Budget 2016: How Govt Can Address Tax Concerns


The global economic recovery has been uneven and wobbly over the course of the last year. Even as the US economy posted a steady revival, sluggish economic growth in the EU has raised expectations of additional policy support while fault lines have emerged in the Chinese growth story. Amidst all this, the Indian economy has remained an attractive destination with high single-digit growth rates. That said, India has not been insulated from the global tumults; the growth forecast for 2015-16 has been revised downward from the 8.1-8.5 percent range in February 2015 to 7.6 percent in December last year. Investments have failed to post a robust expansionary trend while corporate earnings have fallen short of expectations.

Rural demand has been suffering from two consecutive seasons of drought. Against this background, the Union Budget of 2016 -17 will be presented on the February 29, 2016.

Last year’s Union Budget managed to address the needs of the poor, the middle class as well as the industry. Measures to introduce an effective subsidy distribution, improve farm yield and income, create a national agricultural market, and introduce a multi-pronged social security net for the poor ensured that India’s growth was an inclusive and sustainable one. Meanwhile, the Budget took initial steps toward improving the conditions of doing business in India, which are already bearing results. For instance, time taken to offload goods at ports has fallen from 48 to 10 hours. Overall, India has moved up four spots in the World Bank’s global ranking on ease of doing business. Other industry-friendly announcements included a bankruptcy code of global standards, a single window for multiple permissions, deepening of financial markets to increase access to funds, and, importantly, the roadmap to reduce the basic rate of corporate tax.

This year, however, a lack of fiscal room may force the Government to avoid a populist budget and make trade-offs between various stakeholders. It is likely that the Government will show continued adherence to the fiscal consolidation targets while boosting domestic demand, especially rural, and removing the roadblocks in the way of higher private investment momentum, particularly in infrastructure. The focus on domestic consumption and investment is very important in light of a subdued outlook for exports and global expansion.

 GST: A Game Changer for Revenue Targets

The magnitude of Government tax revenues in 2016-17 will largely depend on whether the goods and services tax (GST) is implemented or not and the framework of this indirect tax. If implemented, it will help the Government by boosting revenues directly as well as through the multiplier effect – NCAER estimates that the GST will boost growth by 2-2.5 percent and, thereby, increase tax revenue collections. To this end, the parliamentary session beginning from the 20 February, when the bill will be introduced in the Rajya Sabha, will provide early indications on whether the political logjam will be successfully broken in time for the Budget announcements.

There are some other positive factors that will support revenue collections in the coming fiscal. They are:

- The budget is expected to announce measures to address the heavy leverage of corporate entities and the non-performing assets (NPAs) of banks. Measures to restructure or write down loans will act as a stimulus and help corporate activities to pick up. This will result in higher corporate tax revenue collections in the next fiscal.

- An increase in the pay and pension of Government employees and, if old patterns are to be followed, a cyclical upturn in agriculture resulting in some recovery in rural demand and continued urban demand will provide a modest boost to revenue collections.

- The series of excise hike on petroleum and diesel introduced since early November 2015 is expected to fetch around close to INR 700 Billion in the next fiscal.

- The Center can increase its non-tax revenue and non-debt capital receipts by auctioning premium 700 megahertz band of airwaves during 2016-17. The successful spectrum sale in 2014-15 generated INR 1.1 Trillion in terms of revenue for the Government.   

- The Government is also expecting to garner additional revenue of INR 2.4 Trillion from the Reserve Bank of India (RBI) in the form of special dividends. In June 2015, the central bank paid INR 658.7 Billion as dividend – an increase of 25 percent over 2014-15. With the special dividend, the total amount in 2016-17 could be much higher.

Disinvestment Target to be More Realistic in 2016-17

With the prospects of disinvestment target being unmet this fiscal and the markets expected to remain subdued through the next fiscal, the Government is likely to scale down its disinvestment targets in the budget for 2016-17. 

The Government has so far only been able to raise INR 128 Billion through disinvestments in public sector units during April-October 2015-16 (18.4 percent of the target) and is unlikely to raise more than another INR30 Crore in the remaining months of this fiscal. At around 22 percent of total, revenue collection from disinvestments is expected to be well short of target and continue the streak of missing disinvestment targets since 2010-11.

