Pre-budget 2018 expectations

Aerospace and Defense (A&D)

Introduction

• India has the 5th largest military spend (~USD55.9 billion) and is the world’s largest arms importer with about 70% of requirement and about 14% share. The Indian civil aviation market is likely to be the third largest market by 2020 on the back of the UDAN scheme, increased demand for aircraft, modernization of airports and development of MRO capabilities.
• Challenges/Issues of the Sector
• Government programmes such as ‘Make in India’ and the Strategic Partnership Model have provided positive impetus for the defense sector. There is still a long way to go in the implementation of these programs. Only 15% of military equipment is state-of-the art while 50% is obsolete. In addition, there is capping of DRDO allocation to 5.3% and no allocations for ‘make’ projects (development of prototypes and new technology platforms). There is also a requirement to invert the duty structure to promote ‘Make in India’ for domestic production
• The MoD’s procurement procedures are time consuming, cumbersome. The programmes require clarity and shorter procurement time. There is also the need to institute a more permanent defense procurement agency/body that can take ownership
• For Indian aerospace and defense participants, including MSMEs, the endeavor is to be part of the global supply chain. One of the key challenges and reason for large imports is lack of superior quality of expertise and skills in manufacturing. The key ingredients to global excellence are a combination of winning ideas, innovation and talent. While there are some initiatives between industry and academia to collaborate, this is still at a nascent stage
• An area of concern is that while foreign companies can claim offset credit for their equity investment in joint ventures, all FDIs may or may not be directly linked to offsets. The permissible FDI is cumulative and includes portfolio investment which is not eligible for the purpose of discharge of offsets

Expectations from Union Budget 2018

• To fast track global OEM participation in Indian manufacturing ecosystem, 100% FDI under automatic route for the defense sector should be considered. This will also reduce the issues around Transfer of Technology (ToT)
• Currently, Indian tax laws provide exemption to foreign companies from taxability of royalty or Fees for Technical Services where an agreement has been entered with the government for projects connected to security. Similar exemption should be carved out for private players where the projects involving transfer of technology are entered between private players and foreign companies
• There is a need to boost the MRO sector beyond provision of land at future airports through development of skillset to undertake C & D checks in India, and to rationalise tax structure to retain MRO activities in the country
• On direct taxes, the government has not provided any tax incentives, tax holidays for the sector. Similarly, weighted deductions for incurring research and development spends are being phased out. There should be an extension of weighted deduction (200%) for companies specifically engaged in the A&D sector. The sunset clause for claiming weighted deduction for R&D spends as per section 35(2AA) / 35(2AB) which are to be phased out post 31 March 2020, could be extended by another 5 years
• The time period for availing deduction of 15% on account of investment in new plant or machinery under section 32AC which was available until 31 March 2017, should be extended for all sectors or at least for the A&D sector
• On indirect tax front, post GST implementation no special indirect tax benefits are extended to research and development or indigenous manufacturing sector of defense equipment. There is requirement for tax incentives to ease burden of GST. However, pre-GST benefits available under central excise laws for goods manufactured by government factories or specified units/institutions and supplied to defense sector, should be revived
• Procurement cost of defense sector should be reduced by providing exemption or lowering GST rates on major procurements of defense industry such as maintenance or repair services, spare parts etc. from both government and private entities
• Government can promote Indian Defense exports and accord ‘infrastructure’ status to the defense sector, for allowing various associated benefits. Profit-linked deductions should be introduced for promoting companies engaged in the manufacture of A&D equipment. For instance, tax holidays available under section 80-IA for companies engaged in infrastructure development, should be extended to include A&D sector also

Conclusive Remarks

The Indian aerospace and defense ecosystem is poised for a transformational change. Considering India is one of the world’s largest purchaser in defense, an enabling regulatory environment and favorable tax policies are the need of the hour which shall propel India to be a major manufacturing hub for the aerospace and defense sector, in line with the ‘Make in India’ initiative.

