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Pre-budget expectations: Union Budget 2019

Financial Services

The fiscal budget 2019 under the new Government and especially under the leadership of the new Finance Minister, needs to focus on strengthening the financial services sector, which is a backbone of the industry and country’s economic growth. With India being an inbound foreign investment economy, the Finance Minister needs to consider relaxing the policies for foreign investments in India and also have a friendly fiscal system, especially on direct and indirect taxation, giving certainty to the investors.

Today global investors do consider India as a growth market and prefer to invest in India.  However, the Indian Government should be cautious that global investors have other choices and if the policies and fiscal laws are not eased, the country may become a second choice destination for such investors.  Having said this, certain key areas which can be priorities in the forthcoming union budget 2019 exercises are below:
 

The foreign investor needs to have a flexibility to invest, divest, and repatriate its funds in a tax efficient manner.  There is a need to create foreign investment via a long-term debt instrument without any conditionality attached for end use.

The banking system needs to be supported by additional liquidity and address the current non-performing assets situation.

The insolvency process needs to be more effective and quick as to revive the NPAs. The current process does not allow any stakeholder and investor to have a timely acquisition /resolution of such NPAs.

To boost the NPA resolution, the Finance Minister may consider to pull the NPAs together in a common pool and invite global investors to create a pool of funding and a PPP model for its resolution. 

Most NBFCs are under a huge liquidity crunch, which has a direct impact on the economic activities resulting in a financial pressure and slowing down of businesses. The Finance Minister, with support from RBI, needs to create a professional panel to address the situation on a war footing. The NPAs situation of NBFC also needs a solution as discussed for the banks above.

Prime Minister is focused on housing for all.  The Prime Minister Awas Yojana (PMAY) will need to have a focus is this term. There are investors and developer community who are likely to participate provided land acquisition and requisite approvals are obtained on time. To succeed, PMAY must have a single window approval system, irrespective of central and state regulations, and policies around that.

 Affordable housing / compact housing (other than PMAY) is going to be the future of real estate in the country.  To incentivise investment in the sector, fiscal benefit such as tax incentive for developers, effective GST system (which can reduce the burden on end customer), minimal stamp duty levied by state, foreign debt funding in the said projects, non-applicability of thin capitalisation (BEPS Action Plan 4) regulations, etc., must be offered for an impactful outcome.

Certain players have explored introduction of an alternate platform like REIT / INViT. However the domestic investors are unable to foresee a real benefit due to limited players and restricted asset class it can invest in. The Finance Minister may consider the benefits of merging two platforms to create a unique investment opportunity in real estate and infra assets.  This will give fund manager a wider asset class to invest in and manage a better return (higher than the Government paper) to attract domestic and international investors.

The regulations of LLP has been introduced for easing out the operational and compliance issues faced by SME sector.  LLP options are explored by many start-ups like Fintech, IT/ITES, real estate development, etc. Foreign investment including debt; local debt funding by banks; and NBFCs should be permitted freely in LLP.  The regulations should be streamlined to have ease of operations for the SME sector.

The fiscal benefit is the contribution made by the Government to attract investment and fuel growth in any sector.  It is an expectation to streamline tax laws to create efficiency in the overall tax cost and reduce the uncertainty of litigation for investors.  For example:

  1. Indirect transfer taxation applicability for foreign investors in certain cases like investments in AIF, REIT, INViT, group restructuring of overseas holding companies, etc.
  2.  MAT and DDT impact which actually increases the overall tax cost due to non-availability of the credit against the home taxation
  3.  Restricting interest deduction for funding raised from associated enterprises (group entities)
  4.  Deduction of bad debts in case of banks and NBFCs should be linked to the RBI guidelines on provisioning norms to avoid litigation on the same
  5. Impact of non allowability of expenses related to tax free income – this issue is the most contentious issue and has created plethora of judicial decisions.  To boost the FS sector, this provisions need to be revamped completely for ease of planning and implementation.

 

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