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What Corporate India Expects From Union Budget 2017

This year's budget is being presented in the background of demonetisation, a major decision the government has taken to curb the black money problem

The first major change a few years ago was the shifting the time of the budget from evening to morning. It was traditionally read out in the evening so that the British could follow it in London. Also, now the budget will be presented on 1st February to enable more time to implement the provisions. Third, the railway budget will now be a part of the main budget. Moreover this year's budget is happening in the background of demonetisation, a major decision the government has taken to curb the black money issue.

We have randomly asked few of the corporate representatives their expectations from this year's union budget in the background of demonetisation, and indications from various other statements vis-à-vis last year's budget promises met.

According to Jayant Manglik, President, Religare Securities, since this budget will be launched in the shadow of demonetisation, it could be an important inflection point if the government decides to be brave. The GDP growth forecasts have been affected by the move, which in turn has led to high expectations of a budget which will cut taxes, incentivize savings, raise more revenue, be anti-inflationary and push growth, all at the same time. By any yardstick, it is a tough job.

But some direction is clear from the previous two budgets. For example the government has already stated that its intention is to double farmers' income by 2022 and this budget will articulate the next steps aimed at this. Secondly, the MSME segment, which bore the brunt of demonetisation because of its dependence on cash transactions, will definitely be favourably addressed in the budget. Also sure is more budget allocation for Make in India, Digital India and Swachh Bharat. All three will be part of the government's continued focus in future budgets as well. Digital India can look forward to additional plans, ideas and allocations because it ties in well with the aim of moving India away from cash.

Job creation and revival of the investment cycle, both will receive major attention in the budget. This is important economically, socially as well as politically. On the tax front, there are expectations of moves to neutralize the pain of demonetization by lowering income taxes or increasing tax slabs. However this will have to be done in a revenue-neutral way i.e. to the extent of the new revenue which will come in due to the extended tax net thanks to demonetisation and the data collected by the government. And while corporate taxes may be tinkered with, service tax may be hiked for alignment with the GST rates which is expected to be implemented within six months.

Says Kunal Bajaj, CEO and Founder of Clearfunds.com, a SEBI-registered online mutual fund investment adviser, "By moving the budget from the last day of February to the first day, and combining the Railway Budget with the Union Budget, Prime Minister Modi has already shown his willingness to try fresh ideas and break with tradition. The 2017 budget will have a lot more for Modi's new vote bank - the common man, who has cheered his demonetisation move rather than the middle class, which has been affected by it."

He expects a marginal increase of the income-tax exemption rate to Rs 3 lakh. In order to include as many persons as possible in the tax net, he also expect the introduction of a new 5 per cent tax slab on incomes between Rs 3 and Rs 5 lakh.

The zero per cent tax rate on Long Term Capital Gains (LTCG) on Equities and Equity Oriented Mutual Funds has meant zero taxation on the assets of the wealthy (or 'capital') while workers (or 'labour') continue to pay tax according to their tax slab. This is similar to Warren Buffett asking why he pays a lower tax rate than his secretary. We think that this inequality in tax rates will be reduced by raising the LTCG rate to, say, 10 per cent. Alternately, the budget could introduce a new rule, whereby anyone earning more than, say, Rs 25 lakh a year of Long Term Capital Gains on listed equities would have to start paying tax on the same, instead of the current zero per cent tax rate on these earnings.

Similarly, Kunal says, one year is not long enough for an equity investment to be called 'Long Term'. He expects that the holding period for equities and equity oriented mutual funds to be called 'Long Term' will increase to three years.

Economic slowdown

In an environment where the overall economy has already slowed down due to demonetisation, the government cannot afford to have lower tax collections. Any tax relief to one set of people will have to be balanced with higher tax collections from another set of people. Prime Minister has already declared his intentions - to make India a more equal place for the villages, the poor, the farmers, the dalits, the tribals, the marginalised, the oppressed, the deprived and women. It is likely that the theme of this budget, as well as the Fiscal Budgets of 2018 and 2019 will be 'labour over capital,' according to Kunal.

From a life insurance perspective, Vighnesh Shahane, CEO, IDBI Federal advocates for promoting long term savings. "As an industry we need to work towards promoting long-term savings habit and strengthen the persistency of our policies," he says. The Government in the Finance Act, 2012 mentions that all insurance policies, except pension plans, need to offer a cover of at least 10 times the annual premium to be eligible for tax benefits under section 80 C and section 10 (10D). It is recommended that tax relief be linked to the term of the policy instead of sum assured. Further the Section 10(10D) provision can also be revised in line with the IRDAI recommendations. It can be based on the term and not the sum assured. It was suggested that only long-term policies should be allowed section 10(10D) benefit.

Vighnesh also expect a separate limit for Section 80 C. Currently, the Section 80 C clubs investments in various saving instruments like mutual fund, PPF, pension products, etc and also include other expenses like tuition fees, housing loan repayment. "It has been recommended to create a separate limit for long-term savings instruments like life insurance and pension products," he adds.

As far as pensions/annuities are concerned, currently, it is taxable while in hands of the policy holders. To incentivise old age pension created by self funding, a provision should be inserted that any amount received under pension/annuity plan which is used to buy an annuity plan should not be taxed.

The Indian economy lacks access to a comprehensive social security regime unlike other developed economies and is constantly under strain due to rising life expectancy. Pension plans from life insurance companies are one great way to bridge that gap and enable individuals' to meet post retirement needs effectively.

However, pension products are at a sharp disadvantage compared to NPS despite offering similar features. It is important to bring parity around deduction for pension policies from life insurance companies along the lines of NPS. The two products have similar deductions applicable under Section 80CCD(1), an upper limit of Rs.1,50,000.

