Pre-budget 2018 expectations

Retail

Introduction

The Indian retail sector has been seeing a steady growth with estimates pegging the future pace of growth at above 10% CAGR, based on the rise in per capita income and consequent expenditure. This, despite the recent impact from demonetization which has hit footfalls as the average Indian prefers cash. That is however changing. Greater adoption of digital technology and e commerce are seen as the way forward for the sector which continues to be plagued by inefficient infrastructure and high rentals. GST has been positive although more needs to be done on anti-profiteering.

Challenges/Issues of the sector

• Lack of proper infrastructure and under-developed supply chain has resulted in inefficiencies, higher costs. Coupled with rising real estate cost, there has been significant impact on profitability
• Demonetization has had an impact on sales/ footfalls given that the Indian consumer primarily prefers cash transactions; though the trend is changing
• Though GST has been positive, ambiguity remains on transitional credit for existing stock and anti-profiteering rules.
• Multiple changes in GST rates have made transition difficult and also resulted in increased prices, in some cases
• Lack of skilled workforce at management and operational levels
• Tight budgets and low staff engagement levels has led to high staff turnover
• Severe shortage of trained workforce in Tier II/III cities and rural areas have hurt ability to reach out and serve these markets
• Despite several relaxations in FDI policy, multiple regulatory bodies is slowing decisions
• Mom & Pop and kirana store owners perceive entry of foreign players a threat to their livelihood. Deep discounting by some e-tailers has bred insecurity among local players

Expectations from Union Budget 2018

• All eyes on the Budget as focus on infrastructure and rural sector will provide impetus to retail
• Reduction of GST rates for consumer goods and services and clarifications on transitional credit and anti-profiteering can achieve price reduction
• Budget should also relax conditions for income tax incentives related to employment generation (time and monetary thresholds), along with reduced corporate tax rate to boost the sector
• Clarifications on open issues and measures for ease of doing business, including those related to return filing timelines, their revisions, relaxation of non-compliance penalties would be welcome
• Steps needed to promote upward movement of cities within Tier II and Tier III segments which will enable rural population to reap benefits of retail margin
• Government could sponsor training programmes for employment in retail sector to address challenges of inadequate skilled manpower
• Incentivizing training initiatives undertaken by private players can create new employment opportunities and retain skilled talent
• Government needs to increase spending and create quality infrastructure to help expansion of modern and organized retail sector in rural areas and Tier II/III cities
• The Budget should spell out measures for use of technology and to encourage digital transactions for e-commerce which can also help in dealing with steep rentals
• The Budget could bring clarity in FDI policy, especially in relation to e-commerce and sourcing, which can lead to greater foreign investment.
• Announcements related to single window clearance for retail investment would be welcome
• Technology and sourcing collaboration agreements amongst small players and foreign investors must be created to promote trust and avoid formation of oligarchy
• Simplification of compliance procedures under GST regime, scaling up of IT infrastructure will help ease compliance

Conclusive Remarks

The Indian market provides a good opportunity for the retail sector to flourish, with robust demand, increasing investments and innovation in financing. Good policy and fiscal support would act as a strong catalyst, for the success of the retail sector.

Energy & Resources

Introduction

Economic growth of a country is directly linked to development of its energy and resources. This is evident as the total allocation for infrastructure development in 2017-18 stands at a record high of Rs. 3,96,135 crores as against total outlay for infrastructure of Rs. 2,21,246 crores in 2016-17. India is the third largest consumer of crude oil and petroleum products in the world and second largest refiner in Asia.

Challenges/Issues for the Sector

• Government has set the deadline for electrifying all villages by May 1, 2018. Similarly, it is aiming to provide 24X7 power to all by March, 2019. With likely fiscal buoyancy due to demonetization and GST revenue, it is expected that the share of policy reform expenditure in power sector could increase
• The natural gas and petroleum sector contributes to about 15% of India's GDP. With Prime Minister's vision of reducing import dependence for energy by 10% by 2022, it is imperative to boost investments through policy reforms for encouraging private players to participate in oil and gas exploration
• Like oil and gas exploring companies, mining sector carries risk of non-productive mines where companies invest huge capital. Insignificant or no production from some mines results in sunk cost for companies. The sector needs policy reforms boost in the form of subsidies, cheaper funds from government

