CII Union Budget Analysis 2014

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CII Union Budget Analysis 2014

  1. 1. Union Budget 2014-15 An Analysis The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded in 1895, India's premier business association has over 7200 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 100,000 enterprises from around 242 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus- building and networking on key issues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. The CII theme of ‘Accelerating Growth, Creating Employment’ for 2014-15 aims to strengthen a growth process that meets the aspirations of today’s India. During the year, CII will specially focus on economic growth, education, skill development, manufacturing, investments, ease of doing business, export competitiveness, legal and regulatory architecture, labour law reforms and entrepreneurship as growth enablers. With 64 offices, including 9 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 312 counterpart organizations in 106 countries, CII serves as a reference point for Indian industry and the international business community. . Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi – 110 003 (India) T: 91 11 45771000 / 24629994-7 | F: 91 11 24626149 E: info@cii.in | W: www.cii.in Reach us via our Membership Helpline: 00-91-11-435 46244 / 00-91-99104 46244 CII Helpline Toll free No: 1800-103-1244 Follow us on : www.mycii.infacebook.com/followcii twitter.com/followcii
  2. 2. Union Budget 2014-15 An analysis 10 July, 2014
  3. 3. Copyright © 2014 Confederation of Indian Industry (CII). All rights reserved. No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), in part or full in any manner whatsoever, or translated into any language, without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of the information and material presented in this document. Nonetheless, all information, estimates and opinions contained in this publication are subject to change without notice, and do not constitute professional advice in any manner. Neither CII nor any of its office bearers or analysts or employees accept or assume any responsibility or liability in respect of the information provided herein. However, any discrepancy, error, etc. found in this publication may please be brought to the notice of CII for appropriate correction. Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi 110003, India, Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: info@cii.in; Web: www.cii.in
  4. 4. Contents Chapter Title Page No. Foreword 1 Key Features of the Union Budget 2014-15 3-11 2 Key Budget Trends 15-21 3 Analysis of the Budgetary Proposals 25-36 4 Analysis of Fiscal Trends 39-44 5 Direct Taxes 47-56 6 Indirect Taxes Sector & Industry Specific Analysis 59-93 7 Annexure-Key Indicators: Economic Survey 2013-14 97
  5. 5. FOREWORD In its first Budget, the new Government has activated a number of directional changes that would stabilize the economy, boost investments, and encourage savings with a view to reviving GDP growth to 7-8% in the near term. The Budget lays out a medium term vision for the economy and meets industry expectations on growth and employment creation. A roadmap for fiscal consolidation and fiscal prudence has been defined to bring fiscal deficit to 3% by 2016-17, with stress on reviving all sectors of the economy including agriculture, power and infrastructure, manufacturing, and services. Tax stability and rationalization is addressed widely, according high importance to restoring investor confidence and boosting sentiments. CII is happy to note the encouragement to manufacturing through various measures such as correcting inverted duty structures, setting up of industrial clusters and promoting entrepreneurship. The provision of a fund of Rs 10,000 crore the Budget to provide equity to start-ups is most encouraging. Many CII suggestions such as reducing investment allowance, changing definition of MSME, setting up a start-up fund, and overhaul of the subsidy regime have found mention in the Budget. The promise of maintaining a stable and predictable tax regime will be a boost for investors’ confidence which had taken a hit due to issues such as the retrospective changes in tax laws. A key measure has been to reassure foreign investors that India remains an attractive destination. Expanding FDI in defense and insurance to 49% and allowing FDI in e-commerce as well as liberalisation of urban development would bring in vital funds to these sectors. Investment promotion and boosting business confidence has received high attention and is greatly welcomed by industry. We believe that the Budget would set the tone for quick recovery of GDP growth and generation of new jobs and hope that it will be followed up by close monitoring and implementation of announcements. Chandrajit Banerjee Director General Confederation of Indian Industry
  6. 6. © Confederation of Indian Industry 1 Chapter 1 Key Features of the Union Budget 2014-15
  7. 7. © Confederation of Indian Industry 2
  8. 8. © Confederation of Indian Industry 3 Chapter 1 Key Features of the Union Budget 2014-15  First budget of the new government lays down broad policy directions for achieving a sustained growth of 7-8 per cent or above within the next 3-4 years along with macro-economic stabilization. Fiscal Deficit  The government is committed to achieve fiscal deficit targets of 4.1 per cent in FY15, 3.6 per cent in FY16 and 3 per cent in FY17. ECONOMIC INITIATIVES AGRICULTURE SECTOR  Achieve a sustainable growth of 4 per cent in agriculture.  Central Government to work closely with the state governments to re-orient their respective APMC Acts.  Technology driven second green revolution with focus on higher productivity and including “Protein revolution” to be the area of major focus.  Two more Agricultural Research Institutes of excellence to be established in Assam and Jharkhand with an initial sum of Rs 100 crore.  Rs 100 crores set aside for “Agri-tech Infrastructure Fund”.  Rs 200 crore provided to open Agriculture Universities in Andhra Pradesh and Rajasthan and Horticulture Universities in Telangana and Haryana.  To launch a scheme to provide every farmer a soil health card in a Mission mode. Rs 100 crore provided for this purpose and additional Rs 56 crore to set up 100 Mobile Soil Testing Laboratories across the country.  A “National Adaptation Fund” with an initial sum of Rs 100 crore to be set up.  Rs 500 crore to be provided for establishing a “Price Stabilization Fund”.  Sum of Rs 50 crore to be provided for the development of indigenous cattle breeds and an equal amount for starting a blue revolution in inland fisheries.  Transformation plan to invigorate the warehousing sector and significantly improve post-harvest lending to farmers.  To provide institutional finance to landless farmers. It is proposed to provide finance to 5 lakh joint farming groups of “Bhoomi Heen Kisan” through NABARD.  A target of Rs 8 lakh crore has been set for agriculture credit during 2014-15.  Corpus of Rural Infrastructure Development Fund (RIDF) to be raised to Rs 25,000 crore.  Allocation of Rs 5,000 crore provided for the Warehouse Infrastructure Fund.  To set up “Long Term Rural Credit Fund” for the purpose of providing refinance support to Cooperative Banks and Regional Rural Banks with an initial corpus of Rs 5,000 crore.  Rs 50,000 crore allocated for Short Term Cooperative Rural Credit.
  9. 9. © Confederation of Indian Industry 4  Sum of Rs 200 crore for NABARD’s Producers Development and Upliftment Corpus (PRODUCE) for building 2,000 producers organizations over the next two years.  Proposal to reduce the excise duty on specified food processing and packaging machinery from 10 per cent to 6 per cent.  Service tax on loading, unloading, storage, warehousing and transportation of cotton, whether ginned or baled, is being exempted to bring it on par with certain other agricultural produce.  Services provided by the Employees’ State Insurance Corporation for the period prior to 1st July 2012 is being exempted.  Rs 1000 crore provided for “Pradhan Mantri Krishi Sinchayee Yojna” for assured irrigation. INVESTMENT, INFRASTRUCTURE AND INDUSTRY Foreign Direct Investment  Government to promote FDI selectively in sectors.  The composite cap of foreign investment to be raised to 49 per cent with full Indian management and control through the FIPB route.  The composite cap in the insurance sector to be increased up to 49 per cent from 26 per cent with full Indian management and control through the FIPB route.  Requirement of the built up area and capital conditions for FDI to be reduced from 50,000 square metres to 20,000 square metres and from USD 10 million to USD 5 million, respectively for development of smart cities.  The manufacturing units to be allowed to sell its products through retail including Ecommerce platforms. Infrastructure  Rs 100 crore to be provided for setting up a National Industrial Corridor Authority.  An institution to provide support to mainstreaming PPPPs called 4PIndia to be set up with a corpus of Rs 500 crores.  SEZs to be developed in Kandla and JNPT.  An investment of Rs 37,880 crores proposed in NHAI.  Scheme for development of new airports in Tier I and Tier II Cities to be launched.  Comprehensive policy to be announced to promote Indian ship building industry.  Incentives for Real Estate Investment Trusts (REITS). Complete pass through for the purpose of taxation.  A modified REITS type structure for infrastructure projects.  Investment Trusts (INVITS) to attract long term finance from foreign and domestic sources including the NRIs.  Mission on Low Cost Affordable Housing anchored in the National Housing Bank to be set up.  National Housing Bank (NHB) to get additional corpus of Rs 4000 crore.  Slum development to be included in the list of Corporate Social Responsibility (CSR) activities to encourage the private sector to contribute more.  Rs 100 crore is allocated for a new scheme “Ultra-Modern Super Critical Coal Based Thermal Power Technology.”  Comprehensive measures for enhancing domestic coal production.  Adequate quantity of coal will be provided to power plants which are already commissioned or would be commissioned by March 2015.
