Budget Analysis 2016 – Vision for revival of Bharat
Amid huge speculations, finance minister Shri Arun Jaitley has presented third budget of NDA government and tried to maintain a sound balance between mounting expectations and economic reality. On the basis of recommendation of finance commission, allocation to the state governments has increased since last year (23% of overall receipts given to states in this budget) and despite of the tough situation, government has contained the fiscal deficit target to 3.5% for FY 2016-17 without compromising the economic growth. Macroeconomic indicators suggest that the despite of weak global economic scenario, India remains a bright spot among the emerging economies and the budget proposals are expected to keep that momentum.
Finance minister has unveiled the “Transform India” agenda and priority has been given to agriculture and rural development. As per 2011 census agricultural sector employs 52% of overall workforce and thus provide largest number of employment in unorganized sector. Farmers were suffering after back-to-back droughts and a vast country like India can’t imagine to grow without growth of agro sector. Poor growth of agriculture over the decade resulted into large scale migration which created its own problems in metro and tier II cities. Now the government seems to be concerned to address the plight of farmers and now the vision of rural development is not limited to food security but the aim is to increase the farmer’s income and the government has set an ambitious target of doubling their income in next five years.
Government has taken a holistic view and barring a few all the priorities have been addressed in the budget proposal. There is adequate focus on infrastructure development, fiscal discipline, taxation reforms, and financial sector reforms. Some of the major initiatives/announcements are as below-
- Growth of agricultural sector – Although our economy is doing good in terms of GDP growth but a growth without employment is meaningless and it has its own share of problems including rise of social evils. Data suggests that employment per factory is declining and budgetary support for agriculture & allied activities increased from Rs. 9,795 Crores in FY 2014-15 to Rs. 19,394 Crores in this fiscal. In addition to this there is an allocation of Rs. 20,000 Crores towards irrigation fund also. Government has also announced that it plans to cover all the farmers under soil health card scheme by 2017 which will be a major step to help the farmers increase the agricultural productivity by choosing the right kind of crop for their land.
Government has set a target of allocating Rs. 9 lakh Crores towards agricultural credit and Rs. 5,500 Crores has been set aside towards crop insurance under “Prime Minister Fasal Bima Yojana” to provide aid to farmers in case of any contingency. In addition to this Rs. 15,000 Crores have been allocated towards interest subvention to reduce the loan repayment burden and this is a welcome step to address the farmer’s concern. Ambit of crop insurance is now enlarged to cover more amount by removing artificial capping which was part of earlier scheme.
Finance bill proposes to impose “Krishi Kalyan Cess” @0.5% on all the taxable services and this amount will be used only for the betterment of farmers. It may be noted that growth of agricultural sector will increase the rural consumption which will help to achieve the desired growth.
- Focus on rural development- Bharat’s soul remains in villages and rural development is required if we want to grow as a country and wish to establish our-self as a world power. On the basis of finance commission’s recommendation state governments share in total receipts was already increased since last budget (states share is 23% in current budget) and now 2.87 lakh Crores have been set aside as “Grant in Aid” to gram panchayats and municipalities which is jump of 228 percent compared to the previous five-year period.
Government has not only increased the allocation from Rs. 73,270 Crores to Rs. 87,765 Crores (an increase of ~20%) but various new schemes have been announced to change the rural landscape. An ambitious target of 100% village electrification by May 2018 and covering additional 6 Crore additional household under “Digital Literacy Mission” in next three years is set. Government’s plan of digitation of land records in villages will reduce the litigation.
Budget proposes to open 3,000 medical stores to provide quality medicines at affordable prices and health cover of Rs. 1 lakh per family will also be provided. From a completely practical standpoint, litigation and illness of family member’s causes severe stress on financially weak families and these steps will provide financial security to the much needed category of our population.
It appears that benefits of voluntary giving up of LPG subsidy will be passed on to the needy sector as budget proposals states that LPG connection will be given to poor household on massive scale. Government actions seems to be directed towards fulfilling Mahatma Gandhi’s dream of village empowerment.
- Infrastructure development- Success of “Make in India” and other initiatives is dependent on robust infrastructure and previous financial year was a great success on this front. Nearly 10,000 Kms of highways were awarded in the previous year and ~97% of the power generation targets for FY 2015-16 were achieved by January’16. Overall Rs. 2.21 lakh Crores have been allocated towards infrastructure sector (this amount doesn’t include Rs. 19,000 Crores towards “Pradhan Mantri Gram Sadak Yojana” which will be used to develop rural connectivity). In order to meet the funding requirements for infrastructure sector NHAI will issue tax free bonds of Rs. 15,000 Crores and LIC will guarantee infra bonds which will improve the credit rating of the instrument.