Aviation

Introduction

Several progressive announcements had been made in the previous budget including the UDAN scheme which seeks to connect smaller cities and towns with air transport network. There was also the plan for awarding of operations and management of airports in Tier II cities under the PPP mode to bring in private participation.

However, with the total Indian domestic passengers carried in FY17 being 104.2 million, an annual growth rate of 22% year-on-year, there is heightened pressure on airports for capacity expansion and need for improvement in quality of services on offer.

Challenges/Issues of the Sector

• Need for government to provide roadmap for safety enhancement, airport capacity expansion and provision of improvement of quality of services at all AAI airports. It is expected that most of India's 40 largest airports will exceed their design capacity within a decade, based on projected growth rates, with Mumbai and Chennai fast approaching saturation

Expectations from Union Budget 2018

• Budget should consider the need of the sector where it is vital to triple airport capacity within 15 years at a cost of approximately INR 3 lakh crores
• Reduction in VAT on ATF to 1% or below across all airports in line with the provisions of Regional Connectivity Scheme
• Enabling policy for inviting private sector for operations and maintenance of airports in Tier-II and Tier-III cities and development of underserved/ unserved airstrips/ airports to alleviate infrastructure constraints at Tier-I airports
• Filling the aviation and aerospace industry skill gap. Need to set up industry specific Skill Development Centres and Centres of Excellence. Training impetus is required for all levels of technical and service staff. Need for infrastructure/skill development centres/ to develop skillsets for aerospace manufacturing
• Policy/plans for promoting energy efficient airports. Comprehensive study to be undertaken to examine how airports can be made energy efficient
• Expansion of e-Visa initiatives to additional countries. This is mainly to improve ease of visa applications globally, especially for expatriates, students, medical tourists
• Airport Operation & Maintenance under PPP. Formulation of enabling policy for attracting private sector participation for O&M of airports in Tier-II and Tier-III cities and lower infrastructure constraints at metro airports
• Need to finalise Indian Civil Drone Policy guidelines for use of drones for civil purposes

Consumer and Industrial Products

Introduction

One of the most dynamic and among the fastest growing, the Consumer and Industrial Products sector is closely monitored to study policy impact – the recent introduction of GST is a case in point. The sector also provides policy makers and the RBI with key inputs to map inflationary trends via the Consumer Price Index.

Challenges/Issues of the Sector

Consumer Products

• Consumer product companies have been heavily impacted by GST with supplies remaining muted in the past few months
• Consumer demand has not been picking up at the desired pace
• Consumer Price Index inflation (CPI) rose to a 15-month high in November 2017

Manufacturing

• Slowdown in capital goods demand
• Low value-added manufacturing

Expectations from Union Budget 2018

Consumer Products

• Ensuring benefits of GST are passed on to consumers in near future
• Measures needed to increase consumer demand
• Strengthening agriculture supply chain and ensuring effective management of fluctuation in prices
• Law curbing anti-profiteering to be regulated by a dedicated body/authority

Manufacturing

• Boost capital goods demand by increasing spend on infrastructure in short term
• Key areas for demand generation include airlines, urban infrastructure, water and irrigation, defence and homeland security
• Better PPP framework to increase investment flow to infrastructure projects
• Investments in advance manufacturing and digitisation including IoT, additive manufacturing, robotics, automation
• Promotion of research and innovation by
• Promoting collaboration between defence laboratory and private sector
• Promoting DIY ecosystem - Focus on product, material technology
• Improving efficacy of GST implementation to reduce supply chain cost
• Rationalisation of tax rates (corporate tax and minimum alternative tax) and tax incentives
• Efficient technology-enabled, transparent tax administration and fast track settlement of pending tax cases
• Clarifications on recently introduced concepts such as GAAR and Place of Effective Management (PoEM) to address ambiguities in applications

Conclusive Remarks

• Additional measures needed for a tax payer friendly, transparent (anti-profiteering) GST regime that would facilitate smoother trade
• Incentives needed in infrastructure and rural sector to provide impetus to overall growth