Expectations from Union Budget 2018

• Slow economic growth, reduced demand has affected energy and resources sector. The promised reduction of corporate tax rate from 30% to 25% announced in Budget 2015, is yet to be applied to all the sectors. The industry expects direction on this issue
• Abolishing Minimum Alternative Tax provisions is a long standing demand of infrastructure and energy sectors. While the Income-tax Act has moved from profit-linked incentives to investment-linked incentives, benefit of such incentives can be enjoyed only if MAT provisions are done away with
• Even in current MAT provisions, inclusion of MAT adjustment on adoption of IndAS is leading companies to pay taxes on notional income / gains. Such adjustments are putting undue tax burden on companies and need to be suitably amended
• The proposal for consolidation of tax returns for infrastructure and energy companies did not find any mention in Budget 2017. It is widely expected that Budget 2018 will have an announcement
• Budget 2017 introduced thin capitalization rules to some extent in the form of Section 94B of the Income-tax Act, 1961. Unclear drafting intentions has prompted industry to expect clarification that such provisions will be made applicable for non-resident associated enterprise
• Industry also expects removal of restrictions on number of years to carry forward interest disallowed under section 94B
• Removal of generation-based incentives, reduction in accelerated depreciation rate and removal of section 80-IA benefit has affected the power sector. Independent power producers expect revival of some of these incentives or new sops
• There should be an amendment in the Income-tax Act to include ‘generation of power’ as manufacture
• At present, electricity is an ‘exempted’ product under GST. Which makes power producing companies unable to claim input tax credit on inputs. Electricity needs to be put under zero rating items under GST regime so that input tax credit can be claimed
• With GST, amendments in Income-tax Act to align with objectives of BEPS would lead to additional compliance burden. The industry expects that government would remove GAAR provisions or at least defer its applicability

Conclusive Remarks

Energy and resources sectors are the backbone of the economy. With constant assurances from the Finance Minister to retain focus on development of infrastructure, it is expected that Budget 2018 will bring lot of cheers to this industry.

Infrastructure - Transport Sector (Roads and Highways, Railways, Aviation, Ports, Logistics, Urban Transport)

Introduction

Transport is an important contributor to India’s growth story. The journey of economic revival has been long and the government has been successful in some critical aspects, such as identifying and formulating long term development initiatives, policy and in reviving languishing projects. Recent regulatory challenges post adoption of GST and legacy issues from demonetization continues. It is important to continue with action on critical fronts like regional connectivity, asset recycling, and alternative financing for infrastructure. It is also important to ensure focus on mainstreaming of electric vehicles, enhancing last mile connectivity and addressing skill gaps.

Challenges/Issues for the sector

• Increased allocation of funds and setting up of dedicated road sector financing institution. Government plans 83,677 kilometres of roads by spending Rs 7 lakh crore over 5 years. Bulk of financing shall have to be borne by government
• In Railways, government has planned several measures including the deployment of safety corpus of INR 100,000 crore under Rail Sanraksha Kosh. Comprehensive plan for Railways to achieve target of 40% freight share, 10% increase in throughput in 3 years
• In Aviation, with 104.2 million Indian domestic passengers carried in FY17, a growth rate of 22%, there is need for capacity expansion in airports and for improvement of quality of services
• Major initiatives in Ports include Sagar Mala Project, plan to develop 2,000 km of coastal roads to improve connectivity with remote villages, strategy to increase cargo and passenger traffic via inland waterways by nearly five-fold and construction of 34 mega multi-modal logistics parks
• Most Indian cities not equipped to provide mobility options leading to growth of personal motorised vehicles. Budget should promote urban mobility solutions along with promoting electric vehicles. Opportunity for government to introduce portfolio of measures in urban transport ecosystem through structured policy and planning

Expectations from Union Budget 2018

• In taxation, sector wants revenue to be offered to tax for the Operation Maintenance period, not over construction period as projects are in Build-Operate model
• Clarity needed in taxability of revenue for annuity and hybrid model under ICDS, due to difference in revenue treatment under IGAAP and IND AS
• Plan for scale-up of high-speed train network in India. Plan to specify funding requirements, integration of technology transfer into railways
• With reversal of PPP plan for railway station development, larger commitment from Railways’ allocations
• Action on listing of IRCON, IRFC, IRCTC could unlock value for Indian Railways
• Need policy framework to support development of ‘seamless’ payment infrastructure in Ports. Need to formulate policies for development, integration of payment infrastructure at tolls and fuel retail outlets
• All tariff regimes on same level, provisions for review of tariff on inflation, political / regulatory changes
• Need to bring petroleum products such as motor spirit, high speed diesel, natural gas, crude within GST. With input tax credit, it would reduce logistics, transportation cost
• Provide exemption from provisions of e-way bills for import and export consignments routed via vessels
• Eliminate differential tax treatment for shipping industry
• In Urban Transport, promote sustainable financing via dedicated funds and specifying allocation
• National Urban Transport Fund be created at national level. States/city governments encouraged to generate additional funding. Equal matching from NUTF be provided
• Budget provides opportunity to plan, promote electric vehicle ecosystem to meet targets of 100% electrification by 2030
• Stimulating switch to alternative fuels by introducing measures promoting use of biofuels such as ethanol, methanol to replace fossil fuels
• Tax holidays for electric vehicle manufacturers, OEMs and charging infrastructure providers
• Transport sector is debt-intensive, high interest costs. Limit on interest deduction should be higher in initial years. Further, restriction on interest deduction should attract when either of the associated enterprises is non-resident
• Amendment on disallowance under section 14A should not apply in investments in SPVs which are strategic and not for dividend earning