Considering the importance of water transportation ministry has allocated Rs. 8,000 Crores towards “Sagarmala Project” which will help to utilize this untapped potential. Tax incentives have also been announced for startups.
- Interest payout in overall expenditure and deficit- Finance minister has done a commendable job by keeping the fiscal deficit within the targeted limits without cutting down the expenditure and therefore deficit targets are met without compromising the economic growth. However interest payment is an issue which is evidenced from the fact Rs. 533,904 Crores are raised through “Borrowings and other liabilities” but Rs. 492,670 is incurred on “Interest expense” which indicates that government is borrowing not to create any corresponding asset but to meet or interest obligation. Fiscal deficit target is kept at targeted level of 3.5% and if we exclude the interest payout then the deficit (which is called primary deficit) comes down to 0.3% and therefore government has to think of the ways of reducing the interest cost in coming years.
- Capitalisation of banks- Government has allocated Rs. 25,000 Crores towards capitalization of banks and it is needed due to mounting bad loans. Several public sector banks recorded large amount of NPA in the third quarter because significant part of the advances have become bad for recovery and this amount is expected to increase in fourth quarter also. Although this amount doesn’t seem adequate to meet the requirements but still it’s a welcome move for financial sector coupled with introduction of “The Insolvency and Bankruptcy Bill, 2015”.
Budget proposals include raising of Rs. 56,500 Crores through disinvestment of PSUs and from a completely economic standpoint this amount should be used for asset creation only which can be in the form of capital infusion in banks, infra development etc. and disinvestment proceeds should not be used for meeting operational expenses.
- Income declaration scheme for domestic black money- Government has plans to introduce voluntary disclosure scheme for domestic black money. Tax payer will have to pay overall 45% tax & penalty and he will get immunity from prosecution. The government wants to give a final opportunity to come clean and detailed rules are yet to be issued.
- Dispute resolution scheme- Various retrospective amendments were made in the year 2012 but as a country we are still facing the heat of those amendments in the form of overall image and arbitrations are still going on in those disputes. Both prime minister and finance minister had assured that retrospective amendments will not be made and now the government has moved one step further and all the disputes which are on account of retrospective amendments can be settled under this scheme without paying any interest & penalty (i.e. just tax demand is to be paid). Vodafone and Cairn can chose to go for this option.
- Key direct tax proposals- Some of the key tax proposals are:
- Taxation of startups- As promised earlier, 3 years tax break has been given to startups but these entities will be subject to MAT (minimum alternate tax) which should have been avoided. Similarly section 56 relating to fair market value of shares in a private company should have been amended to exclude startups.
- Dividend tax- It’s a tax on rich and an individual/HUF/Firm receiving dividend of more than Rs. 10 lakhs will have to pay tax @10% on entire dividend.
- Specific taxation regime for new companies- A newly setup company can opt to pay tax at a lower rate (i.e. 25%) subject to certain conditions which are mentioned under section 115BA.
- Controlled foreign corporations- In the previous year the government changed the provisions related to determination of residential status of companies and draft guidelines were released in December’15 posing a practical challenge for the assesse. Considering the practical difficulty its implementation has been deferred from next year.
- MAT on FIIs & foreign companies- It was a widely discussed issue and now the government has tried to put the entire controversy at rest by excluding FIIs and foreign companies having no permanent establishment in India from MAT perspective.
- Income from licensing of patents- Income from patent will be taxable at a lower rate of 10% provided patent is owned by Indian company. This move is aimed to promote R&D.
- TCS on car purchase and cash expenditure- It’s again a tax on rich who will have to pay upfront tax @1% for any purchase of motor vehicle exceeding Rs. 10 lakhs or any cash purchase of more than Rs. 2 lakhs.
- Deduction for infrastructure projects- Section 35AD of the Act has been proposed to be amended to included infra sector also for deduction which will help this sector.
- Deduction for housing developers- Section 80IBA proposes to allow hundred percent deduction to entities engaged in development of housing projects. This deduction is available for development of small houses which is part of poll promise of ruling party.
- Taxation of online services- Budget proposes to tax the revenue generated by foreign companies through online advertisement. However constitutional validity of these provisions may get challenged in future.
- Rationalisation of TDS – Government has considered the recommendations of Easwar committee report and TDS provisions have been rationalized (increase in maximum threshold/decrease in rates in various sections).
By: – Shshank Saurav (Chartered Accountant and Anti-Money Laundering Specialist