This year, a realistic target with the political will to undertake the sale of big ticket stake in public sector units in a staggered manner is what is required to improve the Government’s performance in this area.

 Pace of Public Expenditure will be Restrained in 2016-17   

The Government is likely to curb public spending in fiscal 2016-17. Having said that, the quality of expenditure is expected to continue improving with CAPEX expected to be 20-25 percent higher than the current fiscal. 

- Investment in more infrastructure projects is possible to benefit from the falling global commodity prices.

- For 2015-16, the budget had estimated total CAPEX (including loan disbursements) at INR 2.4 Trillion, about 25.5 percent higher than 2014-15. The focus was on increasing outlay for roads and railways by INR 140 Billion and INR 100.5 Billion, respectively. The public sector CAPEX was also higher by INR 808 Billion in the current fiscal. In 2016-17, there may not be a significant jump in this segment. What is more likely is the shifting of expenditure for non-productive to productive areas.

-  Meanwhile, managing revenue expenditure will remain a challenge with an additional burden of the 7th Pay Commission and One Rank One Pension (OROP) estimated at INR 740 Billion and INR 800 Billion, respectively.

Fiscal Deficit Target Likely at 3.5 percent

Looking ahead, 2016-17 requires a careful planning of growth-centric spending to avoid a slippage on fiscal consolidation targets. As per the consolidation targets, the fiscal deficit needs to be tightened by 0.4 percent of gross domestic product (GDP) to be 3.5 percent of GDP. However, this will face considerable headwinds.

·         The implementation of the 7th Pay Commission is estimated to impose an additional burden of 0.65 percent of the GDP to expenditure.

·         The windfall subsidy gains for the Government, which arose from record low international prices – estimated at around 1-1.5 percent of the GDP in 2015-16, will taper off as global commodity prices stabilize in 2016.  

While relaxing the fiscal consolidation target in order to keep up the pace of public investments and sustain the Indian growth story is an option, it is likely to result in a negative review from the credit rating agencies and impact the Government’s credibility. Already the medium term fiscal targets have been extended by a year during the last budget. Any further relaxation could result in a sovereign rating downgrade, push up borrowing costs, and act as a drag on corporate growth plans. Likewise, making a cut on the much-needed public sector investment to meet the fiscal target is not advisable.

Instead, implementing the pay commission provisions amounting to INR 1 Trillion over the course of two years is advisable. To this end, the first ever formation of an empowered committee of secretaries by the Center to look into this is a step in the right direction. Other measures to improve the tax collection systems, widen the tax base, close loopholes for tax evasion, bring the black economy under the tax net, and make a better plan for disinvestment and strategic sales should help. All in all, the Government is likely to keep the fiscal deficit target at 3.5 percent of the GDP in 2016-17.

TDS Relief for Tax Payers

It is hoped that the Government will consider rationalizing tax deducted at source (TDS) as per recommendations of the R V Easwar Committee to make TDS more tax payer-friendly. This will have a significant impact for small income tax payers. Nearly 65 percent of the personal income-tax collection in India is being raised through TDS.

-  One of the suggestions is to reduce the TDS rates in case of interest and commission for individuals and Hindu Undivided Families (HUF) to 5 percent from the current 10 percent.

-  The threshold limits for TDS should also be revamped:

o The panel has suggested increasing the annual limit for TDS liability on payment of bank interest to INR 15,000 from the current INR 10,000.

o  The annual limits for TDS liability for payment of interest on securities and on interest on National Savings Scheme accounts is proposed to be raised to INR 15,000 from INR 2,500, while that for rent income is suggested to be hiked to INR 2,40,000 from INR 1,80,000.

- In an effort to help small businesses and sole proprietorships, the committee has recommended changes in the presumptive scheme, wherein turnover threshold for mandatory audit of the books has been proposed to raise from INR 10-20 Million  for businesses and INR 2.5-10 Million for professionals. It has also been proposed that under the presumption scheme, businesses should not be required to maintain a book of accounts. These recommendations are supportive of the Government’s focus on start-ups and are likely to be taken up.

-  In terms of tax simplification, refunds should be made on time and a penalty of higher interest rates should be levied in case the tax departments delay the refunds beyond six months.

- The committee has recommended that stock trading gains of up to INR 0.5 Million be treated as capital gains and not business income.  

