Union Budget 2015-16: A preview by Karvy Stock Broking To spur domestic economic growth, maintain fiscal discipline and improve centre-state relationship
Striking a balance between economic growth and fiscal discipline: Finance Minister Shri Arun Jaitley will present the Union Budget 2015-16 on Feb 28, 2015 which is very crucial for channelizing the government's resources to achieve the double digit economic growth rate under the leadership of Prime Minister Shri Narendra Modi. For the previous interim budget presented on Jul 10, 2014 the Finance Minister could get only few weeks to prepare from the swearing in ceremony on May 26, 2014, this time for Union Budget 2015-16 there is ample time to consult various sections and arrive at the right framework as well as prioritize resource allocation in line with the government's agenda to achieve double digit economic growth, while maintaining fiscal discipline.
Aiming for double digit GDP growth: GDP at constant prices (with new base 2011-12) for the year 2014-15 is estimated at Rs. 106.57 lakh crore as against the first revised estimate of GDP for the year 2013-14 at Rs 99.21 lakh crore. GDP growth during 2014-15 is estimated at 7.4% as compared to the growth of 6.9% during 2013-14. In a more conducive policy environment and optimal allocation of resources in the budget GDP growth is expected to move to double digit in the coming years. Index of industrial production has seen a growth of 2.1% for the period Apr-Dec 2014 and is expected to improve sharply with the 'Make in India' campaign as well as increased allocation to capital spending. Governments thrust on infrastructure projects like roads, railway network, ports and airports would spur industrial production as well as GDP growth.
Thrust on domestic manufacturing: In the last 9 months in office Prime Minister
Shri Narendra Modi has initiated a campaign 'Making India' to spur domestic manufacturing. It envisaged India becoming the manufacturing powerhouse in sectors like Defence equipment, Electronic Hardware, Medical Equipment, Automobiles etc...that drives the economic growth in double digits and generating employment for the overall growth. While the broad policy frame work was outlined in the last few months, investors would be looking for fine print regarding resource allocation for these initiatives, incentives & taxation structure to attract investments into these sectors.
Nurturing the services sector for sustained growth: Service sector which is a major contributor for the economic growth, is likely to get attention from the government to sustain the growth momentum. There are expectations over announcing incentives and concessional tax rate to encourage multinational companies to set-up back offices in India, which would generate employment and boost growth in the services sector.
Improving farm productivity for rural growth: Focussing on improving productivity, warehousing and value added food processing to achieve the twin objectives of lower food inflation and higher realization for the farmers. There is a need to break the wage-inflation spiral with higher food inflation leading to higher inflation linked MNREGA wages in rural areas driving the labour cost that warrant higher MSP for food products. This can be achieved through focus on improving productivity, availability of modern warehousing facilities and increased share of value added food processing. There are expectations over announcing incentives for setting up ware houses, cold storage facilities, food processing clusters to boost agriculture.
Maintaining fiscal discipline: Government is working towards reducing the fiscal deficit to 3.6% and 3% for FY 2015-16 and FY 2016-17 respectively, which is in line with the fiscal target laid in the FRBM rules amended in 2013. Fiscal discipline can be achieved by overhauling the subsidy mechanism as well as mobilizing the additional revenue by improving effectiveness of the tax collection system.
Overhauling the subsidy disbursement mechanism: During the 2014-15 budget the subsidy bill of Rs. 2.6 lakh crore of which fuel subsidy bill was close to Rs. 0.6 lakh crore, with the sharp drop in crude oil prices, implementation of DBT for LPG, de-regulation of diesel & petrol prices the fuel subsidy bill is expected reduce drastically. Similarly, any implementation DBT for transferring Fertilizer and Food subsidy would result in plugging in the loop holes in the system, while delivering the subsidies to the needy. Softening fertilizer prices in the global markets and stable INR against USD would help in containing the fertilizer subsidy. This would bring in fiscal discipline from the non-plan expenditure perspective. Any measures in the budget towards, implementing the DBT of fertilizer and food subsidies would be seen as a step towards attaining fiscal discipline.
Improving the effectiveness of the tax collection system: The present tax collection system with taxes, surcharges and additional cess etc... is biased towards taxing the taxpayer, rather than improving the effectiveness by widening the tax payer base. In a country with over 1.2 billion population and the finance minister acknowledging the fact that there are only 42,800 individuals disclosing annual income of Rs. One crore and above speaks volumes for the need to improve the effectiveness of the tax collection system. Another important issue to be addressed is ways to curb the un-accounted money circulating in the country as well as transferred abroad, by using the technology effectively. Any measures towards addressing the un-accounted money in the system and broadening the tax payer base would dramatically improve the tax revenue, thus improve the effectiveness of the tax collection system.
India is in a sweet spot as crude oil prices below $60/barrel: Steep fall in crude oil prices to sub $60/barrel brought in a sigh of relief, which paved the way for near complete de-regularization of petrol & diesel prices. However, it also posed a risk of lower excise duty collection, but government had increased the excise duty to neutralize the fall in excise revenue. Any impositions of customs duty on import of crude oil would provide cushion for the government to reduce excise duty on petroleum products.
Buoyant other non-tax revenue: Positive response for disinvestment and telecom spectrum auctions is likely to bring down the fiscal deficit. Disinvest is likely to generate in upwards of Rs 45,000 cr, while telecom spectrum auctions are likely to generate over Rs 80,000 cr. Action of other natural resources also generate additional non-tax revenue.
Strengthening the centre - state relationships: Union-budget plays an important role in strengthening the centre - state relationships, with transfer resources to state governments at the optimal level. Major issues in the implementation of the GST can be resolved amicably by accommodating the states legitimate demands with provisions in the budget. Central government would use union budget as a platform to resolve any opinion differences with the state governments on various financial aspects besides mobilizing the political support to implement the key reforms like the GST.