However, NPS allows for additional deductions under Section 80CCD(1B) and Section 80CCD(2) which are not applicable to pension policies from life insurance companies. Even Annuities purchased after maturity of pension schemes of life insurance companies should be exempt from Service Tax like it is for NPS. Such a tax incentive will go a long way in encouraging retirement planning.

As far as indirect tax is concerned, on service tax on policies, Vighnesh expect tax clarity and concessions from the budget. This includes service tax levied on various components on services/various types of services offered including fund management charges, policy administration charges and mortality charges. We recommend revisiting service tax rate applicable on various insurance products. Especially on traditional and single premium products, which attract a high indirect tax making these products fairly expensive for the policyholders.

He also expects Goods and Services Tax (GST) to get launched next year. "With the implementation of GST a moderate increase in the cost of financial services such as loan processing fees, debit/credit card charges, insurance premiums, etc. is also expected," he says.

Demographic dividend

Anuj Gulati, MD & CEO, Religare Health Insurance recalls the statement of Finance Minister Arun Jaitley a couple of years ago; that the benefits of our demographic dividend will flow only if our population is healthy, educated and properly skilled. "Despite all the developments we have seen in recent years, health insurance products are still severely under-utilised, with a little over a tenth of the population covered by health insurance," says Gulati.

Some evident solutions could lie in a multi-pronged approach to augmenting the coverage of health insurance, especially to those in the low income bracket, could be effected by offering simple yet focused tax incentives such as additional benefits to MSMEs that insure their employees and Service tax holiday for base-level health insurance policies.

At present, under section 36(1)(ib) of the Income Tax Act, the premium paid by an employer towards the health insurance of employees can be considered as a business expenses and is allowed as a deduction. However, MSMEs and other corporates could be offered an additional incentive in the form of an income tax break that is equivalent to the amount spent on insuring employees, especially those with a basic salary that falls below a certain marginal level (but above Rs.15,000 i.e. those qualifying for ESIC coverage). This will have the dual benefit of extending health insurance coverage to the marginalised and promoting MSMEs, which directly translates into sustainable economic growth.

Shripal Gandhi, Founder and CEO, Swipe Technologies feels that the Government's got an important role to play in creating conditions that promote industry and entrepreneurship their intentions and inclinations are typically manifested in their budgets. Shripal, as an entrepreneur and the representative of the mobile handsets manufacturing sector says, "Home-grown mobile handset manufacturers face stiff competition from the global players as well as from the low-cost handset manufacturers from China. For an industry that has significant bearing on the society and the economy, we strongly feel that the local manufacturing of mobile handsets must be encouraged by the government with the right kind of incentives for the domestic players."

On the macro front, we feel that the government should provide definitive timeline on implementation of the Goods & Services Tax (GST), which is India's biggest taxation reform since independence, which aims to create the national market for goods and services and make India an attractive destination for foreign investments. The country will gain from the implementation of GST, as it would promote exports, raise employment and boost growth. In the GST system, both central and state taxes will be collected at the point of sale. Both components (the central and state GST) will be charged on the manufacturing cost. From the perspective of mobile handsets, the implementation of the GST will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping all mobile handset manufacturers.

On the micro-level, importers of full-fledged mobile handsets get unfair advantage in terms of low customs duties. We feel that the domestic mobile handset manufacturers of mobile phones could be provided a level-playing field by way of a fair quantum of countervailing duty on imported handsets.

Real estate

With a series of activities happening in the real estate industry, the budget 2017 will be a crucial affair for the realty market. There are huge expectations from the Government which is already making the right moves creating the perfect atmosphere for the industry. The realty market is growing at a steady pace and there is much more development which will take place if the industry expectations are met from the budget.

According to Chintan Sheth, Director - Sheth Corp, "Firstly, the Government needs to put in place the single window clearance for projects. While the demand for housing in metropolitan cities is only on the rise, and the industry is not able to bridge the gap between demand and supply quick enough as the already lengthy process of construction is further increased by the difficulty in obtaining permissions."

Mumbai's realty market focuses on the mid and the affordable segment of home buyers. The Government can exempt Income tax for affordable homes built for economy weaker sections and low income groups. The reduction of service tax will take off huge load off the shoulders of home buyers as they are already loaded with several other taxes. "We expect the Finance Minister to roll out special incentives for first-time home buyers in the affordable housing category which will help in trimming the financial burden on home buyers and further enhance their buying power," says Chintan.

"We have a strong trust in Government which has played a vital role in the implementation of RERA along with the Benami Transactions Bill and have also taken a few stringent steps like demonetization," says Chintan. The RERA Act once implemented will boost the entire industry and will definitely prove to be a game changer for the market. The impact of this bill will be profitable to both consumers as well as builders as it will bring transparency in the industry and confidence amongst buyers. These moves by the Government will help to curb many inconsistencies and unfair trade practices bringing professionalism in the sector.

Similarly, Kishore Bhatija, MD - Real Estate Development, K Raheja Corp is anticipating positive reforms to be announced in the forthcoming budget. "We are hopeful that the Finance Minister addresses certain key issues such as easing tax reporting and Income Tax slabs as well as the IT SEZ Policy and clarity on the much debated GST," he says.

Implementation of other policies like RERA, land acquisition policy and Benami Transactions Bill will infuse transparency and bring the much-needed credibility to the sector. Buyer sentiments are improving (post demonetisation) as the banks are passing on the benefits to the customers by reducing the interest rates on loans. REITs too need to kick off, and the reduction in the cost of finance for both developers and buyers will make housing more affordable. "All such policy reforms will give the realty sector the desired push," he concludes.




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