Daily Archives: February 12, 2015

12Feb

Union Budget 2015-16 Pre-Update: Loss in Delhi polls will not slow down eco reforms: Jaitley

The defeat of the BJP in the Delhi Assembly elections will not slow down the pace of economic reforms, Finance Minister Arun Jaitley asserted today. In his first comments after the near-whitewash of his party in the Delhi polls, he said the government was determined to go ahead on the path of economic reforms.

“The fact that four (state assembly) elections have been won and one has not been won is absolutely no ground for believing that there will be any slowdown on the path which we have undertaken,” he said while addressing a joint press conference with US Treasury Secretary Jacob Lew at the end of 5th Indo-US Economic and Financial Partnership meeting.

Jaitley’s comments assume significance against the backdrop of experts raising questions whether the government would resort to populism in the wake of electoral reverse. The kind of reforms that the government has been undertaking, he said, would bring in investment, generate jobs, improve the quality of life of people and also help in alleviating poverty. Jaitley is scheduled to present his first full budget for 2015-16 on February 28 which among other things will unveil government’s strategy to boost economic growth.

The BJP suffered a crushing defeat in the Delhi Assembly election winning only three out of the 70 seats. Ever since its spectacular victory in the May Parliament elections, the BJP notched power in Haryana, Maharashtra, Jharkhand and emerged the second largest party in Jammu and Kashmir. Since coming to power in May last, the government has taken a slew of economic reforms, especially easing of the foreign investment norms.

12Feb

Union Budget 2015 India Predictions: Removal of MAT & inverted duty structure to boost infra cos

Infrastructure would be one of the major focused sector in Union Budget 2015-16. Removal of MAT & inverted duty structure and more infrastructure funds would be major drivers for infrastructure sector.

Currently, MAT nearly negates the benefit of Sec 80 IA, removal would help bump up returns on infrastructure projects by deferring cash outflows, say the brokerage in its expectations note. Removal of (or reduction in) the inverted duty structure in some capital goods sector would help Make in India theme (announced by Narendra Modi last year), by making value addition more profitable.

If the government announces further setting up of infra funds, then that would help companies get more funds.

12Feb

Union Budget 2015 India Expectation: Lift cap of 49% FDI in Indian security industry

Union Budget 2015-16 is due for February 28 and the expectations are building up, being it the first of the series by Shri. Narendra Modi Government. Budget 2015 should take various measures to give boost to Indian security industry. These measures include increase in FDI in security industry, improve working conditions of the workforce and achieve 100% statutory compliance.

An investment-friendly atmosphere along with transparency and predictability in tax policies would further fuel a sustainable growth trajectory for India. With IMG lowering the global growth rate for 2015 to 3.5 in its recent Wold Economic Outlook Update and the European Union, India’s largest trade partner, slipped into recession, the new government will be hard pressed to go all out to make sure that our country grows over 6 percentage. With the inflation and the current account deficits falling to the comfortable zones, I believe this is an achievable figure.

Skill development, creating more employment opportunities for youth, improving basic amenities and higher emphasis on capital expenditure on infrastructure should be the key focus. Furthermore, the finance minister’s indication not to burden the middle class with additional tax is welcoming.

12Feb

Union Budget 2015 India Expectation: Clarity on treaty benefits provisions needed

Specific safe harbor provision needs to be introduced to make sure that fund managers of offshore funds being based in India does not result in such offshore funds being regarded as tax resident of India, thereby compromising the eligibility to claim treaty relief in respect of capital gains in any manner.

The financial services sector in India is growing rapidly. This is evidenced by buoyant capital markets, strengthening of the Indian Rupee, Reserve Bank of India’s (RBI) action on interest rates and increased foreign investment in the country.

The Finance Minister, Mr. Arun Jaitley, is set to announce the Union Budget 2015 in a few days. In the promise of better times by the Modi government, the financial services sector expects some of the key changes discussed below in the upcoming Budget.

Capital markets/Private equity Funds/Venture Capital Funds

Considering the positive tone set by the new government to make India a hub for global investments, investors are looking forward to a predictable tax regime in India. The recent decision of the government to accept the Bombay High Court order in the Vodafone tax case is a step in this direction and is expected to go a long way in boosting investor confidence.

The GAAR provisions are proposed to be implemented from 1 April 2015. The primary concern on introduction of GAAR is that the anti-abuse provisions are too broad and subjective. Considering the government’s initiative for improving business sentiment and promoting foreign investment, it may be prudent for the FM to defer GAAR for a few years and have clear guidelines in place as regards its applicability.

The indirect transfer provisions, as are drafted currently, do not provide for any exemption for transfers done by FIIs/ FPIs/ minority / small shareholders whose shareholding may not result in indirect change in ownership, capital, control or management of the Indian company. Accordingly, it would be necessary to get a threshold which would exempt FIIs / small investors from the preview of indirect transfer provisions.

Time and again, treaty applicability has been challenged by Indian tax officers and they have also held the payer entities liable for non-withholding of tax. This has become a major road block for foreign investment in India. It would be helpful if the FM comes up with clear provisions regarding applicability of treaty benefits, which would deter the tax office from challenging the tax treaty without any strong reasoning.

Safe harbour provisions were introduced in last year’s Budget by specifying that securities held by FIIs and FPIs shall be regarded as capital assets. Similar provisions i.e. characterisation of income as capital gains need to be introduced for private equity funds because largely the investment made by these entities is long term in nature. Also, specific safe harbor provision needs to be introduced to make sure that fund managers of offshore funds being based in India does not result in such offshore funds being regarded as tax resident of India, thereby compromising the eligibility to claim treaty relief in respect of capital gains in any manner.

The domestic fund industry faces several tax issues such as complexity of trust taxation laws, taxation of fund as an Association of Persons (AOP), TDS credit issues, etc. It would be helpful if a clear tax pass through status is extended to all SEBI registered AIFs instead of restricting it to only Cat I AIFs registered as Venture Capital Fund. Also, in order to encourage availability of a large pool of capital for PE/VC investments in start-ups, SMEs and growing companies, the government should encourage insurance companies, EPFO, Pension funds and charitable trusts to invest in AIFs by making suitable regulatory amendments.

Banks & Non-banking Financial Services (NBFCs)

Banks and NBFCs are required to make a provision for Non-performing assets (NPA) as per the RBI guidelines. Currently, the provision for bad and doubtful debts (if made as per RBI directions) made by banks are allowed as a deduction to the extent of 7.5% from the gross total income and 10% of aggregate average rural advances made by them. However, such a deduction is not available to NBFCs. This discrimination should be done away with as it severely impedes the functioning of NBFCs.

In order to make securitisation trusts a viable investment option for Banks/ NBFCs, expenditure incurred in connection with exempt income earned from a securitisation trust should not be disallowed. Alternatively, the distribution tax levied on such income should be abolished and dividend be taxed in the hands of the bank/ NBFC so that the cascading effect of dis-allowance in respect of exempt income which has already suffered distribution tax is removed.

Insurance Sector

The insurance industry has a long gestation period. Accordingly, the limit of eight years for carry forward and set off of business losses is not sufficient. Considering the importance of insurance for the Indian economy, it should be allowed to carry forward and set-off unabsorbed business losses for an indefinite period or at least 10-12 years. Further, a level playing field should be provided to the general insurance industry vis-à-vis the life insurance industry. Clarity is also required on withholding tax issues on policyholders’ payout in case of life insurance companies.

The above issues, if addressed in the forthcoming budget, would provide the much needed tax certainty to the financial services sector and boost confidence in the Indian financial markets.

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