Display of political resolve and financial commitment for flagship programs: Overall, budget is an important event to assess the government financial commitment to various flagship programs like 'Make in India', Swatch Bharat, Namami Gange, Housing for All, Power for All, Rural Development. It also indicates the capital allocation for procurement of domestically manufactured defence equipment, building infrastructure projects to fast track economic growth. It also displays the ruling coalition's political strategy in passing crucial bills after a series of ordinances due to lack of cordial political environment in the parliament especially Rajya Sabha, political strategy is all the more important after the recent set-back for BJP in Delhi assembly elections. The Political resolve and financial commitment displayed in this budget session sets the direction for key policy implementation the next few years.
Other key initiatives
Disinvestment: In the year 2014-15, besides this Rs 43,425 crore of disinvestment target, there was additional Rs 15,000 Crore target from the sale of residual stakes in SUUTI holdings.
In the upcoming budget, we are expecting the disinvestment target to be around Rs 40,000-45,000 Crore. In the next financial year, we hope that the government will commence the activity of disinvestment starting from the financial year, instead of keeping it delayed up to last quarter as it had been done in the previous years.
We are expecting one more offer for sale from Coal India in the next financial year as well. After the recent offer for sale in January 2015, the stake of government has reduced to 79.65%. As per the minimum public shareholding norms, government cannot hold more than 75% stake in Coal India. Hence, the government needs to dilute at least 4.65% stake further through one more offer for sale. Even though there is time until 2017 to meet this requirement, considering the possible aggressive disinvestment target to be announced, one may expect Coal India offer for sale in the upcoming financial year 2015-16 itself.
Roadmap to implementation of GST: As part of the roadmap to GST government could give more clarity on Classification of Goods and Services, Rate of Tax, Threshold Limits, Stability of Taxes, Area based exemption schemes, clarity on SGST, Inter-state stock transfers, Tax credit for capital goods, Neutralization of taxes, Deposit of taxes and refund of excess input tax credit, Trade discounts and Sales incentives, Statutory forms and check-posts, Uniform laws and simple tax administration, Eco taxes in the GST regime, Computerized system and time frame for implementation, Transitional issues and Advance ruling. While, in this budget government could take steps towards convergence of VAT and GST as part of preparing the ground for GST rollout in 2016.
Clarity and transparency in tax laws to make India as a more stable tax regime: Guidelines that give bring in more clarity and transparency on taxation issues relating to GAAR and retrospective taxation would improve the confidence among the foreign investors on taxation issues in India after the Vodafone issue. This would create the image for India as more stable tax regime among the foreign investors.
GAAR: As per the current regulations, GAAR gets implemented from the AY 2016-17. That means, GAAR gets implemented from the financial year 2015-16 itself. Considering the fact that the corporate business confidence and global investors confidence on India are slowly coming back, it may not be in the best interests of Indian economy and Indian markets to implement GAAR from FY 2015-16. It is recommended that law be changed immediately so as not to introduce GAAR from AY 2016-17.
Clarity on taxation of e-commerce companies: More clarity on Taxation issues for E-commerce companies with complex business models as well as diverse payment methods could boost the segment. Clarity on taxation of SEZs and EOU would attract investments into India. More clarity on other issues like MAT, increase in Excise Exemption Limit for the M&SME, tax rate on royalty & fees for technical payments would bring in stability for taxation issues in those respective areas.
CSR: To usher in a new era of tax friendly policies which harmonizes other legislation within the framework of which a Corporate functions, it is imperative that CSR spends shall be allowed as a deductible expenditure. This kind gesture shall go long way in encouraging corporates to contribute whole-heartedly towards various social initiatives of the Government.
Tax Rate on Royalty and Fees for Technical Payments: Vide amendment in Finance Act 2013, the rate of tax on payments by way of royalty and fees for technical services to non-residents has been increased from 10 percent to 25 percent. This hike in the tax rate can lead to an increase in the cost of doing business for Indian subsidiaries in sectors such as technology, automobiles, pharmaceuticals, oil and gas and others. Further, such increased tax rates have a negative impact on foreign companies planning to set up base in India or planning to increase their scale of operation under the 'Make in India' initiative. It is suggested that the hike in the rate of tax on royalties and fees for technical payments may be rolled back to avoid undue hardship for companies making higher royalty payments.
Amending the definition of MSMEs: Small Scale Industry i.e. MSME Units constitute a major share in the growth of the country and are mainly responsible for enhancing the socio-economic objectives of generating employment, exports and revenue for the country. Small scale units are enjoying Excise Limit exemption of Rs.1.5 Crore on their sale during the last 6-7 years approximately. Since then there has been a drastic increase in the manufacturing costs. Considering the above facts, the limit of Rs.1.5 Crore is not at all in consonance with current manufacturing costs and therefore the Excise Exemption Limit for the M&SME Sector may be enhanced to a minimum of Rs. 3 Crore from the current Financial Year itself.
Further key changes in personal income tax:
The Finance Act, 2014 for long term savings has increased the deduction under section 80C to Rs. 1.50 lakhs. It is suggested that this limit be increased to at least Rs. 2.50 lakhs. The above is also recommended since standard deduction has also been removed. This would also act as a fillip for boosting investments.
Limit for deduction of interest on housing loans be revised to at least Rs.3.0 lakhs (from existing Rs. 2.0 lakhs) u/s 24 of the Act.
The limit for principal loan repayment to be increased from Rs 1 lakh to 3 lakhs.
Time limit for completion of acquisition/ construction for self occupied property on borrowings done after April 1999 to be extended to 5 years.
Increase in limit of the interest and principal repayment will give a boost to the real estate sector. Present limits are extremely low.
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