Client Alert India: Union Budget: 2017-18

ABOUT

On February 01, 2017 the Finance Minister of India, presented the Union Budget 2017-18. Through this alert we seek to apprise our clients about the Budget and seek to analyse the same.

HIGHLIGHTS OF THE ECONOMY

India is the fastest growing major economy in 2017.
India is the 6th largest manufacturing country in the world.
Consumer Price Index inflation declined from 6% in July 2016 to 3.4% in December 2016.
Current Account Deficit declined from 1% Gross Domestic Product (“GDP”) last year to 0.3% of GDP in the first half of 2016-17.
Foreign Direct Investment (“FDI”) increased from Rs.1,07,000 crores (USD 16084 million) in the first half of last year to Rs.1,45,000 crores (USD 21796 million) in the first half of 2016-17.
More than 90% of the total FDI Inflows are now through the automatic route.
Foreign Exchange Reserves reached to USD 361 billion.
The World Bank projects the GPD growth of 7.6% in 2017-18 and 7.8% in 2018-19.
Fiscal Deficit for 2017-18 pegged at 3.2%.
Revenue Deficit of 2.3% in 2016-17 stands reduced to 2.1% in 2017-18.

*Post demonetisation: deposits of Rs.2,00,000 (USD 2984) to Rs.80,00,000 (USD 119376) were made in 1.09 crore accounts and deposits of more than Rs.80,00,000 (USD 119376) were made in 1.48 lakh accounts with average deposit size of Rs.3.31 crores (USD 493920).

HIGHLIGHTS OF THE BUDGET

1. Financial Sector

Foreign Investment Promotion Board (FIPB) to be abolished to ease foreign investments.
Multi State Cooperative Societies Act, 2002 to be amended.
A comprehensive bill for resolution of disputes of financial firms to be introduced.
Computer Emergency Response Team (CERT-Fin) to be established for safeguarding the interest of financial sector.
Central Public Sector Enterprises (CPSEs) to be listed on stock exchanges.
Rs.10,000 crores (USD 1503.138 million) allocated for recapitalization of Banks in 2017-18.
Listing and Trading of Security Receipts issued by Securitization or a Reconstruction company under the SARFAESI Act to be permitted in SEBI registered stock exchanges.
Further integration of commodities and securities derivate market.
Registration of financial market intermediaries like mutual funds, brokers, portfolio managers to be made fully online by SEBI.
For Foreign Portfolio Investors (FPIs), a common application form for registration, opening of bank and demat accounts and issue of PAN to be introduced.
Non-Banking Financial Companies regulated by Reserve Bank of India to be categorised now as Qualified Institutional Buyers (QIBs).

2. Tax

Capital gains tax holding period in respect of land and building reduced from 3 years to 2 years.
Concessional with-holding rate of 5% charged on interest earned by foreign entities in external commercial borrowings, bonds and Government securities to be extended to Denominated (Masala) Bonds till June 30, 2020.
Start-ups - condition of continuous holding of 51% of voting rights relaxed provided that holding of original promoter(s) continues. Profit linked deduction available to start-ups changed to 3-7 years.
Minimum Alternate Tax can be carried forward for 15 years now instead of 10 years.
Income Tax for Companies with annual turnover upto Rs.50 crores (USD 7.516 million) reduced to 25% (earlier 30%).
Allowable provision for Non-Performing Asset to be increased to 8.5% (earlier 7.5%).
Basic customs duty on Liquefied Natural Gas to be reduced to 2.5% (earlier 5%).
Interest paid by an Indian company or a permanent establishment of a foreign company in excess of 30% of earnings before interest, taxes, depreciation, amortization, or to associated enterprises, whichever is less, shall NOT be allowed as deduction in computing its taxable profit. Such interest may be set off or carried forward for 8 assessment years.
Foreign companies having strategic petroleum reserves selling leftover stock of crude oil after expiry of agreement or the arrangement, shall not be liable to tax in India.
Foreign missions and State Public Sector Undertakings engaged in business of transportation of passengers to be exempted from Tax Collection at Source provisions relating to purchase of vehicles.
If Amount of Foreign Tax Credit (FTC) allowed against the tax paid in terms of the Income Tax Act exceeds the amount of FTC admissible against the tax payable by the assessee on his income, such excess credit shall be ignored while computing the amount of credit.
Cost of acquisition of share of an Indian company belonging to a demerged foreign company (tax neutral demerger), shall be taken as the cost of acquisition in the resulting foreign company.

3. Ease of Doing Business

Scope of domestic transfer pricing to be restricted to only one of the entities involved in related party transaction enjoying specified profit-linked deduction.
Increase in limit for audit requirement from Rs.1 crore (USD 150000) to Rs.2 crores (USD 298441) for business entities opting for Presumptive Income Scheme.
Foreign Portfolio Investors Category I[1] & II[2] exempted from Indirect Transfer Provision (ITP).
ITP shall also not apply in cases where redemption of shares or interests outside India as a result of redemption or sale of investment in India which is chargeable to tax in India.
Time period for revising a tax return reduced to 12 months (earlier: completion of financial year).
Time period for completion of scrutiny assessment compressed to 18 months for Assessment Years 2018-19 and 12 months for AY 2019-20.
Rationalization and Amalgamation of existing labour laws into 4 Codes on:
Wages;
Industrial Relations;
Social Security and Welfare;
Safety and Working Conditions.
Amendments to Payment of Wages Act to benefit labour and ease business.

