A reformist and balanced Budget

The 2015 Union budget of India was presented on the 28th February 2015. Read this opinion editorial piece to gain insights into the budget and the implications for business.

By Rohan Solapurkar

 

The first Budget of the newly elected Modi Government announced by Mr Arun Jaitley, the Finance Minister of India, has been lauded as an excellent Budget. Aimed at attracting more foreign investment and accelerating growth, this budget will pave the way for India’s future and place the country back on track to be one of the world’s fastest growing economies in the years to come.

 

Attracting more foreign investments into India

 

This Budget carries many positive changes targeted at encouraging greater foreign investments into India. The Finance Minister is in the process of simplifying and eliminating the regulatory hurdles and has announced a stable tax policy for India that is non-adversarial with no retrospective changes.

 

The rationalisation of different types of foreign investment is a good move. Firstly, the distinction between different types of foreign investments, specifically between foreign portfolio investments and foreign direct investments will be eliminated. In addition, the Sick Industrial Companies Act (SICA) and the Board for Industrial and Financial Reconstruction (BIFR), which were not fully playing its role will now be removed and replaced with a new Bankruptcy code based on global standards.

 

The most unexpected but welcome change is the reduction in corporate tax rate from 30% to 25% over the next four years – a strategic move, reflecting the vision of the Modi Government to make India’s business environment competitive with other countries. There are other countries in the region like Singapore and Hong Kong which have lower tax rates, but unlike India these are not manufacturing hubs. With the reduction in tax rates, lower business costs and a critical mass market, India will become a competitive place for doing business.

 

The promise of introducing GST from 1 April 2016 is likewise encouraging as the existing Excise and Service Taxes would be consolidated into a single state-of-the-art indirect tax system which will play a transformative role in the way the Indian economy would function. Foreign investors will also have much to cheer about with the reduction in withholding tax rates on royalty and fees for technical services from 25% to 10%, the deferment of General Anti-Avoidance Rule (GAAR) and greater clarity with respect to ‘indirect transfers’.

 

In addition, the Finance Minister is also committed to integrate 14 regulatory permissions into one approval process as well as set up an Expert Committee to examine the possibility of replacing the need for seeking multiple prior permissions with a pre-existing regulatory mechanism.

 

Finally, the concealment of foreign income and foreign assets as well as non-filing of tax returns and inadequate disclosure of foreign assets, which is now an offence punishable with rigorous imprisonment is a good move and will definitely assist in improving compliance.

 

Promoting growth within India

 

India has also recognised the need for accelerating investments into infrastructure and has allocated about Rs 70,000 crore (approximately US$11.5bn) to rail, road and irrigation projects. Tax free infrastructure bonds are also proposed to be introduced, which would help raise the funds required for the investments into the much needed infrastructure sector. The Finance Minister also announced the setting up of five ultra-mega power projects in a plug and play mode. His intentions were clear that the project would be awarded once all the approvals for setting up the power plants were obtained and the entire process would be very transparent. This emphasis on investments in infrastructure comes through very clearly in the Budget and is one of the main agenda points of the Modi Government.

 

An interesting area that was introduced in this year’s Budget is the monetisation of gold. No other Finance Minister has ever introduced a scheme such as this, which allows depositors of gold to earn interest. It will also be very interesting to see if India will eventually introduce a sovereign gold bond as an alternative to purchasing gold.

 

However, there is likely to be discontentment among individuals with regard to personal taxation. Not only was the basic threshold not enhanced, service tax was increased from 12.36% to 14%, which would mean a higher cash outflow for individuals.

 

On the whole, this Budget provides the foundation for the future of India. To put in sporting terms for this cricket-loving nation who are currently engrossed in the World Cup, it is a Budget which lays the foundation for the ‘slog overs’ rather than trying to hit for the boundaries right from the start.

 

The author is a Director of Taxes with Deloitte Singapore and the views expressed are his own.

 

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