The Narendra Modi government presented it’s third budget on 29th February 2016 with hopes riding high that it would finally deliver the ‘big-bang’reforms that have been keenly awaited ever since the BJP swept away the national elections in May 2014. Although the budget did not present any major reforms, it focused on fiscal discipline, resolving the banking crisis and rebooting the rural economy. In this post, I shall attempt to analyse how Budget 2016 impacts the economy at large, the private sector and ultimately, the ordinary taxpayer, along with a special emphasis on the international tax proposals therein.
Stabilizing the Economy
Before the budget, there were speculations whether the Finance Minister would stick to the fiscal deficit target of 3.9% or miss the same in order to increase spending. Experts agree that by maintaining the fiscal deficit target of 3.9%, the Finance Minister made the right move, giving way for a rate cut by the Reserve Bank of India. Also, one needs to appreciate the government’s efforts to deal with the Non-Performing Assets (NPA’s) crisis which has gripped the Public Sector Banks (PSB’s), in a systematic and practical manner.
The 22 PSB’s in the country have been riddled with bad debts cumulatively amounting to 3.5 Lakh Crore and have thus proved to be the most significant impediment to India’s economic growth. The government had promised recapitalization worth 70,000 crore across four years while raising the balance from the markets. Although the current budget only allocates 25000 crore for recapitalization, it provides a clear roadmap to solve the crisis in an incremental manner. It proposes a Bank Boards Bureau which would advise the government on how to tackle the NPA problem as well as suggesting deserving people to occupy board positions of the banks, thus addressing the endemic problem of such positions being captured by cronies of the politicians in power. It further provides that the government may even contemplate privatising some of these banks, thereby reducing the government’s stake below 50%. More importantly, a new bankruptcy code is in the pipeline which aims at simplifying the insolvency process and would play a significant role in liquidating of assets of the defaulting borrowers in an efficient and timely manner, thereby providing a major relief not just to PSB’s but other corporate lenders as well.
The Budget places a big thrust on reviving the rural economy which has been in distress at the back of two consecutive bad monsoons. It allocates 87,765 crore across infrastructure, irrigation and other welfare schemes to augment the suffering agricultural sector. It unveiled the path breaking initiative of a common online market for agricultural produce of the farmers which would help them fetch the highest price available therein, a complete break-from-the-past move aimed at increasing agricultural income. Also, the government plans to institutionalize direct benefit transfer (DBT) schemes for various subsidies, including fertilizers and LPG, which would not only lead to better governance by eliminating middlemen and reducing corruption, but would also result in significant cost savings for the exchequer.
The Budget promotes the government’s pet scheme ‘Make in India’ by providing a reduced corporate tax rate of 25% for manufacturing companies incorporated after April 1st, 2016 and reduces the corporate tax rate to 29% from 30% for companies with a turnover less than 5 crore. It also promotes another government scheme ‘Start-Up India’ by exempting 100% of profits for start-ups set up during April 2016 – March 2019.
However, it provides for further 10% tax on dividends in excess of 10 lakh, aside from the dividend distribution tax (DDT) already paid by the companies, a major flop in the budget, which would result in double-taxation. The Budget further provides for an increase in taxes on people earning more than 1 crore by 3%, both amplifying the government’s intention of taxing the rich going forward. The above proposals have evoked mixed reactions from India Inc, with some expressing their discontent over the benefit of the reduced tax rate not being passed to the companies already in operation, while start-ups complaining that they expected a lot more from the government.
Middle Class Concerns
This budget provides a lot to smile about to BJP’s core vote base i.e. the ‘neo-middle class’ by providing a significant increase in rebates for low income individuals, first-time home buyers and rent-payers. But it balances that out by imposing additional tax on the purchase of cars and attempts to pluck the cash economy by imposing an additional tax of 1% on cash purchases of goods and services valuing more than 2 lakh. The Budget further increases the overall service tax rate by 0.5%, thus preparing the country for a higher tax rate under the Goods and Services Tax Bill which aims at unifying all the indirect taxes currently imposed in the country.
The Finance Minister reiterated the government’s commitment to adopt the Base Erosion Profit Shifting (BEPS) provisions which were presented at the G20 summit in late 2015. He adopted BEPS Action Plan 13 of Country-by-Country (CbC) reporting as well as imposing a tax on digital transactions in line with BEPS Action Plan 1 at the same time. But the corporate sector has something to cheer for with the announcement of the Patent Box Regime in line with BEPS Action Plan 5 which aims at providing the underlying tax benefit to those companies which are able to prove the ‘nexus’ between qualifying expenditure for developing intangible property (IP) and income received from those IP assets, signalling the government’s vision to turn India into an R&D hub. But at the same time, he announced that the government would adopt the ‘Place of Effective Management (POEM)’ residence test as well as General Anti Avoidance Rules (GAAR) from fiscal year 2017-18, preparing the MNE’s for a strict administrative road ahead.
Conclusively, I think Mr. Arun Jaitley, the Finance Minister has presented a pragmatic, forward-looking budget which might appear short on reforms, but provides a sensible road-map to transform the world’s fastest growing democracy. The key, however, lies in implementation, especially with regards to the resurrection of the rural economy and a hassle-free, responsive & efficient administrative system across all sectors. It is with desire that the country rallied behind the BJP in the May 2014 elections and one can hope that the government delivers on its promises.