  10. 10. © Confederation of Indian Industry 5  An exercise to rationalize coal linkages to optimize transport of coal and reduce cost of power is underway.  Rs 500 crores provided for Ultra Mega Solar Power Projects in Rajasthan, Gujarat,Tamil Nadu, Andhra Pradesh and Laddakh.  Rs 400 crores provided for a scheme for solar power driven agricultural pump sets and water pumping stations.  Rs 100 crore provided for the development of 1 MW Solar Parks on the banks of canals.  A sum of Rs 7060 crore has been provided in the current fiscal for the project of developing one hundred Smart Cities.  500 urban habitations to be provided support for renewal of infrastructure and services in next 10 years through PPPs.  Present corpus of Pooled Municipal Debt Obligation Facility to be enlarged to Rs 50,000 crore from Rs 5000 crore.  Rs 100 crore provided for Metro Projects in Lucknow and Ahemdabad. Manufacturing and MSME  A fund with a corpus of Rs.10,000 crore to be created for providing equity through venture capital funds, quasi equity, soft loans and other risk capital, to encourage new start ups by youth.  Corpus of Rs 200 crore to be set up to establish Technology Centre Network.  Definition of MSME to be reviewed to provide for a higher capital ceiling.  Programme to facilitate forward and backward linkages with multiple value chain of manufacturing and service delivery.  Entrepreneur friendly legal bankruptcy framework will be developed for SMEs to enable easy exit.  A nationwide “District level Incubation and Accelerator Programme” to be taken up for incubation of new ideas and necessary support for accelerating entrepreneurship.  Rs 50 crore is provided to set up a Trade Facilitation Centre and a Crafts Museum to develop and promote handloom products and carry forward the rich tradition of handlooms of Varanasi.  Sum of Rs 500 crore for developing a Textile mega-cluster at Varanasi and six more at Bareilly, Lucknow, Surat, Kutch, Bhagalpur and Mysore.  Rs 20 crore to set up a Hastkala Academy for the preservation, revival, and documentation of the handloom/handicraft sector in PPP mode in Delhi.  Rs 50 crore provided to start a Pashmina Promotion Programme (P-3) and development of other crafts of Jammu & Kashmir. TAXATION ADMINISTRATION AND BUSINESS ENVIRONMENT  To promote a stable and predictable and investor friendly taxation regime to spur growth.  Exercise Retrospective legislation with extreme caution and judiciousness, keeping in mind the impact of each such measure on the economy and the overall investment climate.  Bring Legislative and administrative changes to sort out pending tax demands of more than Rs 4 lakh crore under dispute and litigation.  Resident tax payers enabled to obtain on advance ruling in respect of their income-tax liability above a defined threshold.  Take measures for strengthening the Authority for Advance Rulings.  Income-tax Settlement Commission scope to be enlarged.  National Academy for Customs & Excise at Hindupur in Andhra Pradesh.
  11. 11. © Confederation of Indian Industry 6  The subsidy regime to be made more targeted for full protection to the marginalized, poor and SC/ST.  High level committee to interact with trade and industry on regular basis to ascertain areas requiring clarity in tax laws to be set up.  Central Government Departments and Ministries to integrate their services with the e-Biz -a single window IT platform- for services on priority by 31 December this year. GST  Find a solution in the course of this year and approve the legislative scheme, which enables the introduction of GST EXPENDITURE REFORMS  Setting up of Expenditure Management Commission to look into expenditure reforms.  New Urea Policy would be formulated. FINANCIAL SECTOR  Convergence with International Financial Reporting Standard (IFRS) by Adoption of the new Indian Accounting Standards (2nd AS) by Indian Companies.  Financial Inclusion Mission to be launched on 15 August this year with focus on the weaker sections of the society.  Banks to be encouraged to extend long term loans to infrastructure sector with flexible structuring.  Banks to be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL).  Six new Debt Recovery Tribunals to be set up.  Ongoing process of consultations with all the stakeholders on the enactment of the Indian Financial Code and reports of the Financial Sector Legislative Reforms Commission (FSLRC) to be completed.  To infuse Rs 2,40,000 crore as equity by 2018 in banks to be in line with Basel-III norms.  Capital of banks to be raised by increasing the shareholding of the people in a phased manner. Capital Markets  Introduce uniform KYC norms and inter-usability of the KYC records across the entire financial sector.  Introduce one single operating demat account. Small Savings  Kissan Vikas Patra (KVP) to be reintroduced.  A special small savings instrument to cater to the requirements of educating and marriage of the Girl Child to be introduced.
  12. 12. © Confederation of Indian Industry 7  A National Savings Certificate with insurance cover to provide additional benefits for the small saver.  In the PPF Scheme, annual ceiling will be enhanced to Rs.1.5 lakh p.a. from Rs.1 lakh at present. EDUCATION, SKILLS AND HEALTH  An amount of Rs 28635 crore is being funded for Sarv Shiksha Abhiyan(SSA) and Rs 4966 crore for Rashtriya madhyamic Shiksha Abhiyan (RMSA).  Provide toilets and drinking water in all the girls’ schools.  Initiate a School Assessment Programme at a cost of Rs 30 crore.  Provide Rs 500 crore under “Pandit Madan Mohan Malviya New Teachers Training Programme” to infuse new training tools and motivate teachers.  “Skill India” to be launched to skill the youth with an emphasis on employability and entrepreneur skills.  Strengthen at least five institutions as Technical Research Centres.  Development of Biotech clusters in Faridabad and Bengaluru.  Nascent agri-biotech cluster in Mohali to be scaled up. Two new clusters in Pune and Kolkata to be established.  Global partnerships to be developed under India’s leadership to transform the Delhi component of the International Centre for Genetic Engineering and Biotechnology (ICGEB) into a world-leader in life sciences and biotechnology.  Major space missions planned for 2014-15.  Employment exchanges to be transformed into career centres. A sum of Rs 100 crore provided.  Two National Institutes of Ageing to be set up at AIIMS, New Delhi and Madras Medical College, Chennai.  A national level research and referral Institute for higher dental studies to be set up.  To set up AIIMS like institutions in Andhra Pradesh, West Bengal, Vidarbha in Maharashtra and Poorvanchal in UP. A provision of Rs 500 crores made.  12 new government medical colleges to be set up.  States Drug Regulatory and Food Regulatory Systems to be strengthened by creating new drug testing laboratories and strengthening the 31 existing State laboratories.  15 Model Rural Health Research Centres to be set up for research on local health issues concerning rural population.  A national programme in Mission Mode to halt the deteriorating malnutrition situation in India to be put in place within six months. RURAL DEVELOPMENT  Shyama Prasad Mukherji Rurban Mission for integrated project based infrastructure in the rural areas.  Rs 500 crore for “Deen Dayal Upadhyaya Gram Jyoti Yojana” for feeder separation to augment power supply to the rural areas.  Rs 14,389 crore provided for Pradhan Mantri Gram Sadak Yojna(PMGSY).  More productive, asset creating and with linkages to agriculture and allied activities wage employment to be provided under MGNREGA.  Under Ajeevika, the provision of bank loan for women SHGs at 4 per cent to be extended to another 100 districts.
  13. 13. © Confederation of Indian Industry 8  Initial sum of Rs 100 crore for “Start Up Village Entrepreneurship Programme” for encouraging rural youth to take up local entrepreneurship programs.  Allocation for National Housing Bank increased to Rs 8000 crore to support Rural housing.  New programme “Neeranchal” to give impetus to watershed development in the country with an initial outlay of Rs 2142 crore. TOURISM  Rs 200 crore provided to build the Statue of unity (National project).  Facility of Electronic Travel Authorization (e-Visa) to be introduced in phased manner at nine airports in India.  Countries to which the Electronic Travel authorisation facility would be extended would be identified in a phased manner.  Rs 500 crore provided for developing 5 tourist circuits around specific themes.  Rs 100 crore provided for National Mission on Pilgrimage Rejuvenation and Spiritual Augmentation Drive (PRASAD).  Rs 200 crore provided for National Heritage City Development and Augmentation Yojana (HRIDAY).  Rs 100 crore provided for Archaeological sites preservation. OTHER PROPOSALS  Exemptions are being withdrawn, including those extended to services by air-conditioned contract carriages and technical testing of newly developed drugs on human participants.  A further sum of Rs 1000 crore to meet requirement for “One Rank One Pension”.  Capital outlay for Defence increased by Rs 5000 crore including a sum of Rs 1000 crore for accelerating the development of the Railway system in the border areas.  Urgent steps would be taken to streamline the procurement process to make it speedy and more efficient.  Rs 100 crore provided for construction of a war memorial in the Princes Park, which will be supplemented by a War Museum.  Rs 100 crore provided to set up a Technology Development Fund for Defence.  Pan India programme “Digital India” with an outlay of Rs 500 crore to be launched.  Programme for promoting “Good Governance” to be launched .A sum of Rs 100 crore provided. BUDGET ESTIMATES  Non-Plan expenditure estimates for FY15 are Rs 12,19,892 crore.  Plan allocation of Rs 5,75,000 crore mark an increase of 26.9% in 2014-15 over actuals for 2013- 14.  Total expenditure estimates stand at Rs 17,94,892 crore.  Gross Tax receipts will be Rs 13,64,524 crore.  Non Tax Revenues for the current Financial Year will be Rs 2,12,505 crore and capital receipts other than borrowings will be Rs 73,952 crore.
