The 2nd Union Budget of the current government will be a defining document in 2015 as it is expected to lay down the framework for policy reforms to get the economy back on track. The most keenly watched figure in the budget will be the worrisome fiscal deficit and how the government manages to restrict it. According to data released by the Controller General of Accounts, the fiscal deficit during April-December has already crossed 100% of the FY15 budget estimates. The shortfall in tax revenues and disinvestment proceeds could see some major expenditure prioritisation by the Government during the remaining part of the fiscal year.
While there are challenges on fiscal deficit front, the precipitous decline in the global crude oil prices, benign inflation trajectory and the reversal in the interest rate cycle will be the three major positives for the government.
We expect fiscal prudence to be the central theme for the budget and would be watchful about how the government maneuvers public expenditure on manufacturing and infrastructure. Besides,rationalisation of the tax structure could be explicit given fiscal consolidation to be achieved. However, given the increased thrust on infrastructure development, allocation of funds towards this segment might see some enhancement.
Accepting recommendations of the 14thFinance Commission would bring about a fundamental change in centers’ area of policy intervention. It is likely that the share of states in the centre’s tax revenue would be increased significantly from the current 32% as per 14thFinance Commission’s recommendations. Greater devolution of taxes would provide more flexibility and power to the states in formulating their expenditure strategies. Politically, the increase could help the Government in resolving some of the pivotal issues between the centre and states towards introducing the Goods and Service Tax.
Sectoral Budget Expectation
The automotive industry faced one of the most challenging times last year. Although economic growth factors remain favourable for boosting demand for vehicles across sectors going ahead, the removal of excise duty relief in December 2014 may hit OEMs to some extent. The industry had welcomed Budget 2015 and the focused approach on infrastructure development. Industry’s expectations from the forthcoming Budget are high as it expects the policy measures to lead to creation of a favourable and stable policy environment.
We expect the auto components industry to benefit from appropriate policy support given the Government’s focused thrust on Make in India. The auto components industry is in favour of early implementation of Goods and Services Tax, and elimination of customs duty on certain raw materials/metals to make domestic auto components production more competitive vis-à-vis imports.
The year 2014 had not been a favourable one for the hospitality industry, with decline in average room rent due to the overall economic slowdown. Nevertheless, given the long term potential of the Indian market, the hospitality industry, particularly the hotel sector is on an expansion spree. Considering the huge capital investment requirements of the industry, the Hotel Federation expects hotels to be allowed a higher weighted deduction of 150% of the capital expenditure incurred in setting up new projects.
The government is expected to introduce several policy changes to successfully implement its three flagship programmes Digital India, Make in India and Smart Cities in the Union Budget 2015-16 and strengthen the growth of the Indian ICT (Information, Communication & Technology) industry. These include:
- In a move for successful execution of the “Make in India” initiative, rationalisation of inverted duty structure is expected, which currently favours the import of finished goods more as compared to the import of electronic components. Currently, India meets a significant proportion of its electronic component demand through imports and finished goods imports are taxed at lower rates than that of raw materials which restrict the domestic manufacturing of electronic finished products. Therefore, the Union Budget 2015-16 is likely to look at exemption of 4% Special Additional Duty (SAD) chargeable on all electronic components such as memory, chassis and battery used by the desktop/laptop manufacturers. This move would help in promoting the domestic manufacturing of the electronic goods specified under ITA (Information Technology Agreement) list proposed by The World Trade Organization (WTO).
- Incentivisation of the domestic manufacturing of the ITA bound goods which would potentially result in import substitution and lower the import bill. The budget is also likely to come up with modification and alternation in current norm related to Customs Special Valuation Branch (SVB) to fast track the proceeding of zero duty electronic goods imports.
- Extension of easy access to funds, operational incentives and hassle free regulatory framework for tech entrepreneurs, start-ups, and SMEs to venture into electronic component manufacturing.
- Additionally, measures for speedy projects approval are likely to be introduced to enhance ease of doing business in the country. This would attract fund from foreign manufacturer seeking to invest and set up electronic manufacturing unit in India.
The Government’s Make in India initiative and its thrust on expanding the share of manufacturing in India’s GDP has the potential to transform the fortunes of the MSMEs in the country. Amidst India’s evolving economic environment, MSMEs have been advocating revision of the basic structureof definition of MSMEs. The Government is likely to take adequate steps focusing on entrepreneurial skill development.
Oil & Gas and Petrochemical
Drop in international crude oil prices since July 2014 has reduced India’s oil import bill, thereby lowering the oil subsidy incurred by the government. Current global cues are pointing towards a continuation of lower crude oil price regime for the next few months. If this scenario plays out as expected, it would help in reducing the oil subsidy incurred by the government in FY16, compared to the previous fiscal.
- There is a need to relook the current income tax holiday under section 80-IB (9) of the Income Tax Act 1961. The current regime provides a tax holiday of seven years to hydrocarbon blocks awarded prior to 31st March 2011. Extension of tax holiday to contracts awarded after 31st March 2011 would help companies engaged in exploration of blocks awarded during 9th round of New Exploration and Licensing Policy (NELP IX) to contain their operating cost.
Indian Oil & Gas Exploration and Production (E&P) firms are increasingly looking to acquire hydrocarbon assets in foreign locations to reduce dependence on imports. Extension of coverage of Section 42 of Income Tax Act, which allows deductions in capital and revenue expenditure incurred by Oil & Gas EPC on exploration activities to include exploration of blocks in foreign destinations, would help this initiative. Currently, Section 42 covers only blocks within the borders of the country.
- There is a long standing demand from the industry to refund the service tax paid by Oil & Gas companies on services consumed during E&P activities. Since Oil & Gas exploration is a highly uncertain business, rationalization of duty structure governing the activity would help in improving investments into the sector.
- In a scenario when alternative hydrocarbon assets like Coal Bed Methane (CBM), Natural Gas (NG) and Shale Gas is gaining prominence, there is a need to formulate policy measures to encourage investments in the sector. Inclusion of NG and CBM under the broad category of “Mineral Oil” would be a step in this direction. Such a move would help companies involved in exploration of these hydrocarbon asset to avail the tax holiday granted under Section 80-IB of Income Tax Act.
- There is a need to improve the petrochemical production infrastructure in the country as it is one of the key raw materials for a wide range of consumer products. A reduction on import duty on naphtha to 2.5% – which is a key raw material in petrochemical industry – would help reduce raw material cost in the sector.
Given the shortage of skilled manpower in the Indian retail sector, with the Government’s thrust on Make in India, announcements related to skill development would benefit the retail sector. The sector continues to demand an industry status for itself as also early implementation of GST. The players have also expressed an urgent need to create a retail policy that addresses FDI in a manner that it creates a level-playing field.
ITA allows zero-tariff and duty-free trade in hundreds of electronic products.