Pre-budget 2018 expectations

Manufacturing

Introduction

Manufacturing has emerged as one of the high growth sectors in India. The country has jumped 31 places to reach the 100th spot in the World Bank’s ’Doing Business Report 2017‘. Manufacturing sector is estimated to touch USD $1 trillion by 2025 accounting for about 25-30% of the country’s GDP and creating up to 90 million jobs domestically.

Challenges/Issues

• Government has an ambitious plan of locally manufacturing around 181 products. Coupled with digital push, this could be a big catalyst to sectors such as power, oil and gas, automobile manufacturing
• Strong consumerism in domestic market and sustained availability of high skilled low cost manpower together with policy incentives from the government will boost manufacturing
• GST would go long way in boosting manufacturing sector in India.  However, reduction in taxes comes at a huge cost and countries are often faced with the task of maintaining new equilibrium to address fiscal deficits

Expectations from Union Budget 2018

• Some large disputes relating to in-direct tax incentives promised to multinational companies in India by state governments have not been resolved, impacting cash flows of MNCs. Government should amicably resolve those disputes in consultation with state governments to avoid International Arbitration
• Relaxation in tax compliance and fast track settlement of long pending tax cases; currently, over 390,000 tax cases are pending at various fora
• Matters decided by courts or tribunals in favour of taxpayer should be given effect by lower authorities without delay
• Reducing Minimum Alternate Tax rate and exempting manufacturing in SEZs from MAT
• Tax deduction of lease premium to set up manufacturing facility and clarity on set-up related tax issue
• Exemption of overseas profit distributed as dividends which will bring back accumulated overseas profits of India-controlled foreign subsidiaries
• Clarification on BEPS action will bring certainty in approach of various stake holders
• In GST, automation of in-direct tax refund process will lead to faster disbursements and clarity with respect to refund of ITC to manufacturers selling to merchant exporters
• Abolition of reverse charge mechanism on unregistered purchases and clarity in compliance requirements
• Clarity on approach to be taken on anti-profiteering matters

Conclusive Remarks

The Indian manufacturing industry is poised for rapid growth. ‘Make in India’ initiative has led to a spur in manufacturing. It is expected that with its geographic advantage and huge pool of labour resources clubbed with measures by the government, India would transform itself into a global manufacturing hub.

Financial Services

Introduction

The Indian financial services sector has seen greater attention due to huge bad loans on the books of banks and financial institutions. Threatened by the prospect of huge damage of such institutions and erosion of public confidence, the government along with the Reserve Bank of India has taken strong steps to curtail toxic loans. 

Challenges/ Issues faced

(A) Investment Management

• Foreign Portfolio Investors (FPIs)

1. FPIs face difficulty in obtaining Category II FPI license since they need to comply with broad basing requirements (minimum 20 investors with no investor holding more than 49% shares of the fund) within 180 days
2. Indirect transfer provisions are applicable to Category III FPIs and other offshore funds, leading to multiple taxation in hands of ultimate investors

• Alternative Investment Funds (AIFs) and others

1. Slow refund process of refund claims filed for the accumulated input tax credit for export of services
2. AIFs that pool capital from foreign investors at an offshore location in order to invest in India do not pay GST, as export of services is not taxable. But such tax clarity is lacking for AIFs managed by India-domiciled asset managers
3. No prescribed tax treatment of Category III AIFs
4. Applicability of MAT provisions on transfer of shares of SPV to REIT / InvIT
5. Transfer of assets by a sponsor to REIT triggers tax liability

(B) Banking

• RBI guidelines mandate banks to make huge provisions for bad and doubtful debts and diminution in value of assets. These provisions are generally allowable as deduction in normal computation of income for banks subject to limits. However, for MAT computation, book profit is to be increased by adding back these provisions; thereby removing the benefit provided to banks
• Income of banks is subject to TDS with the exception of interest income other than on securities. Banks earn income from various sources (interest on securities, commission, etc.), creating huge volume of data of TDS certificates, which causes administrative inconvenience for banks
• Units located in International Financial Service Centres are provided with a lower MAT rate of 9%, which is not globally competitive (Dubai 0%, Malaysia 3%). Period of tax holiday period of 10 years is short, compared to other countries (Dubai 50 years)
• On taxability of inter-change fee from GST perspective, acquirer banks and issuer banks are facing huge challenges on assimilation of data

(C) Insurance

• Recently, the costs of private health care have risen exponentially. However, section 80D, allows a maximum deduction of INR 25,000 for qualified medical insurance expenses and section 80C provides a maximum allowable deduction of INR 150,000

Expectation from Union Budget 2018

(A) Investment Management

• The government can consider removing broad base requirement altogether for regulated funds (or those funds which are administered by a regulated investment manager), alternatively the existing 180-day period can be extended to 1 year for fund to become broad based
• To neutralize tax on overseas reorganization of funds
• Indirect transfer provisions exemption should be extended to all foreign investors on upstreaming of funds post exit from Indian investments which is currently restricted to select investors
• Provide tax pass-through status for Category III AIF
• Relaxation of safe harbor conditions for offshore funds being managed from India
• CG tax exemption on transfer of assets by a sponsor to REIT
• Carving out sponsor on transfer of shares of SPV to REIT / InvIT from MAT provisions
• From GST perspective, industry expects faster processing of refund claims filed for the accumulated input tax credit for export of services. Industry also expects a 5% GST rate for fund management of an AIF where a significant majority of capital comes from overseas