Pro-industry Announcements Expected in Budget 2016-17  

-  It is a foregone conclusion that the Government will dismantle various incentives — often the reason for tax disputes — for companies as it starts reducing the corporate tax to 25 percent from 30 percent over the next three years. According to the finance ministry, profit-based tax sops, also called tax incentives, for businesses venturing into new and long-gestation areas such as oil exploration or refining, power generation, and infrastructure will be phased out. At a higher level, what is important is that there is a clear year-wise roadmap to phase out incentives in a calibrated manner. This will help to usher in a uniform, effective, and non-adversarial tax regime.

- Equally, qualitative measures like providing clarity on tax policy and improving the administrative structure will improve business sentiments.

-  The Government is expected to ease rules for offshore fund managers moving to India and relax conditions for them to avail of tax exemptions to increase foreign investments in the country.

- To promote special economic zones (SEZ), the Government is likely to remove the minimum alternate tax (MAT) levied on them. Currently, MAT is levied at 18.5 percent on the book profit, with the effective rate touching 20 percent.

-  Capital markets could get a big boost in the budget for 2016-17, with the Government contemplating measures to channelize domestic savings into high-quality equity and debt investments.   

- Addressing inverted duty structures and rationalization of the CENVAT credit scheme will also aid industrial growth.

Sectoral Expectations Infrastructure Sector

The Government has paid special attention to infrastructure investments in the current fiscal with investments during April-November of 2015-16 increasing by 30 percent to INR 1.59 Trillion, as compared to the same period in the last fiscal (2014-15). Given the lack of private sector investments, the Government is expected to keep up its pace of investments in this sector.

- Capital expenditure is expected in key sectors such as roads, railways, irrigation, power, low-cost airports, and inland waterways development.

- The union budget of 2016-17 is also expected to focus on Smart City investments in the 20 cities shortlisted so far. An overall investment of around Rs 508 Billion has been marked for the next five years.  

Financial Sector

The high NPAs in the banking sector are a big source of worry for India Inc. and the economy at large. In a move to tackle the problem, the Government pumped Rs 700 Billion in 2015 to recapitalize state-run banks. The Government is expected to release more funds for the recapitalization of the public sector banks in the coming budget. Furthermore, the budget is expected to provide direction on addressing the high level of NPAs in the banking system.

- The sector expects an increase in the tax exemption limit for savings to Rs 0.25 Million. This will help to promote household savings in the economy, which have fallen from 40 percent in 2011-12 to 32 percent in 2013-14.  A lower saving will have an adverse impact on availability of money with the banks for lending purpose.     

- To increase infrastructure financing in the country, banks are hoping that the Government will allow them to issue off-shore rupee bonds.

- The Government needs to decentralize public sector bank boards to improve their performance and make them competitive. The boards need to be given the freedom to set compensation structures and performance measures for their senior executives.

- It would be good if the stock broking community is recognized as a part of the investment industry. With one of the world’s largest number of intermediaries, this move will help the Government’s plans to set up an international financial center in the country.

Real Estate Sector

The real estate sector contributes nearly 6 percent to the GDP. However, sluggish demand, rising inventory levels, and weak sentiments have pulled down the Indian realty market in 2015. According to Liases Foras Research, unsold stock increased by 18 percent between Q2 FY15 and Q2 FY16, while new residential launches and sales declined sharply in 2015, the lowest since 2010, across top eight property markets in India. 

- The Government can start with the implementation of Real EstateRegulatory Authority (RERA) to help curb corruption and enhance transparency for customers.

- Doing away with the dividend distribution tax (DDT) in the upcoming budget will promote Real Estate Investment Trusts (REIT) and give financial protection to home buyers for delay in project deliveries. So far, the announcement of the REIT has not translated into a single REIT listing due to the existence of DDT.

- To promote buying, the real estate sector is expecting the Government to increase the tax deduction limit for housing loans, especially for buyers in metropolitan cities. The current limit of INR 0.2 Million is insignificant in cities like Mumbai, where most houses are priced at above Rs 10 Million. It is also expected that the budget will provide incentives to encourage affordable housing under its target of housing for all Indians by 2022. Tax benefit should be increased from the existing limit to Rs 0.3 Million.