge in bad loans at a time when capital requirement is on the rise

The government, in its determination to change the structure of state-run banks, is reviving the idea of a holding company structure to hold its shares in them. As a first step, it is planning to constitute a bureau that will spearhead hiring of senior executives for banks and advise them on business strategy. The bureau will eventually morph into the holding company.
"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," Finance Minister Arun Jaitley said in his speech. "This would be an interim step towards establishing a holding and investment company for banks."
The government wants to reduce the banks' dependence on it for capital amid a tight fiscal situation. It has set aside `9,555 crore for the next fiscal year, against `6,990 crore this fiscal, for investment in state-owned banks, including Nabard.
"It (the bureau) will improve governance, lay norms for the appointment procedure and will screen candidates for the post," said TM Bhasin, chairman of Indian Banks Association and CMD of Indian Bank.
Both the government and the Reserve Bank of India are seeking to revamp state-run banks, which account for nearly three-fourths of the market share. Although these banks are large, poor lending practices of the past and constant meddling from the political system have resulted in many of them performing below potential.
Some of the decisions of the government are based on the recommendations of the PJ Nayak Committee on revamping corporate governance practices in state-run banks. The panel had suggested the splitting of posts of chairman and managing director, a plan that is already being implemented in banks such as Bank of Baroda and Punjab National Bank.
In the last seven years the govern ment has invested `68,724 crore in PSU banks. Capital will be a critical factor in running public sector banks as the new Basel norms require banks to hold higher capital to grow their loan book. India Ratings & Research has estimated that PSU banks will need `4.5 lakh crore in capital in the next three years to meet the Basel III accord. With the government in a fiscal consolidation mode, to bring down fiscal deficit to 3% of the gross domestic product, not much funding would be available for banks. So, it has directed them to improve their efficiencies.
The Economic Survey released on Friday said banks should be proactive in booking profits from their bond holdings that has been gaining in value. Instead of showing gains as profits, banks should sell them, provide for bad loans, and utilise the undistributed profit to create capital buffer.
Skeptics abound when it comes to changing the way state-run banks function. "A lot will depend on people who are selected in the committee and what kind of procedure they follow," said DK Mittal, former financial services secretary. "If the committee continues to have members from the RBI and finance ministry it would just be like old wine in new bottle. More significantly, there is a need to have more filtering in the selection of candidates and group discussions."

FM Fires up Make in India Engine

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - FM Fires up Make in India Engine

Binoy Prabhakar





PLENTY OF PROPOSALS Manufacturing units expected to benefit from specific steps such as customs & excise rejig, greater access to credit, focus on improving skills and broader impetus on ease of doing business and infrastructure

Arun Jaitley has attempted to bolster Prime Minister Narendra Modi's Make in India project by packing his budget with proposals that are expected to help manufacturing units cut costs as well as access credit and skilled manpower.
Both in terms of specific proposals such as reduction of customs duty on inputs and parts and the broad emphasis on making it easy to do business and infrastructure, the budget was unwavering in its attention on Modi's pet project. Jaitley said the first pillar of his tax proposals was to deal with black money while the second was the promotion of manufacturing and `Make in India' (manufacturing found mention 15 times in Jaitley's speech while Make in India made it 10 times).
True to his word, he announced customs duty cuts on 22 items that will make it cheaper for Indian companies to import parts to manufacture products. He sought to protect domestic makers of commercial vehicles such as trucks and buses by thrusting a higher duty on importers of such vehicles. Given that many sectors are reliant on trucks to transport goods, the helping hand here is expected to lift a number of accompanying sectors.
Jaitley also sought to facilitate cheaper technol ogy transfer to small businesses by more than halving the rate of income tax on royalty and fees for technical services to 10%. By proposing to re cast excise duty structure on certain goods, the FM has tried to boost the manufacture of products such as tablet PCs and leather footwear.
Despite Modi's ambition to make India a manufacturing hub, the current situation is not pretty.Manufacturing actually declined from 18% to 17% of the GDP, according to the new GDP data, while manufacturing exports have remained stagnant at about 10% of the GDP.
The government seems keen to make amends.Jaitley said the government will launch a National Skills Mission to consolidate skill initiatives spread across several ministries. In the works is also a scheme called Deen Dayal Upadhyay Gramin Kaushal Yojana to enhance the employability of rural youth.
Now, less than 5% of the potential workforce get formal skill training.
The budget has taken note of the difficulties of small businesses in accessing credit. The proposed Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of `20,000 crore and credit guarantee corpus of `3,000 crore and tax breaks for Alternative Investment Funds are expected to provide relief on this front. The only sector that failed to match the hype on Make in India was defence. "As against the likely expenditure of this year of `2,22,370 crore the budget allocation for 2015-16 is `2,46,727 crore," said Jaitley.
Defence analysts said the 11% increase in outlay is too modest to achieve the government's ambition on greater self-sufficiency in making defence equipment, including aircraft. India's military will not have much money to expand its arsenal significantly, given that a substantial chunk of this money will go to meet operational expenditure.
Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG, said the industry expected "infrastructure status" for the sector in order to attract tax incentives and to meet the capital requirements. "That has been a disappointment," he said, adding that overall, there is nothing to write home about in defence.
At least one manufacturing sector was left disappointed, too. Mehul Choksi, chairman of the Gem & Jewelry, Luxury & Lifestyle Forum of industry lobby Ficci, said though the FM has announced a slew of measures to curb black money, he has ignored one of the biggest issues faced due to smuggling of gold. "The impact of this `unofficial' supply of gold of about 180 tonnes is valued at about $10 billion, leading to a loss in foreign exchange inflow of a similar amount and a loss in revenue of over $ 1 billion on account of customs duty," he said.