On 1 February, Finance Minister Arun Jaitley presented India’s annual Union Budget for 2017-2018 (the “Budget”) for the fiscal year beginning 1 April 2017. The central aim in this year’s Budget appears to focus on the most vulnerable with increased spending on rural areas, infrastructure and fighting poverty, but keeping fiscal deficits in check. The Finance Minister’s stated three-point agenda for 2017 is Transform, Energise and Clean India. This Budget, unlike the previous 2 years looks to consolidate on those big changes of previous budgets, in order to continue to help the growth of the economy of India.
We set out below a summary of the key initiatives from the Budget that could be of interest to international investors:
Business tax benefits
Corporation tax has been reduced to 25% for small and medium sized enterprises (“SME’s”) and new enterprise businesses (“Start-Ups”). Start-Ups and SME’s are crucial to the economy of India and the Budget tries to recognise this, with certain tax incentives. This includes increasing the carrying forward of losses from 5 to 7 years and allowing those losses to be carried forward even where additional investors have been acquired, providing the original shareholders of the company at the end of the financial year in which the loss was incurred continue to be shareholders in the financial year in which it is claimed.
The Indian Government is continuously striving to make the tax-payers spectrum broader to ensure that no company that is earning a substantial profit is able to avoid tax payments. Minimum Alternative Tax (“MAT”) provides that every domestic or foreign company is required to pay tax. One of the significant features of MAT is MAT credit. MAT credit is where a company pays MAT instead of regular tax and the tax paid is more than that accrued, then the excess amount is credited back as tax credit to the company. The tax credit can be carried forward and set off in the financial year in which the company is liable to pay tax under the general provisions of the Income Tax Act. The Budget provides an increase from 10 to 15 years in which the MAT credit can be carried forward and set off for consecutive assessment years succeeding the year in which the tax credit first accrued. This increase will be beneficial to Start-Ups which have a large unused MAT credit.
Infrastructure, Commerce and trade focus
In last year’s budget the minister discussed the need to prioritise expenditure in the infrastructure sector in order to improve efficiency. The government is keen to continue on the progress made last year and in this Budget infrastructure has received the highest ever allocation which includes ₹2.41 trillion ($35 billion) allocated for rail, road and shipping. Capital and development expenditure in railway is targeted at ₹1.31 trillion ($19 billion). The focus of this expenditure includes rural road schemes and seeking to achieve 100% rural electrication by 2018. The Budget also includes Viability Gap Funding (a grant to support projects that are economically justified but not financially viable) to airline operators for an initial 1 year period towards passenger transportation. Improvements to India’s infrastructure will continue to facilitate India’s connectivity and the ease of conducting business in the country.
Social focus – Agriculture, Healthcare and Housing
The Budget clearly has a social focus with agriculture and healthcare also being key to the 2016 - 2017 budget.
The Budget provides for an extension to 31 March 2021 for the 100% prescribed deduction of profits from housing projects – a sign that the government wants to continue to promote affordable housing.
The Budget’s target of agriculture credit has been fixed at ₹10 trillion ($147 billion), with the government wishing to promote initiatives to try to ensure the flow of credit to small farmers.
The Budget provides for a 20% increase in the National Health Mission, an initiative launched in April 2005 by the government to address the health needs of under-served rural areas. The Budget includes clear goals for the National Health Mission, including the elimination of leprosy by 2018 and tuberculosis by 2020.
Technology and e-commerce
India continues to strive for a better digital economy using both a carrot and stick approach. The banks aim to setup an additional 1 million Point of Sale (“POS”) terminals by March 2017 to create a cashless India by encouraging digital payments. The aim is to also provide 2 million Aadhar (unique identification numbers for residents) based POS terminals by September 2017. In parallel there will be a prohibition on cash transactions exceeding ₹300,000.
Tax benefits to Start-Ups and an increase in the Budget allocation for digital infrastructure gives a clear message that the government continues to believe in the importance of a digital economy for India.
The Finance Bill 2017 provides that changes are to be made to take effect retrospectively from 1 April 2012 to benefit foreign investment portfolio investors (“FPIs”).
Indirect transfer tax provisions will not apply to Category I and Category II FPIs which will provide welcome relief to them. The aim of such change is to try and entice back those FPIs that have had to stop investing in India due to the transfer tax provisions. The Foreign Investment Promotion Board is also to be abolished with the aim to improve the ease of doing business.