  14. 14. © Confederation of Indian Industry 9 DIRECT TAXES PROPOSALS  Personal Income-tax exemption limit raised by Rs.50,000/- that is, from Rs.2 lakh to Rs.2.5 lakh in the case of individual taxpayers, below the age of 60 years. Exemption limit raised from Rs.2.5 lakh to Rs.3 lakh in the case of senior citizens.  No change in rate of surcharge either for the corporates or the individuals, HUFs, firms etc.  Education cess to continue at 3 percent.  Investment limit under section 80C of the Income-tax Act raised from Rs.1 lakh to Rs.1.5 lakh.  Deduction limit on account of interest on loan in respect of self occupied house property raised from Rs.1.5 lakh to Rs.2 lakh.  In PPF scheme, annual ceiling will be enhanced to Rs.1.5 lakh p.a. from Rs.1 lakh at present.  Income arising to foreign portfolio investors from transaction in securities to be treated as capital gains.  Concessional rate of 15 percent on foreign dividends without any sunset date to be continued.  Eligible date of borrowing in foreign currency extended from 30.06.2015 to 30.06.2017 for a concessional tax rate of 5 percent on interest payments. Tax incentive extended to all types of bonds instead of only infrastructure bonds.  To remove tax arbitrage, rate of tax on long term capital gains increased from 10 percent to 20 percent on transfer of units of Mutual Funds, other than equity oriented funds. Further, period of holding in respect of such units increased from 12 months to 36 months for this purpose.  Income and dividend distribution tax to be levied on gross amount instead of amount paid net of taxes.  In case of non deduction of tax on payments, 30% of such payments will be disallowed instead of 100 percent.  Conducive tax regime to Infrastructure Investment Trusts and Real Estate Investment Trusts to be set up in accordance with regulations of the Securities and Exchange Board of India.  Investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs. 25 crore in any year in new plant and machinery. The benefit to be available for three years i.e. for investments upto 31.03.2017.  Investment linked deduction extended to two new sectors, namely, slurry pipelines for the transportation of iron ore, and semi-conductor wafer fabrication manufacturing units.  10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31.03.2017.  Introduction of a “Roll Back” provision in the Advanced Pricing Agreement (APA) scheme so that an APA entered into for future transactions is also applicable to international transactions undertaken in previous four years in specified circumstances.  Introduction of range concept for determination of arm’s length price in transfer pricing regulations.  To allow use of multiple year data for comparability analysis under transfer pricing regulations.  Provision of section 115JC of the Act has been amended so as to determine the adjusted total income for the incidence of Alternate Minimum Tax (AMT).  It is proposed to tax under the head income from other sources any sum of money received in advance which is forfeited without resulting in any transfer of capital asset.  Expenses incurred for the purpose of CSR activities shall not be considered for deduction under section 37(1) of the Act.  Where a trust or an institution has been granted registration for purposes of availing exemption under section 11 of the Act, then such trust or institution cannot claim any exemption under any provision of section 10 of the Act.  In order to rationalize the provisions relating to cancellation of registration of a trust, the existing provisions under section 12 (AA) of the Act have been amended.
  15. 15. © Confederation of Indian Industry 10  Scope of Section 40(a) (ia) of the Act has been broadened to cover the payment of salary and director fees.  Section 54F of the Act has been amended so as to provide that the exemption is available if the investment is made in one residential house situated in India.  Mutual Fund referred to in clause (23D) of section 10 of the Act, securitization trust referred to in clause (23DA) of section 10 of the Act and Venture Capital Company or Venture Capital Fund referred to in clause (23FB) of Section 10 of the Act are required to furnish the income tax return instead of furnishing a statement giving the details of income if their income exceeds maximum amounts which is not chargeable to tax.  Transfer of government securities by a non-resident to another non-resident shall not be considered as transfer for the purpose of charging capital gains.  It has been proposed to exclude the company having principal business of trading in shares from purview of Speculation Business u/s 73 of the Act.  New clause to be introduced under Section 220 of the Act, wherein notice of demand deemed to be valid till disposal of appeal by last appellate authority.  Existing provision of section 92B of the Act has been amended to cover unrelated parties in certain situations.  Central Government shall notify in the Official Gazette from time to time the income computation and disclosure standards to be followed by any class of or in respect of any class of income.  Government to review DTC in its present shape and take a view in the whole matter. INDIRECT TAXES PROPOSALS  Tax proposals on the indirect taxes side are estimated to yield Rs 7525 crore.  To boost domestic manufacture and to address the issue of inverted duties, basic customs duty (BCD) reduced on certain items.  To encourage new investment and capacity addition in the chemicals and petrochemicals sectors, basic customs duty reduced on certain items.  Steps taken to boost domestic production of electronic items and reduce our dependence on imports. These include: o imposition of basic customs duty on certain items falling outside the purview of IT Agreement, o exemption from SAD on inputs/ components for PC manufacturing, o imposition of education cess on imported electronic products for parity etc.  Colour picture tubes exempted from basic customs duty to make cathode ray TVs cheaper and more affordable to weaker sections. Service tax  To broaden the tax base in Service Tax, sale of space or time for advertisements in broadcast media extended to cover such sales on other segments like online and mobile advertising. Sale of space for advertisements in print media remain excluded from service tax.  Service provided by radio-taxis brought under service tax.  Services by air-conditioned contract carriages and technical testing of newly developed drugs on human participants brought under service tax.  Provision of services rules to be amended and tax incidence to be reduced on transport of goods through coastal vessels to promote Indian Shipping industry.
  16. 16. © Confederation of Indian Industry 11  Services provided by Indian tour operators to foreign tourists in relation to a tour wholly conducted outside India to be taken out of the tax net and Cenvat credit for services of rent-a-cab and tour operators to be allowed to promote tourism.  Service tax exempted on loading, unloading, storage, warehousing and transportation of cotton, whether ginned or baled.  Services provided by the Employees’ State Insurance Corporation for the period prior to 1st July 2012 exempted from service tax.  Exemption available for specified micro insurance schemes expanded to cover all life micro- insurance schemes where the sum assured does not exceed Rs 50,000 per life insured.
  17. 17. © Confederation of Indian Industry 12
  18. 18. © Confederation of Indian Industry 13 Chapter 2 Key Budget Trends
  19. 19. © Confederation of Indian Industry 14
  20. 20. © Confederation of Indian Industry 15 Chapter 2 Key Budget Trends Sources of Revenue - contribution of borrowings & other liabilities goes down Sources of Expenditure - share of Central Plan Expenditure declines
  21. 21. © Confederation of Indian Industry 16 Fiscal consolidation on track T: Target Moderation in Deficits as percent of GDP Revenue receipts on the rise
  22. 22. © Confederation of Indian Industry 17 Tax-GDP ratio increases marginally Disinvestment target rises significantly Debt Receipts move up
  23. 23. © Confederation of Indian Industry 18 Debt servicing shows sign of moderation Expenditure - GDP ratio remains stable Plan exp. (as % of GDP) moves up while non-plan exp. falls
  24. 24. © Confederation of Indian Industry 19 Capital expenditure as % of total expenditure remains low Major components of non-plan expenditure continue to rise Subsidies as percent of total expenditure decline
  25. 25. © Confederation of Indian Industry 20 Subsidy on food & fertilizer increases whereas that on petroleum declines Central Plan Outlay on various sectors of economy declines
  26. 26. © Confederation of Indian Industry 21 Central plan outlay on Agri, Rural Dev & Social Services Slashed *Includes the provision for rural housing but excludes provision for rural roads. ** Includes the provision for rural roads. ***Excludes provision for rural housing. **** Includes Communications, Irrigation and Flood Control and General Economic Services. Infrastructure spending to increase Net transfers to states go up significantly
  27. 27. © Confederation of Indian Industry 22
  28. 28. © Confederation of Indian Industry 23 Chapter 3 Analysis of the Budgetary Proposals
  29. 29. © Confederation of Indian Industry 24
  30. 30. © Confederation of Indian Industry 25 Chapter 3 Analysis of the Budgetary Proposals Prelude The Union Budget 2014-15, the maiden budget of the newly elected government, has been announced at a time when the macro-economic milieu continues to be domestically and globally challenging. As a result, the year 2013-14, was primarily marked by slowdown in GDP growth and persistent inflationary pressures. At the same time, declining industrial and manufacturing production, subdued consumption, stalled investments and high fiscal deficit indicates that recovery is still some distance away. What is more, the government has had to contend with elevated expectations from citizens who were anticipating the revival of 'Achche Din' from this government. Under these circumstances, the Finance Minister has attempted a fine balancing act by taking steps to provide an impetus to economy and industry, reignite investment demand even while enforcing fiscal prudence and intending to contain food inflation through appropriate fiscal and supply side initiatives. The Union Budget 2014-15 stands out for the pragmatic and bold approach adopted by the Finance Minister to lift growth, reignite investment, boost savings and provide a fillip to employment generation. A bold and reformist budget, it has rightly focused on the priority areas which would boost business confidence by providing an impetus to growth. The vision articulated in the Budget shows that the government means business. Some of the announcements made by the Finance Minister in the speech which deserve special mention are given below. Fiscal Consolidation The initiative taken by the Finance Minister to adhere to the path of fiscal prudence as well as present a credible medium term plan to bring down fiscal and revenue deficit is indeed laudable. The Budget has rightly spelt out a roadmap of gradually reducing the fiscal deficit to 3 per cent of GDP by 2016-17 which would bring in the much needed efficiency and certainty in government finances. This singular measure, if effectively implemented, has the potential to be a game-changer for lifting business sentiment, bolstering our credibility among foreign investors and rating agencies and would send a strong signal that the government is committed to reforms.  Besides, the revenue deficit is estimated to be contained at 2.9 per cent of GDP as against 3.3 per cent in 2013-14. As a result, borrowings are expected to rise by a mere one per cent in 2014- 15 over the revised estimates of last year.  As per the data provided in the Budget 2014-15, total receipts have been budgeted at Rs. 1,794,892 crore in 2014-15, which is around 13 per cent higher than the revised estimates of 2013-14. Similarly, Plan expenditure has been estimated at Rs. 575,000 crore, which is 21per cent higher than the revised estimates of last year. And non-Plan expenditure is budgeted at 8 per cent higher than the revised estimates of last year.  The amount set aside in the Budget for capital expenditure has gone up by around 19 per cent in 2014-15 which is higher than 15 per cent Budget rise in 2013-14 but as share of total expenditure, at 12.6 per cent is lower than the 13.7 per cent achieved in the previous year which indicates that the quality of fiscal deficit is still a cause for concern.  Hopefully the disinvestment target of Rs.63,425 crore for 2014-15 would materialise considering that only Rs. 25,841 crore worth of disinvestment was achieved last year.