(B) Banking

• Align tax provisions with RBI guidelines. NBFCs to be provided parity under tax provisions with banks
• Provide blanket TDS exemption for payments to banks. Alternatively, introduce provisions in line with foreign banks. Banks can apply and obtain benefit of non-deduction of tax at source on all income to ensure level playing field
• Abolish MAT for units in IFSCs and increase tax holiday period
• Clarification on GST implications on sale of repossessed goods and also on applicability of GST on securitization of loans
• Waiver of interest to acquirer banks and issuer banks preferred on account of late payment of GST on interchange fees (due to data complexities)

(C) Insurance

• Increase limit prescribed under section 80D to INR 75,000 to commensurate with the growing cost of health care
• The limit under section 80C be increased from INR 150,000 to at least INR 200,000 and/ or separate deduction be provided for life insurance premiums
• Under erstwhile service tax regime, co-insurers share was considered exempt. Expect an amendment specifying that reinsurance of insurance schemes, specifically with regard to weather and crop insurance under specific schemes will also be exempt from GST to protect interest of farmers and to keep cost of insurance premium affordable
• Based on international practices, government should contemplate exempting GST for life insurance sector. The input tax credit of life insurance services is ineligible for set off, which becomes a cost for businesses. It is expected that government review this provision and allow set-off on specified/notified life insurance schemes/ policies. Industry expects that status quo under service tax is maintained under GST on premium received in INR from overseas policy holder. Under service tax, such premium was exempted

(D) RE

• JDA taxation provisions should be extended to all types of assessees.

Conclusive Remarks

Financial services sector needs structural incentives to provide solutions for raising capital and refinancing credits. These changes can lead to better opportunities for business and investment opportunity in newer asset class for investors.

E-commerce

Introduction

The e-commerce sector, which is estimated to touch USD 40bn in 2018, has seen the largest players reporting growth numbers ranging between 60% and 80%. 

Some of the challenges, which have plagued the sector in the past, include the dominance of cash payments, challenges of internet bandwidth and connectivity, and high cost of logistics. The past year has seen significant positive shifts in the above areas, but the industry has had to face a temporary struggle with the implementation of GST.

Challenges/Issues of the Sector

With the Union Budget, 2018, just around the corner, let us take a look at some of the key challenges of the e-commerce sector:

• Digital payments increase ease of buying online and reduces overall cost in the system by eliminating cash handling charges and improving availability of funds with the seller. However, currently, India has a large volume of consumers (especially in the rural market) who do not have access to this facility
• On the seller side, managing logistics, compliance, and working capital are some of the big issues.
• Logistics contributes to 2% to 10% of the cost of e-commerce. Therefore, faster and cheaper logistics is a catalyst to e-commerce. However, this sector is yet to receive the requisite support and attention from government.
• The Foreign Direct Investment policy for this sector is in a nascent stage and still evolving. Ambiguity around some of the conditions related to B2C e-commerce is adding to the uncertainty.
• There is insecurity among Mom & Pop and kirana store owners, who perceive the entry of foreign players to be a threat to their livelihood. Deep discounting practiced by some of the e-tailers has bred further insecurity among the local players.
• Lack of clarity on issues such as tax treatment of Advertisement, Marketing and Promotional (AMP) expenditure, taxation of digital content, withholding of taxes on software, advertisement and other foreign expenditures, etc., has led to protracted litigation with the tax authorities.
• In addition, there are many grey areas around characterization of e-commerce transactions and their tax treatment, especially for foreign players.
• Introduction of GST has resulted in additional compliance requirements for the sector, increasing the complexity of doing business.
• Blockage of working capital due to additional GST on stock transfers, non- availability of composition scheme for e-commerce transactions and lack of clarity on treatment of cash-back schemes / gift coupons / vouchers offered by e-commerce operators, have all added to the uncertainty.
• While the GST law mandates passing on to benefits to end consumers (Anti profiteering); No clarity has been provided on the methodology to be followed. The transparency and symmetry between all related sectors would definitely be a challenge.

Expectation from Union Budget 2018

• Budget 2018 presents the government with a good opportunity to address some of the above challenges:
• The government should consider taking measures to increase digital access countrywide. Further, incentivizing the use of technology, and digital / cashless transactions, can facilitate e-commerce.
• On the logistics front, some of the areas that could further improve the logistics costs are reducing GST on tyre prices, continued progress on development of highways, railways and roads, and minimizing (potentially digitizing) the paperwork associated with logistics, easing labour laws, etc.
• Greater clarity in the FDI policy could assuage the gnawing doubts of foreign players and lead to greater investment.
• Encouraging/ incentivizing technology and sourcing collaboration agreements, between Mom & Pop / Kirana store owners and the foreign e-commerce players, could help in promoting trust between these players. This will also help in creation of a model for collective growth.
• The Government can consider making/ issuing amendments / clarifications, which address some of the long-standing issues leading to litigation with the tax authorities.
• Specific clarification on characterization of e-commerce transactions for tax purposes, including those related to deemed income and Permanent Establishment issues, would be a welcome move.
• Simplification of registration and compliance requirements, including availability of composite scheme for suppliers selling goods through e-commerce, could bring much needed relief.
• Issuance of specific clarifications on treatment of various transactions unique to the sector, for GST purposes, so that the ambiguity in law does not hinder business operations.
• Setting out clear and simplified procedures on anti-profiteering so as to ensure maximum compliance by all sectors so that the GST benefit is passed on to end consumers.

Conclusive Remarks

The Indian market provides a good opportunity for the e-commerce sector to flourish, with the penetration of mobile phones, robust demand, increasing investments and digitisation. Good policy and fiscal support (especially around GST) would act as a catalyst, for the success of the e-commerce sector.