Budget 2016: Tax incentives vital for success of Make in India and other initiatives

By Jaijit Bhattacharya

India has sustained over 7 per cent growth in 2015-16, earning the economy the tag of being one of the world’s fastest growing large economies. However, predictions of weak global growth, the slowdown of the Chinese economy and the continued uncertainty in global crude oil prices, have put an additional burden on the Indian economy. Thus far, however, India’s macro-economic fundamentals remain stable, as evidenced by the continued investor confidence the economy presently enjoys.

 Budget 2016: Tax incentives vital for success of Make in India and other initiatives

Finance minister Arun Jaitley

Against this backdrop, the need of the hour is to address the impact of the unfavorable external conditions and the subsequent slowing down of exports, while domestic rural demand is suppressed on account of two consecutive years of deficient rainfall. Moreover, the stagnation in infrastructure, high-debt burdens of corporates, stressed banks due to high Non-Performing Assets (NPAs) and low indirect taxes due to poor corporate earnings, continues to weigh down the economy. These bottlenecks also limit the ability of the government to intervene through any significant spending, without potentially inducing inflation by violating the fiscal deficit target.

The upcoming Budget sets the stage for nuanced measures by the government, to help navigate the economy to a higher growth orbit. The economy currently needs a more cohesive push for reforms, while continuing along the path of fiscal consolidation.

Fiscal consolidation

While the government looks to meet the deficit target of 3.9 per cent set for the current year, the 3.5 per cent deficit target set for the next fiscal is quite ambitious. Given that challenges continue to plague the Indian economy, a robust fiscal consolidation plan can help it achieve higher economic growth and mitigate inflationary pressure. A minor relaxation in the deficit target, in order to accommodate foreseen additional expenditure, along with a strong focus on speeding up structural reforms, set the tone of expectations from the fiscal consolidation path to be adopted for the upcoming year by the Finance Minister.

Infrastructure support

For the government, announcing various transformational infrastructure initiatives comes with the challenge of financing them. The initial funding coupled with the continued capital infusion over time, requires that the central government takes the cost factor into consideration. Moreover, stressed assets in the infrastructure sector and the over-stretched balance sheets of infrastructure companies are deterring PPP investments.

While the increased allocation for capital expenditure needs to be allowed for, subsidy rationalisation could act as a possible financing channel. In addition, a predictable regulatory environment, transparent contractual framework, strengthened dispute resolution mechanism and measures to address the bankability of infrastructure projects with medium to long gestation periods, are critical for this sector.

In addition, measures to mitigate risk, such as a clear focus on strengthening the risk-sharing mechanism for PPP mode investments, can help revamp PPP and potentially boost investments.

Clarity on taxation

Multiple interpretations of the existing IT Act have given rise to varied understandings of its provisions and increased litigation. Providing clarity on the Act’s provisions and simplifying them are key to make the business environment more conducive. While the previous Union Budget did offer considerable forward-looking announcements, the Finance Minister might need to top it up with a few amendments this year to enhance clarity. In this regard, the recommendation put forth by the Easwar Committee regarding the lowering of the capital gains tax is likely to be important.

Further to the announcement of phased reductions in the corporate tax rate over the next few years, a structured plan to phase-out the exemptions is also crucial. A fine line of balance needs to be maintained, as tax incentives attract investors and are vital for the success of several initiatives such as Make in India.

A unified indirect tax system can also bring in several potential benefits, and thus, introducing (GST) is both urgent and critical. Considering the scale of systems and mechanisms that need to be in place to help enable its implementation, defining clear and penultimate timelines is key, and constitutes one of the most important expectations from the upcoming Budget.

Rural economy

In light of the two consecutive, insufficient monsoons and the resulting stress in rural regions across the country, destressing the sector and boosting rural demand is critical. Widening the irrigation and crop insurance coverage base, revising farm subsidies to attract investment and further consolidating the progress made in direct benefit transfers, can help build resilience in the sector. A substantial rise in allocation for the sector can go a long way in accommodating the much-needed reforms. Additionally, sustainable micro-irrigation schemes and rain-water harvesting and storage need to be revisited for both drought-proofing the economy and generating employment.

Flagship programmes

Initiatives like Make in India, Digital India, Swacch Bharat Abhiyan and the Smart Cities Mission have been initiated to help boost the economy while contributing to social upliftment. Thus, alleviating bottlenecks, both administrative and financial, with an aim to realise the objectives set out by these initiatives needs to be continually addressed.

Improved habitation and affordable and adequate housing for all is an ambition envisioned by the urban transformation initiatives such as Housing for All, Smart Cities and AMRUT. However, the lack of adequate infrastructure and connectivity and access to finance for construction developers, are amongst the various factors hindering efficiency in the affordable housing space.

Similarly, the duty inversion structure remains a concern for the domestic manufacturing industry. Addressing this issue, along with measures such as the creation of a credit system to allow 100 per cent credit for tax to be paid on inputs, might be beneficial for the Make in India initiative.

The newly launched Start-Up India, Stand-Up India initiative is a step in the right direction to nurture entrepreneurship development in the country. The initiative needs to be complemented with further measures such as waiving off the capital gains tax for investment in start-ups, mainly to attract foreign investment.

Financial, social inclusivity

While the ‘Pradhan Mantri Jan Dhan Yojana (PMJDY)’ has made substantial progress, the Atal Pension Yojana (APY) aiming to create a pensionless society, is yet to have significant impact. Thus, amendments to enhance APY is one such expectation from the Budget towards financial inclusion in society.

Similarly, measures to enhance the rural outreach of the Micro Units Development and Refinance Agency (MUDRA) is another important expectation. Enhancing the functioning of the Missing Middle Credit Scheme under which financial intermediaries funding micro entrepreneurs and units are given financial support, is necessary to make MUDRA more effective.

Another significant expectation from this year’s Budget is a road map for creating a food subsidy transfer mechanism. It is estimated that a direct benefit transfer scheme for LPG can help channelise around INR150 billion annually. Hence, a well-designed food subsidy transfer mechanism could have even more significant implications on financial savings for the government.

Phase of growth

In summary, the upcoming Budget is an opportunity for the government to reinforce its pro-reforms stand. The economy is looking forward to large scale reform measures being announced. Thought the expectations may be diverse and varied; the underlying need is to further India’s growth, while navigating a highly-constrained economic environment. Determined execution plans must follow the announcements of major reforms and initiatives, in order to boost business and investor confidence.

(The author is Partner – Infrastructure and Government Services, KPMG India. Views are personal)


Updated Date: Feb 26, 2016 19:44:00 IST