  31. 31. © Confederation of Indian Industry 26 Rationalising Subsidies  Another creditable feature of the Budget is the intent towards better targeting of subsidies so that the amount reaches the intended beneficiary. What is significant is the decision to announce an Expenditure Management Commission to look into expenditure reforms. The move would bring in certainty and efficiency in expenditure management. The formulation of a new urea policy is noteworthy and would serve to restore the soil nutrient balance. The decision to curtail subsidies such as that on fuel and fertilizers is noteworthy as it neither promotes efficient utilization of resources nor does it have significant positive externalities. The linking of MNREGA with asset creation would help build productive assets and help regenerate the village economy. Tax Reforms  The most striking feature of the Budget has been the attempt to rekindle business confidence and make India an attractive place for doing business for the domestic and foreign investor. The Budget has announced a stable, transparent and non-adversarial tax environment with a focus to re-engineer tax administration and overhaul the dispute settlement mechanism so as to improve the ease of doing business in India. The announcement that the government would not ordinarily change policies retrospectively is noteworthy. The creation of a high level Committee by CBDT to scrutinize all cases arising out of past amendments, changes in transfer pricing regulation, widening the scope of authority of advance rulings are all steps in the right direction. The Finance Minister has also given an assurance that the concerns of the States about loss of autonomy and compensation for loss of revenue will be resolved by end of this financial year which in turn would pave the way for the implementation of GST. This is a sure way of strengthening business sentiment and restore faith of the foreign investor in the India growth story. Rejuvenating the projects pipeline: Infrastructure Development of adequate infrastructure is a critical pre-requisite for sustaining the momentum of economic growth while at the same time ensuring inclusiveness in the growth process. As the country aspires to resume the journey towards a path of sustained growth of 7-8 per cent or above within the next 3-4 years it is imperative to put in place policies and programmes which would provide a fillip to infrastructure development. With a view to incentivise development of infrastructure, the Budget has proposed a number of welcome measures which would make investment in infrastructure a viable business proposition. Some of the key measures announced for the infrastructure sector are as under:  Rural infrastructure to be promoted via PPP through Shyamaprasad Mukherjee Rurban Mission for which a grant of Rs. 500 Crores has been set aside. The scheme would serve to strengthen rural infrastructure and prevent rapid pace of urban migration.  An institution to provide support to mainstreaming PPPs called 3P India will be set up with a corpus of Rs.500 Crores.  Priority would be accorded to quick Dispute Resolution  Banks will be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL)  Infrastructure Investment Trusts to be set up with tax incentives. This would provide long term affordable finance to the Sector and hopefully these steps would provide incentive to Banks for lending.
  32. 32. © Confederation of Indian Industry 27 Roads & Highways  A grant of Rs. 14,389 crore provided to Pradhan Mantri Gram Sadak Yojna (PMGSY)  Allocation to National Highway Authority of India (NHAI) enhanced to Rs 37, 850 Crores, including Rs 3,000 Crores to North East Ports  16 New Ports to be announced this fiscal  Comprehensive Policy to be announced for Ship Building Industry this fiscal  Ship Building Industry is looking for impetus at par with other developing countries Shipping  A comprehensive policy will be announced to promote Indian ship building industry in the current financial year. Inland Waterways  The waterway from Allahabad to Haldia to be created (1620 Km) over the next 6 years with an investment of Rs 4,200 Crores. Hopefully, the development of this waterway would revive the traditional, cost effective and faster means of freight transport in the country. Airports  Launch of new airports in Tier I and Tier II cities through Airport Authority of India or PPP to ensure connectivity amongst Tier I & II Cities.  However, while regional connectivity has always been a focus area, greater clarity is required on controversial issues in the Concession Agreements to attract private investment. Real Estate & Housing Low Cost Affordable Housing  Limit for attracting FDI lowered from 50,000 sq.m to 20,000 sq. m. Capital Requirement reduced from Rs 10 million to Rs.5 million with 3 year lock in period. This would help provide low cost finance for affordable housi  National Housing Bank (NHB) to get additional corpus of Rs 4000 Crore. Hopefully, this would motivate the National Housing Bank (NHB) to come out with innovative financing mechanisms for this crucial sector of the economy. Financing Real Estate & Housing  Tax Incentives provided for Real Estate Investment (REITs). This would provide a fillip to Real Estate & Housing Sector as REITs have been proven global instruments for bringing investment in this Sector. Urbanization & Future Cities Smart & New Cities  A budgetary Allocation of INR 7,060 Crore proposed for creation of 100 New Smart Cities. This would result in the creation of new and smart cities to manage the burgeoning urban population in the country that is expected to reach 600 million by 2031.  Industrial Corridor Headquarter to be established in Pune, which would also focus on Smart Cities across Industrial Corridors in the country with grant of INR 100 Crore
  33. 33. © Confederation of Indian Industry 28 Financing Urbanization  Special focus on water, Sewage and Transport for Urban Renewal.  Budget allocation proposed to increase from Rs 5,000 Crore at present to Rs 50,000 Crore by 2019 for pooled Municipal Debt Obligation Facility. This will not only take care of the crumbling city infrastructure but would also provide greater financial powers at municipal levels. Power Sector  Rs 100 crores set aside for preparation work for a new scheme “Ultra-Modern Super Critical Coal Based Thermal Power Technology”. This will lead to the adoption of cleaner and more efficient technologies.  Comprehensive measures are underway to increase domestic coal production, which includes supply of crushed coal and setting up of washeries. Exercise to rationalize coal linkages which will optimize transport of coal is also underway  Easing supply of coal for power producers. This will help curb coal imports significantly thereby easing pressure on current account deficit. A detailed roadmap on increasing coal production is awaited.  A budgetary allocation of Rs 200 crores for power reforms in Delhi. Hopefully, this will improve the power supply in Delhi Harnessing Agriculture Production Contributing around 15% of India’s Gross Domestic Product (GDP), the sector provides employment to 52% of the country’s work force and livelihood security to more than 620 million people. Hence, a vibrant and robust agriculture sector is critical for promoting inclusive growth in the country. However, the sector finds itself constrained on account of structural bottlenecks which gets reflected in low agriculture yields, poor agriculture productivity and weak agriculture supply chain and has resulted in persistently high inflation. With a view to provide an impetus to growth in agriculture, the Budget has proposed wide-ranging initiatives to reinvigorate the sector. General  New urea policy will be formulated which will bring in efficiency in nutrient use  MNREGA will be linked to agriculture, focusing on works that are more productive, asset creating and substantially linked to agriculture and allied activities.  Setting up of national market and farmer markets with state level  Allocation of Rs 100 crore for agri tech infrastructure fund  Allocation of Rs 5,000 crore to increase warehousing capacity  Development of integrated marketing infrastructure Water management  Pradhan Mantri Krishi Sichayin Yojna announced with allocation of Rs 1,000 crore  National adaptation fund for climate change with Rs100 crore  Assured irrigation and risk mitigation  A new program called “Neeranchal” with an initial outlay of Rs2,142 crores.  Added impetus to watershed development in the country
  34. 34. © Confederation of Indian Industry 29 Research and Development  Agri research center in Assam & Jharkhand with allocation of Rs100 crore  Agri university in Andhra Pradesh and Rajasthan and Horticulture University in Telangana and Haryana with allocation of Rs 200 crore  Renewed focus on agri education and R&D  Announcement of scheme to provide soil health card to farmers allocated Rs100 crore  Scheme for establishing 100 mobile soil testing labs with allocation of Rs56 crore  Better soil health management by efficiency in nutrient use Agri-credit  Target for agri lending set up at Rs 8 lakh crore  Under the Interest Subvention Scheme for short term crop loans, the banks are extending loans to farmers at a concessional rate of 7%. The farmers get a further incentive of 3% for timely repayment. The scheme to be continued in 2014-15.  Finance to 5 lakh joint farming groups of bhoomi heen kisan through NABARD  Price stabilization fund with allocation of Rs 500 crore  Improved credit availability to farmers  Corpus of RIDF raised by an additional Rs 5,000 crores from the target given in the Interim Budget to Rs 25,000 crores  Help in creation of infrastructure in agriculture and rural sectors across the country.  NABARD allocated Rs 200 crore for setting up 2000 producer organizations  To ensure profitability of small holding based agriculture  Allocation of Rs 50,000 crore for Short Term Cooperative Rural Credit (STCRC) – Refinance Fund during 2014-15.  Ensure increased and uninterrupted credit flow to farmers and to avoid high cost market borrowings by NABARD  Setting up “Long Term Rural Credit Fund” in NABARD for the purpose of providing refinance support to Cooperative Banks and Regional Rural Banks with an initial corpus of Rs 5,000 crore.  Boost to long term investment credit in agriculture Allied sectors  Allocation of Rs 50 crore for indigenous cattle breeding and blue revolution in inland fisheries  Development of agri allied sectors  Kisan television launched with Rs100 crore  Efficient real time information dissemination to farmers on various farming and agriculture issues Energy efficiency  Solar power driven agricultural pump sets and water pumping stations for energizing one lakh pumps with an allocation of Rs 400 crores
