Daily Archives: February 24, 2015

24Feb

Union Budget 2015-16 India Suggestion : Government should give more tax sops to insurance

Union budget is the biggest opportunity for the Government to showcase its vision for the economy and industries. Life insurance industry can help channelise small savings into long term investments required for economic growth. Government should offer tax incentives to life insurance industry.

Upcoming first full year Union Budget of the Finance Minister, Arun Jaitley, would be carefully matched, as it is expected to provide directional clarity on the Modi Governments economic agenda. This is the time and the biggest opportunity for the Government to showcase its vision for the economy and industries.

The budgeted fiscal deficit of the centre is 4.1% of the GDP for the current financial year. In his last budget speech, the Finance Minister, had set the fiscal deficit target of 3.6% and 3.1% respectively for FY 16 and FY 17. Which given the need for providing growth to the current economy, may have to be revised. He may continue to reduce fiscal deficit through control on unproductive Government expenditure and increase in revenue.

A boost in the infrastructure development is critical for giving a minimum 100 bps push to the GDP growth rate. Current Account Deficit is another area the Finance Minister should focus on. During FY 15 a sharp fall in the international crude price and other commodities, decline in import of gold, helped improve trade deficit. However to further improve the status on Current Account Deficit; the Government needs to provide some boost to the exports. A competitive exchange rate of the Rupee and sharper policy focus on sector specific issues will help increase the country’s exports. A clear roadmap to support “Make in India’ will make the country an attractive destination for long term foreign capital. This will help boost the manufacturing sector which is proving to be a drag to GDP growth rate of the country. Tax reform in the coming budget is an urgent need. In this direction, push for GST is required. The GST will create a single, unified Indian market to make the economy stronger besides boosting tax collections.

In India household savings rate form a large part of the overall savings of the country. There is a need to channelize small savings for funding infrastructure development. Life insurance through its extensive retail reach and long term orientation can play a critical role as an aggregator of small savings, as separate limit in section 80CCE for deduction up to Rs. 1.5 Lacs for life insurance premium payments should be considered. We also expect the deduction limit under section 80D for health insurance premium to be increased from Rs. 15,000 to Rs. 50,000.

With growing population above the age of 60 years, and limited state supported social welfare schemes there is a need to promote private pensions in India. World over private pensions are dependent on tax incentives. The Government has made a right beginning by extending specific tax breaks under section 80 CCD(2) for NPS. It would be a reasonable ask that the same benefit be extended to IRDAI approved pension plans offered by life insurance companies.

24Feb

Union Budget 2015-16 India Expectations : Over 56% polled expects a radical Budget

It’s less than six days to go for the Union Budget and expectations are running high. In an interview to CNBC-TV18, Pallavi Bakhru, director, Grant Thornton, said the euphoria quotient has never been higher.

Discussing the firm’s pre-Budget poll on India Inc’s expectations from Finance Minister Arun Jaitley, Bakhru said that 56 percent of the respondents see it to be radical Budget.

According to her, people are keen on the roadmap to GST in the indirect tax front, while on direct taxes the majority sees reduction in income tax and higher exemption in the housing loan interest.

24Feb

Union Budget 2015-16 India Pre-Update : Time to gear up tax regime for outbound investments

Indian companies are shopping assets worldwide. Foreign investors to are entering into various transactions in India. There are issues such as retrospective taxation that has haunted investors involved in such transactions. Budget should put in place a robust tax system to address investors’ fears.

With the changing landscape of Indian businesses, we are witnessing a significant and rapid geographical shift in doing business. Recent times have seen the Indian multinationals regularly flexing their muscle abroad. Not only has the last few years seen established Indian business houses making significant outbound investments into capital intensive sectors such as Energy, Telecom and Technology but recent times have also seen young home grown Indian companies itching to create a global presence within just few years of their operations. These illustrations are demonstrative of the speed at which the Indian economy is flipping over from being an inbound to an outbound centric economy.

The question then arises is whether we are on course to establish ourselves as an outbound centric economy (like many developed economies like USA, Japan and China). If that holds true the next obvious question would be whether our tax regime is geared for such a potential flip? Will Budget 2015 address this question?

