Union Budget 2017 garnered mixed sentiments from the finance world. Some finance leaders find this budget to be ‘great’ whereas others believe that this budget missed the bigger picture for smaller gains.
“Though five per cent reduction in corporate tax rate is a good step for certain corporate, but such corporate rate cut was required for all in order to enable them to plough back funds in the business. This would have created more employment and taxes for the government,” says Vijay Joshi, CFO, RIL- E&P Domestic Petroleum Business & CFO-India, Gas Solutions on corporate tax reduction from 30% to 25%.
But Vishnu Sultania, Group CFO, Mortice believes that the effective rate for the smaller companies was higher than that of the big corporate and so this move will bring them on the same level making the SMEs or MSMEs more competitive. (Also watch his analysis on Budget 2o17: Union Budget 2017: Vishnu Sultania, Group CFO, Mortice)
Supporting this view experts think that this will push the MSME sector and encourage investments. According to Richard Rekhy, CEO, KPMG in India, in the long run a tax cut for 96 per cent of MSMEs will increase compliance and help alleviate the disruption in fund-flow in the long run.
Read: Arun Jaitley offers no big tax sop to corporates
As the corporate tax lowering did not come through the way it was expected, India Inc is still confident. Finance Minister Arun Jaitley reduced the individual income tax rates which will eventually help boost consumption.
What’s in for Trade & Industry
In a survey by ETCFO.com the respondents, finance professionals across the country seem to recover their confidence in the economy after demonetization. Almost 65% CFOs feel that it was a balanced budget and they are not disappointed with it.
The government seemed to be inclined towards rural sector, but urban sector is reaching its saturation and the rural area is the emerging markets place for start-ups or e-commerce companies according to Sultania of Mortice a company that manage and provide project, property and facilities management services in the Indian market. In anycase, government has taken various steps to ease the corporate sector:
1: The carry forward period of Minimum Alternative Tax (MAT) increases from 10 years to 15 years. Though the industry pushed for abolition of this act, the 5 year extension was much appreciated. Murthy of NTT Data Service says, “No significant impact on IT services except the carry forward of MAT”
2: Legislative changes and new law to confiscate assets of financial offenders or defaulters who flee the country.
3: Addressing the issue of compliance cost in small businesses, the Budget has increased the threshold limit under which domestic transfer pricing provisions will be triggered. The threshold limit for domestic transaction has been upped to ₹20 crore from ₹5 crore now. As Paresh Gupta, CFO of a Contract Research Organization GVK BIO feels positive about this move, “removing domestic transfer pricing is a step towards avoiding litigations and harassment.”
4: Finally after 9 GST council meets the government has finalsed recommendation on almost all issues based on the consensus. In fact the IT system is on schedule and the government will reach out Indian companies for GST awareness from April 1, 2017. There was not much on indirect tax which is a good signal for GST implementation.
5: Those who acquired shares in unlisted companies after October 1, 2004, will have to pay 10% long term capital gains tax if they hadn’t paid securities transaction tax (STT) at the time of purchase. Exemption provided under Section 10(38) is being misused by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions. With a view to prevent this abuse, it is proposed to amend Section 10(38).
6: The Government will launch two new schemes to promote the usage of BHIM; these are, Referral Bonus Scheme for individuals and a Cashback Scheme for merchants. Aadhar Pay, a merchant version of Aadhar Enabled Payment System, will be launched shortly
Financial sectors reforms
Though Jaitley’s budget seem more inclined to socio economic sector but he considered the fact that Indian companies had been stressed with low profitability and investment and in lieu of this, he made the following major announcement in this budget:
• Abolition of Foreign Investment Promotion Board (FIPB) in 2017-18. This is another positive step to liberalize FDI policy framework and ease regulatory hurdles in attracting foreign investment
Read: FIPB abolished but reform to continue
• Computer Emergency Response Team for Financial Sector (CERT-Fin) will be established to strengthen security of the financial sector amid increasing incidents of cyber frauds. In 2016 public and private banks saw the biggest cyber fraud when 32 lakh debit cards were compromised, Jaitley in his budget points out that this team will work in close coordination with all financial sector regulators and other stakeholders.
• Listing of identified CPSEs on stock exchanges. The shares of Railway PSEs like IRCTC, IRFC and IRCON will be listed in stock exchanges. “This will increases transparency in government companies and unlock its wealth,” says Ganesh Murthy | Senior Vice President & CFO, NTT Data. This is a great step towards bringing efficiency and accountability and also generating additional resources for both government as well as railways which is currently starved of funds needed for improving its infrastructure and services, feels CFO of GVK BIO.
MEASURES FOR STIMULATING GROWTH
• Concessional withholding rate of 5% charged on interest earned by foreign entities in external commercial borrowings or in bonds and Government securities is extended to 30.6.2020. This benefit is also extended to Rupee Denominated (Masala) Bonds
• For the purpose of carry forward of losses in respect of start-ups, the condition of continuous holding of 51% of voting rights has been relaxed subject to the condition that the holding of the original promoter/promoters continues. Also the profit (linked deduction) exemption available to the start-ups for 3 years out of 5 years is changed to 3 years out of 7 years 13
• Allowable provision for Non-Performing Asset of Banks increased from 7.5% to 8.5%. Interest taxable on actual receipt instead of accrual basis in respect of NPA accounts of all non-scheduled cooperative banks also to be treated at par with scheduled banks
• Basic customs duty on LNG reduced from 5% to 2.5%
Infrastructure & Real Estate
No doubt this budget is considered pro agriculture, pro rural sector but focus has been given to infrastructure as well. The 79% increase in allocation for infrastructure says it all and this is a welcome move by the finance community.
According to experts it is ‘heartening’ to see a significant safety fund in railways and good allocation of capex for roads, railways and other infrastructure, including irrigation (including water efficient micro irrigation).
One move that everyone cheered is the tax incentives given to affordable housing and rationalizing capital gains. Now developers can access foreign funds at a cheaper cost by way of debt and will be a priority lending for banks as well.
“Affordable housing is a priority for this government and it was expected to get an Infra status. This should result into a progress in the said sector,” says Hemal Mehta, Partner – Deloitte Haskins & Sells LLP.
On the other hand Vinit Bagaria, CFO of a manufacturing, finance and trading company Spaze Towers shares his experience: “the fact remains that industry status has not been granted to the real estate industry at large. Due to this no banker is willing to lend money for land acquisition which constitutes more than 35-40% of total cost in urban housing.”
On similar lines the long term capital gains tax (LTCG) on equity investment did not change but instead the holding period for LTCG for immovable property has been reduced to two years.
Read: LTCG tweaked for real estate, remains same for equity: Here’s how it works
The Trade Infrastructure Export Scheme which is allocated Rs 3.96 lakh crore, will help the Indian exporters to become globally competitive. “This leads to high borrowings from NBFC leaving one with high interest and so concessions should have been given to boost real estate sector,” Bagaria adds.
Budget 2017 aims to enhance the tax base and move towards digitization. “Non-applicability of indirect transfer rules to FPIs and AIFs will be a big relief to the investors and could trigger an immediate rally on the stock markets,” says Girish Vanvari, Head of Tax, KPMG in India. Budget 2017 is stable fine balancing act, with fiscal prudence, directional spending and no surprises on the taxation front which should lead the country to a sustainable growth path. Government’s reforms in the recent months be it remonetisation or implementation of GST, it will have a positive impact on the private sector investment.