  35. 35. © Confederation of Indian Industry 30 Manufacturing: A Fresh Deal If the Indian growth story has to be sustained and adequate employment is to be generated then it is imperative that the share of manufacturing in GDP increases to upwards of 25 per cent from the present share of around 15 per cent of GDP. The Budget recognizes that the contribution made by the sector, at around 15 per cent of GDP is not enough to fulfil the developmental priorities of a country with a large population like India. Hence, a number of measures have been announced in the Budget to provide an impetus to the manufacturing sector. Some such measures are as under: General Setting up of 20 industrial clusters, a National Industrial Corridor Authority, linking of smart cities with industrial corridors, reviving SEZs, etc are steps that provide support to the manufacturing sector and attract employment. Capital Goods  A decrease in the threshold limit of investment allowance on plant and machinery from Rs 100 Cr to Rs 25 Cr will promote investment in plant and machinery. This will also give boost to capital goods industry. CII had strongly called for this provision  Infrastructure Investments Announced: Development of 16 new port projects, allocation of Rs 11,635 crores for port connectivity, development of new airports in Tier 1 and Tier II cities, investment in National Highway Authority of India, Ultra Mega Solar Power Projects and additional 15,000 km of gas pipelines via PPP would give a huge boost to capital goods industry.  Reduction of Basic Custom Duty from 10% to 5% on forged steel rings for manufacture of bearings of wind operated electricity generators will lead to reduction in input cost for bearing manufacturers, used in wind operated electricity generators.  Continuation of reduction in excise duty on capital goods from 12% to 10% promises to spur growth in capital goods industry. PSU capital investment of sum of Rs 2.47 lakh crore in 2014-15 also fosters demand for capital goods Steel  Increase in the custom duty on imported flat rolled steel for stainless steel from 5% to 7.5% is a welcome step  Mining sector welcomes the announcement on changes in the MMDR Act This will help in facilitating the mining of iron ore, promote investments and encourage sustainable best practices.  Royalty on minerals to be reviewed to enhance revenue for steel is a negative step as it will affect prices  Customs duty on metallurgical coal increased from nil to 2.5% Chemicals  Reduction of the Basic Customs Duty (BCD) on fatty acids, crude palm stearin, RBD and other palm stearin, specified industrial grade crude oils from 7.5% to nil for manufacture of soaps and oleo chemicals will boost domestic manufacturing and help bring prices of consumables like soaps down  Reduction of the Basic Customs Duty (BCD) on crude glycerin from 12.5% to 7.5% and crude glycerin used in manufacture of soaps from 12.5% to nil would require further correction as it is
  36. 36. © Confederation of Indian Industry 31 not crude glycerin that is used in manufacture of soaps but refined glycerin. A clarification will have to be issued in this regard.  Reduction of the Basic Customs Duty (BCD) on fatty acids from 7.5% to nil is a positive move Textiles  6 new textile clusters are proposed. A handloom and pashmina promotion programme will go a long way in creating Brand India ICTE Manufacturing  Reduction in Customs Duty on LCD panels under 19 inches would make the end products more affordable and generate additional demand.  SAD exemption on input component parts for computers addresses the issue of CENVAT overflow and makes the products cheaper.  Increase in customs duty on Non-STA telecom products would make the domestic manufacturers of such products competitive.  Exemption of CPTs from custom duty - The domestic production of CPTs is being phased out. The CRT based CTV sets would become cheaper as a result of this reduction in customs duty.  Raising the excise duty on Smart Cards to 12% (implies CVD of 12% on imports) would make the domestic manufacturers competitive  Expansion of broadband connectivity and project of 100 Smart Cities would generate demand for IT and Telecom products. Cement  Highway development and state roads, rural housing and infrastructure projects will boost demand for Cement. Food Processing  Reduction of the excise duty on specified food processing and packaging machinery from 10 percent to 6 percent would incentivize expansion of processing capacity and boost investment by small and medium enterprises. MSME Sector: Harnessing the Growth Engine The MSME segment, by contributing over 40 per cent to production and 30 per cent to exports, has emerged as an engine of growth for the economy. The segment has created more than 100 million jobs through 46 million units from rural and urban areas across the country. However, the slow pace of economic reforms has adversely affected the confidence of MSMEs. The sector is afflicted by problems relating to finance, marketing, technology, among others which is preventing the sector from utilizing its full potential. Recognising the immense potential of this sector towards inclusive growth, the government has announced wide-ranging measures in the Budget for accelerating growth in the MSME sector.  Definition of MSME will be revised which is a major CII recommendation. The present definition of MSME based on Investment is not in consonance with inflation rate and exchange rates which have changed over time.  Fund of Rs Rs 10,000 Crore for equity support for MSME and supported with Rs 200 crore corpus fund for technology is a much-awaited move and meets CII recommendations
  37. 37. © Confederation of Indian Industry 32  New Committee will be formed comprising of representation from Ministry of MSME and RBI to address financing problems of MSME, also included in CII recommendations.  Bankruptcy issue of MSME will be addressed, helping viable companies to survive. This is a major CII recommendation.  National Skill India Programme will be started. It will bring in new entrepreneurs and will help existing entrepreneurs running business under SME setup to run their entities in an efficient and cost effective manner.  FDI in defence increased from existing 26% to 49% will boost the business of SME’s in manufacturing defence related products.  A Trade Facilitation Centre for Handloom Industry will be established. It will benefit SME's operating in Handloom Industry and is a major CII recommendation  Rs 100 Crore Fund for Technology Development. Defence & Aerospace Sector A major concern in the defence sector is the dependence on imports for supply of defence equipments and systems. India’s target of achieving 70 per cent indigenization is still a long way off. Besides, the participation of the Indian private sector in defence production is below potential. The Budget has announced the following set of measures to attract domestic investment in the defence sector.  Defence budget has been increased to Rs 2,29,000 crore. This includes modernisation of arms and increased capital outlay by Rs 5,000 crore including Rs 1,000 crore of development of railway in border areas.  This will increase avenues for participation of Indian Industry in Defence Production.  Composite FDI in defence is raised to 49% (The ownership of such joint ventures will stay with Indian companies) These proposals will have positive impact on private defense industry and will speed up indigenization. These provide a huge employment opportunity. Financial sector: The Reforms Agenda The Union Budget FY15 has struck a positive balance between the prudential regulatory and policy reforms and a focused growth oriented strategy for financial inclusion. CII welcomes the government’s decision to increase the composite FDI in insurance to 49%. It is a significant step in the right direction. The Budget addresses the key challenges of banks like growing NPAs, capital infusion and infrastructure financing, and goes a long way in strengthening the financial inclusion agenda. Among the key provisions announced: Banking  Adoption of the new Indian Accounting Standards (Ind AS) for Financial Sector will bring convergence in Indian financial sector reporting standards with internationally accepted norms while also bringing advantages of global best practices for greater transparency and better governance framework.  Launching of Financial Inclusion Mission on 15 August this year with focus on the weaker sections of the society would be critical in extending banking services to the unbanked masses.