Lessons from the past

Just to recap, the opening of the Indian economy had seen a flood of inbound investments into India. While the opening up of economy provided a great impetus to the GDP growth rate of the country, lack of potential clarity on tax laws gave rise to the multi-billion dollar tax litigations. This battle has left the victors and the losers both badly bruised. But the dust seems to have settled, with the current Government making every effort to restore the confidence of the foreign investor.

Need for a taxation framework governing outbound investment

Taking a cue from the past, the Government must set the record straight before the flip happens rather than taxing outbound investments retrospectively. The consequences for failing to do so, may be far direr. Unlike inbound investment into India, the subjects of outbound investment are inevitably Indian resident. This factor may prove very costly to the Government, as losing the confidence of your own resident may break the backbone of the Indian economy itself.

India can take a cue from developed economies, such as the United States, in which the predominant form of investment is outbound. The United States has detailed regulations governing outbound investment such as (1) Check-the-box regulations governing foreign entity classification, (2) Subpart F regulations governing passive income earned by Controlled Foreign Corporations (CFCs) abroad (3) Various rules and regulations governing corporate reorganization of offshore subsidiaries. One does appreciate that it may not be in India’s interest to copy and paste its way through. Having said that, it may be useful for the Government to take a look at these rules and regulations and customize them to fill the vacuum in the current tax regime.

Current Indian tax regime on outbound investment

A frail attempt at regulating taxation of outbound investment was made in the Direct Taxes Code (DTC). The DTC saw (1) regulations pertaining to passive income earned by CFCs located in low tax jurisdictions, (2) sparse discussion on taxation of cross border mergers and (3) the all-encompassing General Anti-Avoidance Rules (GAAR). As it stands currently, the DTC is yet to see the light of day. With this, the outbound taxation space is left with a large vacuum. Add to this, the provisions of GAAR are likely to be introduced from 1 April, 2015. One hopes that this vacuum will not be filled with the exercise of discretionary power of the Revenue Authorities, thereby killing the appetite of Indian multi-nationals who have finally started creating a global presence.

Expectations from the Budget

With the Union Budget just around the corner, Indian multinationals are hoping for a robust and comprehensive tax law pertaining to outbound investment which could include the following:

  • Rules governing foreign entity classification. With the expansion of Indian business into various countries, the Government should lay down detailed guidelines for foreign entity classification. For example, would a US Limited Liability Company (which has the characteristics of an Indian corporate but is a pass through entity from a tax perspective) be considered as a partnership or a company for Indian tax law purposes? So far, this characterization has been made on an ad-hoc basis by Indian Courts.
  • Rules defining the taxation of passive income earned abroad. Most developed economies (like United States, Japan, etc.) have laid down rules governing the taxation of passive income through their CFC regime. In the absence of detailed guidance in India, there is an apprehension that GAAR provisions would be invoked arbitrarily and in-discriminately in all cases of passively earned income.
  • Rules governing foreign business reorganization: There is little guidance on foreign reorganisation of businesses. In the fast changing world of multinational businesses, companies need to be flexible and supple. Law is no different. Robust rules must be laid down to give Indian multinationals the flexibility to reorganize their global operations quickly, without compromising on their tax dues.

Conclusion

A mature and futuristic tax regime for outbound investments requires the Government to be the proverbial “honey bee” and change its attitude from being a mere tax collector to a tax regulator driven with the objective of providing tax certainty. If we truly want to encourage home-grown promoters to create a global presence, the best time to introduce a healthy tax framework governing outbound investments is now. Will the Government make it happen? Like all other answers, this answer too lies in the Finance Minister’s briefcase!

24Feb

Union Budget 2015-16 India Expectations : Pre-Budget expectations for Agri Commodities

Union Budget Expectations for Agri Commodities

Exemption of CTT for processed agricultural commodities to ensure a pickup in volumes in the futures market

Passing on benefits of a fall in petrol/diesel prices to ensure reduction in freight charges

Investment funds in warehousing sector to prevent wastage of food

Bank accounts for farmers for each and every household for direct transfer of subsidies and loans

Subsidized loans to farmers and safeguarding them from crop losses through crop insurance

Availability of quality agri inputs like fertilizers, seeds and advanced technology inputs

Providing irrigation facilities and electricity at cheap rates to farmers

Upgrading weather forecasting system – IMD, for accurate monsoon forecasts which could enable farmer to take informed decisions.

Investments in transportation and infrastructure like roads and railways to reduce transportation costs for farmers for their produce

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