4. Rural Development

Rs.48,000 crores (USD 7215 million) allocated to Mahatma Gandhi National Rural Employment Guarantee Act.
Rs.1,87,223 crores (USD 28142 million) total allocation for the rural, agriculture and allied sectors.
Rs. 19,000 crores (USD 2856 million) provided to Pradhan Mantri Gram Sadak Yojana.

5. Infrastructure

Rs. 1,31,000 crores (USD 19691 million) the total capital and development expenditure of Railways.
Rs.745 crores (USD 112 million) allocated in 2017-18 to incentive schemes like Modified Special Incentive Scheme and Electronic Development Fund.
7000 stations with solar power in the medium term.
Integrated railways solutions through partnership with logistics players.
New Metro Rail Act to facilitate greater private partnership and investment in construction and operation.
Expert International assistance to be harnessed to improve safety and maintenance practices of railways.
Rs.64,900 crores (USD 9756 million) allocated to highways.
Select Tier 2 cities Airports will be taken up for operation and maintenance in the Public-private partnership (PPP) mode.
Amendment to Airport Authority of India Act to enable effective monetization of land assets.
New Trade and Infrastructure for Export Scheme to be launched in 2017-18 to facilitate export infrastructure.
Development of an effective multi modal logistics and transport sector.
Telecom spectrum auctions expected to remove spectrum scarcity in the country.
India creating a global hub for electronics manufacturing.
Over 250 investment proposals for electronics manufacturing received in the last 2 years.
Rs.3,96,135 crores (USD 59545 million) total allocation for infrastructure development in 2017-18.
Rs.2,41,387 crores (USD 36284 million) allocated to transportation sector.

6. Promoting Digital Economy

Government to encourage Small Industries Development Bank of India to refinance credit institutions, which provide unsecured loans at reasonable Interest rates to borrowers.
Amendments to the Payment and Settlement Systems Act, 2007 to create a Payments Regulatory Board in the Reserve Bank of India.
Amendments to the Negotiable Instruments Act, to ensure that the payees of dishonored cheques are able to realize the payments expeditiously.
Presumptive Income Tax for companies with turnover upto Rs.2 crores (USD 298441) to be reduced to 6% (earlier 8%) in respect of turnover received by non-cash means.
Cash donation, which can be received by charitable trust, reduced to Rs.2,000 (USD 30).
No transaction above Rs.3,00,000 (USD 4480) to be permitted in cash.
Maximum amount of Cash donation that a political party can receive shall be Rs.2,000 (USD 30) from one person.
Amendment proposed to Reserve Bank of India Act to enable issuance of electoral bonds.

7. Public Service

Rationalization and merger of multiple tribunals with overlapping functions.
New law to confiscate assets of economic offenders, fleeing the country till they submit to the jurisdiction of the appropriate legal forum to be introduced.

KEY TAKEAWAYS

Through the Union Budget 2017-18, the government has adopted a slew of pro-business measures that are sure to help the economy grow faster in the long run. Reductions in tax for SME’s and individuals will increase the inclusion amounts another important move taken in the backdrop of demonetisation and the upcoming Goods and Services Tax (GST). Such inclusion is likely to cause surplus liquidity, which is expected to lower borrowing costs and increase access to credit. As per the Finance Minister, further liberalization of the FDI policy is under consideration, which shall facilitate the ease of doing business in the Country. In addition to this, non-inclusion of Foreign Portfolio Investments in the capital gains bracket shall also relax the apprehensions of foreign investors.

The absence of any major excise and service tax changes indicates that India is on the path to adopt GST this year. Every endeavour of the government has been directed towards smooth incorporation of GST and is dedicated to bringing in clarity on contentious issues surrounding the Act. More than 90% of the total FDI Inflows are now through the automatic route, which indicates that the government is intending to move all sectors attracting FDI into automatic approval route as well.

Summing up, the Union Budget 2017-18 is a pragmatic one and is a welcome move directed towards providing a big relief to the investors and is also expected to aid the much-needed growth of the Indian economy.

Disclaimer: The views and opinions expressed in this article are based on extensive and thorough research. In no way does the author or the law firm claim ownership of the ideas and concepts presented in this paper. Information so provided is to be strictly considered for general reference of the subject matter, which has been adequately referenced. Specialist advice should be sought about any specific circumstances directly from the law firm.

REFERENCES

[1] “Government and Government Related Investors” – Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 notification dated 07 January, 2014 available at < http://www.sebi.gov.in/cms/sebi_data/attachdocs/1389083605384.pdf > accessed on 02 February 2017

[2] “Foreign portfolio investor" which shall include:

(i) appropriately regulated broad based funds such as mutual funds, investment trusts, insurance/reinsurance companies;

(ii) appropriately regulated persons such as banks, asset management companies, investment managers/ advisors, portfolio managers;

(iii) broad based funds that are not appropriately regulated but whose investment manager is appropriately regulated:

Provided that the investment manager of such broad based fund is itself registered as Category II foreign portfolio investor:

Provided further that the investment manager undertakes that it shall be responsible and liable for all acts of commission and omission of all its underlying broad based funds and other deeds and things done by such broad based funds under these regulations.

(iv) university funds and pension funds; and

(v) university related endowments already registered with the Board as foreign institutional investors or sub-accounts.