  38. 38. © Confederation of Indian Industry 33 This would help bring the targeted financially excluded weaker sections of the society, including women, small and marginal farmers and labourers, under the coverage of formal financial services network.  To encourage banks to extend long term loans to infrastructure sector, the Budget proposes to permit them to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL). On the asset side, banks will be encouraged to extend long term loans to infrastructure sector with flexible structuring to absorb potential adverse contingencies, sometimes known as the 5/25 structure. On the liability side, banks will be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL).  To address the issue of Non-Performing Assets (NPA’s) of Public Sector Banks, six new Debt Recovery Tribunals would be set up at Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri and Hyderabad.  Ongoing process of consultations with all the stakeholders on the enactment of the Indian Financial Code and reports of the Financial Sector Legislative Reforms Commission (FSLRC) to be completed.  Requirement to infuse Rs 2,40,000 crore as equity by 2018 in banks is in line with Basel-III norms.  Capital of banks to be raised by increasing the shareholding of the people in a phased manner. The measure will reduce the pressure on the Government finances whereas greater public shareholding along with autonomy and accountability for Public Sector Banks would help bring necessary reforms in their governance framework. Capital markets  Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector leads to simplification and easier access of financial markets by retail investors. Uniform KYC, approved by one regulator would be accepted by other regulators. This will do away with the requirement to perform multiple KYC for investing in products regulated by different regulators  Single operating demat account will reduce operation difficulties for most retail investors and may help investors and intermediaries to seamlessly transact across all financial instruments  Pass-through status for Real Estate Investment Trusts and Infrastructure Investment Trusts will avoid double taxation and bring in tax clarity beneficial for cash-strapped and highly leveraged developers. REITs are expected to attract more global investment and bring transparency into the sector.  Tax rebate on dividend remitted by foreign companies will encourage receipts by companies in India  The holding period for debt mutual funds to be increased from 12 months to 36 months  Long term capital gain tax rate increased from 10% to 20% on debt MFs.  The rise in the lock-in period may provide long term stable funds to the mutual fund industry and to the economy. Also this would bring parity with other asset classes. This may allow fund managers to manage funds in a much better way as they will get access to funds for a longer time.  The increase in the LTCG for debt funds is intended to give level playing field to fixed income mutual funds vis-à-vis banks deposits
  39. 39. © Confederation of Indian Industry 34  Income from FPIs to be characterized as Capital Gains will give tax certainty to foreign portfolio investors and may pave the way for foreign fund managers to set-up their base in India.  Boost to borrowing through corporate bond market. Extend a liberalized facility of 5% withholding tax to all bonds issued by Indian corporates abroad for all sectors and extend the validity of the scheme to 30.06.2017. This will incentivize FPIs to invest in this class and will give a boost to the corporate bond market. Small Savings  Kissan Vikas Patra (KVP) to be reintroduced.  A special small savings instrument to cater to the requirements of educating and marriage of the Girl Child to be introduced.  A National Savings Certificate with insurance cover to provide additional benefits for the small saver.  In the PPF Scheme, annual ceiling will be enhanced to Rs.1.5 lakh p.a. from Rs.1 lakh at present. Reinvigorating the Healthcare Sector Our healthcare system continues to be in need of a makeover. The demand far outstrips the supply. There are systemic distortions which lead to inefficiencies in the sector and investment in health is inadequate to meet the growing needs of the system. The major provisions announced in the Budget for the healthcare sector are as under:  The Budget has recognized the long standing need for enabling access to “healthcare services for all” through provision of free medicines and free diagnostic services which will benefit a vast number of the underprivileged population in a big way.  The twin benefits of improved sanitation facilities through the “Swatch Bharat Abhiyan” and provision of free diagnostic services and free medicines should enable a significant lowering of the disease burden through preventive and early remedial measures resulting in lesser healthcare costs and an improvement of the health indices over time.  The Budget has also recognized the need for reducing the burden of tertiary care on only a few Metro based institutions. The setting up the additional AIIMS like institutions at the State levels will help to bridge the much needed gap of decentralizing tertiary care facilities and providing healthcare delivery for the population at large closer to their homes.  The proposed setting up of the 12 Government medical colleges is expected to address the problem of the acute shortages of Doctors and Specialists that the country is facing in expanding healthcare delivery, especially in Tier I and III cities and rural areas.  The underlying thrust of the Budgetary provisions for large scale disease prevention, expanded and decentralized infrastructure and build up of Medical talent in a big way are steps in the right direction which should serve the growing healthcare needs of the vast population of India. The proposed 15 Model rural Health Research Centres should be able to facilitate identifying incidence of local health issues and, therefore, targeting interventions better.  The private sector can complement the Government in a significant way in this massive exercise through appropriately structured PPP models and CII looks forward to working with the Government in implementing this mammoth agenda. A higher integration of Health Insurance in the Healthcare delivery agenda will also help in leveraging available resources for public health for higher returns.
  40. 40. © Confederation of Indian Industry 35 Higher Education Sector Among the steps related to higher education, Budget 2014 focuses largely on health education and sports education. Both are areas which have been neglected for long, the latter having had virtually no national focus so far.  4 more AIIMS like institutions in Andhra Pradesh, West Bengal, Vidarbha and Poorvanchal for Rs 500 crore. 12 more government medical colleges with dental facilities.  Agriculture universities in Andhra Pradesh and Rajasthan and Horticulture Universities in Telengana and Haryana for Rs 200 crore.  National Center for Himalayan Studies with Rs 100 crore  Sports University in Manipur with Rs 100 crore Finance minister’s announcement on setting up of new institutes is welcome as it will address the larger agenda of increasing access to higher education but the core issue of faculty shortages in existing institutes and ways to strengthen the system has been left untouched. The more fundamental questions of autonomy for these institutes so that they have the flexibility to recruit the faculty they want and are encouraged to go for the right kind of accreditation, have not been addressed. Focus on Skill Development National Multi Skill programme - Skill India constituted to skill the youth with emphasis on employability and entrepreneurial skills. The FM’s announcement on the convergence of various schemes reiterates the government’s commitment to developing a robust and sustainable skilling ecosystem with the Prime Minister's vision for building India a skilled India with scale and speed. Apprenticeship Act 1961 to be amended. Such a move would make it easier for apprentices to be trained to become skilled workers, which will benefit industry in the long run. Media & Entertainment Sector The budget announcements of setting up a “National Centre for Excellence in Animation, Gaming and Special Effects would help in harnessing the huge potential in the gaming industry, While it will help the M&E sector become globally competitive and attract students from across the globe it will also help the India M&E industry capitalize in the sector of gaming. To boost community radio stations the budget has allocated Rs 100 cr allocated for the set up of new Community Radio stations. The announcement of according status of Institutes of national Importance to Film & Television Institute, Pune and Satyajit Ray Film & Television Kolkata Institute is a welcome step . Realising the Tourism Potential  The initatives announced in the budget will boost the development of tourism infrastructure and tourism industry in india which has a significant potential to attract foreign tourists. The following proposal of  Introduction of facility of E-visas in a phased manner at 9 airports  Development of Sarnath-Gaya-Varanasi Buddhist circuit with world class tourist amenities  Allocation of Rs 100 cr allocated for development of archaeological sites  Allocation of Rs 500 cr allocated for setting up five tourist circuits
  41. 41. © Confederation of Indian Industry 36  Allocation of Rs 200 cr allocated for heritage conservation. Mathura, Amritsar, Gaya, Kanchipuram, Vellankani and Ajmer identified for heritage conservation  Development of Convention Centers and New airports in tier I and tier II cities to be developed on a PPP model  Exemption of Services provided by Indian tour operators to foreign tourists for a tour conducted outside India and provision of Cenvat credit for services of renting a cab. Will help in improving connectivity, preserving our ancient heritage and attract tourists, which in turn will promote job creation within the industry and boost tourism industry IT & Telecom Sector While the provisions of Budgetary Allocation of Rs 100 Crores towards delivery of elementary learning would support in delivery of basic services and augment elementary learning. The proposal of National Rural Internet and Technology Mission for services in villages and schools, training in IT skills and E- Kranti for government service delivery and governance scheme with sum of `500 crore would improve broadband connectivity in rural areas. The rural broadband scheme will help to push IT penetration in rural areas for financial inclusion.
  42. 42. © Confederation of Indian Industry 37 Chapter 4 Analysis of Fiscal Trends
  43. 43. © Confederation of Indian Industry 38
  44. 44. © Confederation of Indian Industry 39 Chapter 4 Analysis of Fiscal Trends A Pragmatic and Extensive Budget  Presenting the first budget of the newly elected NDA government, Finance Minister, Mr Arun Jaitley laid stress on fiscal prudence, retaining the fiscal deficit target of 4.1 per cent of GDP for 2014-15, while aiming to progressively reduce it to 3.6 per cent in 2015-16 and 3.0 per cent in 2016-17. To be sure, the revised fiscal deficit for 2013-14 stood at 4.6 per cent of GDP as compared to 4.8 per cent in 2012-13. To lower the fiscal deficit to 4.1 per cent of GDP in 2014- 15, the government is betting on revenue and expenditure growth both to the tune of 12.9 per cent as compared to the revised estimates for 2013-14. Faced with an economy struggling with low growth rates over the last two years and given the fact that the government’s revenue collection has been falling below the budgeted revenue in five of the past six years including the last fiscal year, the revenue targets for 2014-15 look ambitious.  Revenue deficit is budgeted to decline to 2.9 per cent of GDP in the current fiscal as compared to 3.3 per cent in the previous year. In the Union Budget 2012-13, government had introduced a new fiscal indicator-effective revenue deficit- which is calculated after excluding the expenditure on grants for creation of capital assets. The effective revenue deficit will decline to 1.6 per cent in 2014-15, from 2.0 per cent in the previous year. As per the medium-term policy statement, revenue deficit will moderate to 2.0 per cent in 2015-16 and 1.5 per cent in 2016-17, while effective revenue deficit is budgeted to be eliminated from 2015-16. Figure 1: Trend in Deficits) Table 1: Government Market Borrowings (as a % of GDP (Rs crore) 2012-13 2013-14 (RE) 2014-15 (BE) Fiscal Deficit 4,90,190 5,24,539 5,31,177 % financed through market loans 95.3 86.5 86.8 Gross Market Borrowings 5,58,000 5,63,911 6,00,000 Less repayments 90,644 1,10,009 1,38,795 Net Market Borrowings 4,67,356 4,53,902 4,61,205 Source: Union Budget 2014-15 Note: BE- Budget Estimates, RE – Revised Estimates  Though the fiscal deficit has been targeted at 4.1 per cent of GDP in the current fiscal, lower than 4.6 per cent achieved in the last year, net market borrowings have been pegged marginally higher by 1.6 per cent in 2014-15 over 2013-14. This is expected to put slight upward pressure on yield for the 10-year benchmark government security. Additionally, and perhaps more importantly, the FM has reduced his dependence on market loans for financing the deficit in
  45. 45. © Confederation of Indian Industry 40 2014-15. As a result, the proportion of funding provided through market borrowings is expected to be 86.8 per cent in 2014-15 against a substantially higher share of 95.3 per cent in 2012-13.  Economic activity is positively related to tax revenues. Empirical evidence from India clearly reveals that government revenues plummet during downturns and spike up during upturns. In the coming fiscal, we expect some improvement in the growth prospects, propelled by pick-up in investment and consumption demand, which will in turn provide a fillip to the tax collections for the government. Additionally, in order to achieve fiscal consolidation, the FM hopes to implement Goods and Service tax (GST) as soon as possible to improve tax buoyancy. The following table presents the key budgetary arithmetic for 2014-15. Table 2: Budget at a Glance 2014-15 (Rs crores) 2012-13 2013-14 2013-14 2014-15 % Change Actuals BE RE BE (FY15 BE over FY14 RE) 1. Revenue Receipts 879232 1056331 1029252 1189763 15.6 2. Tax Revenue (net to centre) 741877 884078 836026 977258 16.9 3. Non-Tax Revenue 137355 172252 193226 212505 10.0 4. Capital Receipts (5+6+7) 531140 608967 561182 605129 7.8 5. Recoveries of Loans 15060 10654 10802 10527 -2.5 6. Other Receipts 25890 55814 25841 63425 145.4 7. Borrowings and other liabilities 490190 542499 524539 531177 1.3 8. Total Receipts (1+4) 1410372 1665297 1590434 1794892 12.9 9. Non-Plan Expenditure 996747 1109975 1114902 1219892 9.4 10. On Revenue Account, of which 914306 992908 1027689 1114609 8.5 11. Interest Payments 313170 370684 380066 427011 12.4 12. On Capital Account 82441 117067 87214 105283 20.7 13. Plan Expenditure 413625 555322 475532 575000 20.9 14. On Revenue Account 329208 443260 371851 453503 22.0 15. On Capital Account 84417 112062 103681 121497 17.2 16. Total Expenditure 1410372 1665297 1590434 1794892 12.9 17. Revenue Expenditure 1243514 1436169 1399540 1568111 12.0 18. Capital Expenditure 166858 229129 190894 226781 18.8 19. Revenue Deficit 364282 379838 370288 378348 2.2 As a percentage of GDP 3.6 3.3 3.3 2.9 - 20. Effective Revenue Deficit 248572 205205 232060 210244 -9.4 As a percentage of GDP 2.5 1.8 2.0 1.6 - 21. Fiscal Deficit 490190 542499 524539 531177 1.3 As a percentage of GDP 4.8 4.8 4.6 4.1 - 22. Primary Deficit 177020 171814 144473 104166 -27.9 As a percentage of GDP 1.8 1.5 1.3 0.8 - Source: Union Budget 2014-15
  46. 46. © Confederation of Indian Industry 41 The Revenue Arithmetic The sharp jump in disinvestment receipts budgeted in 2014-15 is a heartening sign. Gross tax receipts are expected to register an impressive growth in the current year too. Coupled with insipid performance on the non-tax receipts front, total receipts are estimated to grow by only 12.9 per cent in 2014-15.  The sub-five per cent growth in the last two years had a negative impact on the industrial performance, with the sector’s growth languishing at an average 0.7 per cent in the same period. This, in turn, severely dented government revenue stream. However, given only a marginal improvement of economic growth in the current fiscal, total receipts are budgeted to increase by 12.9 per cent in 2014-15 as compared to 12.8 per cent growth in 2013-14, underpinned by 17.7 per cent expansion in tax receipts. Positively, disinvestment receipts are budgeted to grow sharply this year, turning around the dismal state of affairs prevalent in the last couple of years. Moreover, the budget makes a mention of the likelihood of finding a resolution to the problems many states are having in implementation of the GST. The latter is expected to streamline the tax administration, avoid harassment of the business and result in higher revenue collection, both for the Centre and the States. Tax Revenue  During 2013-14, growth in gross tax receipts had dipped to 11.8 per cent mainly on account of slower growth in indirect taxes. However, in 2014-15, gross tax receipts are budgeted to grow by 17.7 per cent. Consequently, gross tax revenue to GDP ratio is expected to rise to 10.6 per cent for 2014-15 from 10.2 per cent in the previous year. Under gross tax revenue, corporate and income tax collections are budgeted to grow by 14.6 and 17.6 per cent in 2014-15, respectively over the revised estimates of 2013-14. Amongst the indirect taxes, service tax is expected to retain its robust growth in 2014-15 too. Extension of excise duty concessions for capital goods, consumer durables and automobile sectors for a period of 6 more months may help in boosting growth of the beleaguered manufacturing sector. One important change in the structure of tax revenues in the last couple of years has been the emergence of corporate taxes as the single largest component of overall tax collections since FY07. Prior to that, union excise duty was the single biggest source of tax revenue for the government. Non-Tax Revenue  Non-tax revenue receipts are expected to increase by 10.0 per cent in 2014-15 as compared to a high growth of 40.7 per cent in 2013-14. However, capital receipts growth is budgeted to move to the positive territory in the current year after declining in the last year. Under capital receipts, non- debt receipts, which has disinvestment, as one of its major components, is expected to grow at an exponential rate of 101.8 per cent in 2014-15 from -10.5 per cent in the previous year. During 2013- 14, due to the weak equity market and limited investor appetite in PSU disinvestment, the government was only able to raise about Rs 25,841 crore against the budgeted figure of Rs 55,814 crore. Even though, disinvestment receipts are estimated to increase sharply this year, the disinvestment to GDP ratio still remains abysmally low (budgeted at 0.5 per cent in 2014-15). Going forward, given the limited leg-room available to increase tax revenue in an environment of sluggish growth, boosting disinvestment might prove to be the panacea for curing the fiscal problems plaguing the country currently.
  47. 47. © Confederation of Indian Industry 42 Table 3: Growth in Government Receipts (%) Figure 2: Tax/GDP Ratio (in %) 2013-14 (RE) over 2012-13 (Actual) 2014-15 (BE) over 2013-14 (RE) Revenue Receipts 17.3 13.4 -Tax Revenue 11.8 17.7 Corporate Tax 10.5 14.6 Income Tax 20.0 17.6 Customs Duty 5.9 15.3 Union Excise Duties 1.7 15.4 Service Tax 24.4 31.0 - Non-Tax Revenue 40.7 10.0 Capital Receipts -6.2 7.7 - Non-Debt Receipts -10.5 101.8 - Debt Receipts -5.9 0.9 Total Receipts 12.8 12.6 Source: Union Budget 2014-15 & CSO The Expenditure Arithmetic The increase in Plan expenditure bodes well for pursuing the inclusive agenda of the government. However, on the flip side, the quality of government expenditure as measured by the ratio of capital to revenue expenditure continues to remain dismal over the years.  According to the budget estimates of 2014-15, total expenditure is budgeted to grow by 12.9 per cent in 2014-15 as compared to 12.8 per cent growth in 2013-14. Encouragingly, non-plan expenditure is budgeted to moderate to 9.4 per cent in the current year as against 11.9 per cent in the previous year. Plan expenditure is estimated to increase by 20.9 per cent as compared to 15.0 per cent over the comparable period. However, on the flip side, the quality of government expenditure, as measured by the ratio of capital to revenue expenditure, continues to remain dismal over the years. Capital expenditure has been indiscriminately cut whenever the government has had to trim spending.  As per the budget estimates for 2014-15, capital expenditure as a per cent of GDP is expected to grow marginally by 1.8 per cent in the current year as compared to 12.2 per cent growth in the revenue expenditure. The share of revenue expenditure in total expenditure is still dominant as compared to that of capital expenditure. This needs to reverse quickly as India needs more capital
  48. 48. © Confederation of Indian Industry 43 spending by the government to improve its creaking infrastructure. Hence, there has to be a shift from subsidies to asset creation. In the Union Budget 2014-15, the move to encourage PSUs to invest through capital investment a total sum of Rs 2,47,941 crores in the current financial year is indeed a heartening sign for creating a virtuous investment cycle. Figure 3: Capex Spending Remains Dismal Source: Union Budget 2014-15 Plan Expenditure  Plan expenditure is budgeted to rise by 20.9 per cent in 2014-15, led by increase in plan revenue component. The latter is expected to grow by 22.0 per cent whereas plan capital expenditure growth will moderate to 17.2 per cent in 2014-15 over the revised estimates of 2013-14. We are heartened by the fact that the government has not trimmed the Plan expenditure in 2014-15 as it is crucial for achieving inclusive growth. The axe should fall on non-plan expenditure, the bulk of which are subsidies payments. Plan Outlay to Major Social Sector Schemes  Inclusive growth is critical for India to sustain its current growth momentum and overall economic development in the long run. Efforts have been made in the budget to accord due importance to inclusion so that benefits of growth trickle down to the ‘haves not’. The Budget 2014-15 expands it further introducing new schemes in addition to the existing ones. However, the budgetary allocation for the flagship scheme, MGNREGA, which has created legal entitlements for an individual’s right to work in the rural economy, has been cut in 2014-15 over last year’s revised estimates. Moreover, FM has stressed that wage employment would be provided under MGNREGA through works that are more productive, asset creating and substantially linked to agriculture and allied activities. The budgetary outlay for another flagship scheme, Pradhan Mantri Gram Sadak Yojana, which has had a massive impact in improvement of access for rural population, stands at Rs 14,389 crore. Elementary education is one of the major priorities of the government. An amount of Rs 28,635 crore is being funded for Sarva Shiksha Abhiyan and Rs 4,966 crore for Rashtriya Madhyamik Shiksha Abhiyan in 2014-15. To infuse new training tools and motivate teachers, launching of “Pandit Madan Mohan Malviya New Teachers Training Programme” was announced in the budget too.
  49. 49. © Confederation of Indian Industry 44 Non-Plan Expenditure  Non-plan expenditure growth is budgeted to moderate by 9.4 per cent in 2014-15 as compared to 11.9 per cent in 2013-14 underpinned by moderation in non-plan revenue expenditure. Subsidies are one of the most important components of non-plan revenue expenditure. In 2014-15, the budget envisages subsidies to decelerate to 2.0 per cent of GDP as compared to 2.3 per cent in 2013-14. However in growth terms, subsidies are budgeted to increase by 2.0 per cent in the current year as compared to decline in the previous year. Under various sub-headings of subsides, interestingly, petroleum subsidy is expected to decline by 25.8 per cent in 2014-15 as compared to the revised estimates of 2013-14, due to less requirement of compensation to oil companies for under-recoveries in the wake of movement to market linked prices oil prices. There is, however, a danger of overshooting of the petroleum subsidy this year as the ongoing Iraq crisis has lent uncertainty to the movement of global crude prices going forward. Food subsidy has the highest outgo of Rs 1,15,000 crore in 2014-15, while fertiliser subsidy outgo stands at Rs 7,29,70 crore. Table 4: Expenditure of Government (in %) Table 5: Subsidy Expenditure (in %) 2013-14 (RE) over 2012-13 (Actual) 2014-15 (BE) over 2013- 14 (RE) NON-PLAN EXPENDITURE 11.9 9.4 Revenue Account 12.4 8.5 Capital Account 5.8 20.7 PLAN EXPENDITURE 15.0 20.9 On Revenue Account 13.0 22.0 On Capital Account 22.8 17.2 Total Capital Expenditure 14.4 18.8 Total Revenue Expenditure 12.5 12.0 Total Expenditure 12.8 12.9 2013-14 (RE) over 2012-13 (Actual) 2014-15 (BE) over 2013- 14 (RE) Food Subsidy 8.2 25.0 Fertiliser Subsidy 3.6 7.4 Petroleum Subsidy -11.8 -25.8 Interest Subsidy 12.4 1.7 Other Subsidies -18.4 -49.9 Total -0.6 2.0 Source: Union Budget 2014-15 Summing up To lower the fiscal deficit to 4.1 per cent of GDP in 2014-15, the government is betting on both revenue and expenditure growth of 12.9 per cent as compared to the revised estimates for 2013-14. In order to achieve the revenue growth target, tax revenues, which form around 80 per cent of total revenues, need to prop up. Moreover, the nature of expenditure compression needs to be kept in mind as trimming of capital expenditure will further slow down the economic recovery process.
  50. 50. © Confederation of Indian Industry 45 Chapter 5 Direct Taxes
  51. 51. © Confederation of Indian Industry 46
  52. 52. © Confederation of Indian Industry 47 Chapter 5 Direct Taxes 1. Personal Income Tax: Revision of income tax rates / slabs For Individuals below 60 years of age Income Rate Upto Rs.2,50,000 NIL Rs. 2,50,001 to Rs. 5,00,000 10% Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% For Senior citizens 60 or more years of age and below 80 years of age Income Rate Upto Rs.3,00,000 NIL Rs. 3,00,001 to Rs. 5,00,000 10% Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% For Senior citizens above 80 years of age Income Rate Upto Rs.5,00,000 NIL Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs. 10,00,000 30% 2. Personal Income Tax A. Raising the limit of deduction under section 80C  In order to encourage household savings, it is proposed to raise the limit of deduction allowed under section 80C from the existing Rs. 1 lakh to Rs.1.5 lakh. In view of the same, consequential amendments are proposed in sections 80CCE and 80CCD of the Act. B. Deduction on interest on housing loan from income from house property  Deduction on account of interest in respect of housing loan taken for self-occupied property has been increased from Rs. 1.5 lacs to Rs. 2 lacs.
  53. 53. © Confederation of Indian Industry 48 3. Corporate Tax A. Grossing up of Dividend amount distributed for computing DDT  After the introduction of the DDT, a lower rate of 15% is currently applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company. Therefore, the tax is computed with reference to the net amount. Similar case is there when income is distributed by mutual funds.  To establish a base in alignment to the tax to be paid it is proposed to amend section 115-O and section 115-R to provide that distributed income will be increased by amount of tax to be payable so that dividend after tax be equal to the net distributed profits.  Thus, where the amount of dividend paid or distributed by a company is Rs. 85, then DDT under the amended provision would be calculated as follows: Dividend amount distributed = Rs. 85 Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)] Increased amount = Rs. 100 DDT @ 15% of Rs. 100 = Rs. 15 Tax payable u/s 115-O is Rs. 15 Dividend distributed to shareholders = Rs. 85  These amendments will take effect from 1st October, 2014. B. Qualification of long-term Capital Gains on debt oriented Mutual Fund as Short-term capital asset  It is proposed to amend clause (42A) of section 2 so as to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short- term capital asset if it is held for not more than thirty-six months. C. Tax on long-term capital gains on units  Under the existing provisions of section 112 of the Act, where tax payable on long-term capital gains arising on transfer of a capital asset, being listed securities or unit or zero coupon bond exceeds ten per cent of the amount of capital gains before allowing for indexation adjustment, then such excess shall be ignored. It is now proposed to amend the provisions of section 112 so as to allow the concessional rate of tax of ten per cent on long term capital gain to listed securities (other than unit) and zero coupon bonds. D. Taxation Regime for Real Estate Investment Trust (REIT) and Infrastructure Investment Trust  It is proposed to amend the Act to put in place a specific taxation regime for providing the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. Such regime has the following main features:–  The listed units of a business trust, when traded on a recognized stock exchange, would attract same levy of securities transaction tax (STT), and would be given the same tax benefits in respect of taxability of capital gains as equity shares of a
  54. 54. © Confederation of Indian Industry 49 company i.e., long term capital gains, would be exempt and short term capital gains would be taxable at the rate of 15%.  In case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal. Further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The holding period of shares shall also be included in the holding period of such units.  The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV. However, withholding tax at the rate of 5 per cent in case of payment of interest component of income distributed to non-resident unit holders, at the rate of 10 per cent in respect of payment of interest component of distributed income to a resident unit holder shall be effected by the trust.  In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 per cent tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section 194LC of the Act.  The dividend received by the trust shall be subject to dividend distribution tax at the level of SPV but will be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt.  The income by way of capital gains on disposal of assets by the trust shall be taxable in the hands of the trust at the applicable rate. However, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. Any other income of the trust shall be taxable at the maximum marginal rate.  The business trust is required to furnish its return of income.  This amendment will take effect from 1st October, 2014. E. Investment Allowance to a Manufacturing Company  In order to encourage the companies engaged in the business of manufacture or production of an article or thing to invest substantial amount in acquisition and installation of new plant and machinery, it is proposed that the deduction under section 32AC of the Act shall be allowed if the company on or after 1st April, 2014 invests more than Rs. 25 crore in plant and machinery in a previous year.  As growth of the manufacturing sector is crucial for employment generation and development of an economy, it is proposed to extend the deduction available under section 32AC of the Act for investment made in plant and machinery up to 31.03.2017.  The aforesaid investment allowance would be available for investment made in plant and machinery upto 31 March 2017. F. Tax holiday to the power sector is extended  With a view to provide further time to the power sector undertakings to commence the eligible activity to avail the tax incentive, it is proposed to amend the above provisions to
  55. 55. © Confederation of Indian Industry 50 extend the terminal date for a further period up to 31st March, 2017 i.e. till the end of the 12th Five Year Plan.  These amendments will take effect from assessment year 2015-16 and subsequent assessment years. G. Deduction in respect of capital expenditure on specified business  It is proposed to include two new businesses as “specified business” for the purposes of the investment-linked deduction under section 35AD so as to promote investment in these sectors, which are :-  laying and operating a slurry pipeline for the transportation of iron ore;  setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines.  With a view to ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business, it is proposed to insert sub-section (7A) in section 35AD to provide that any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.  It is further proposed to amend section 35AD so as to provide that where any deduction has been availed of by the assesse on account of capital expenditure incurred for the purposes of specified business in any assessment year, no deduction under section 10AA shall be available to the assesse in the same or any other assessment year in respect of such specified business. As a consequence of this amendment, section 10AA is also proposed to be amended.  These amendments will take effect from assessment year 2015-16 and subsequent assessment years. H. Concessional rate of tax on overseas borrowing  In order to encourage low cost long-term foreign borrowings by Indian companies, it is proposed to amend section 194LC to extend the benefit of lower withholding tax @ 5% towards borrowings by way of issue of any long-term bond, and not limited to a long term infrastructure bond.  Consequential amendment is also proposed in section 206AA to ensure that this benefit of exemption is extended to payment of interest on any long-term bond referred to in section 194LC.  These amendments will take effect from 1st October, 2014. I. Reduction in tax rate on certain dividends received from foreign companies  With a view to encourage Indian companies to repatriate foreign dividends into the country, it is proposed to amend the Act to extend the benefit of lower rate of taxation without limiting it to a particular assessment year. Thus, such foreign dividends received in financial year 2014-15 and subsequent financial years shall continue to be taxed at the lower rate of 15%.  These amendments will take effect from assessment year 2015-16 and subsequent assessment years.
  56. 56. © Confederation of Indian Industry 51 J. Roll back provision in Advance Pricing Agreement Scheme  In many countries the APA scheme provides for “roll back” mechanism for dealing with arm’s length price (ALP) issues relating to transactions entered into during the period prior to APA. The “roll back” provisions refers to the applicability of the methodology of determination of ALP, or the ALP to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA. However, the “roll back” relief is provided on case to case basis subject to certain conditions. Providing of such a mechanism in Indian legislation would also lead to reduction in large scale litigation which is currently pending or may arise in future in respect of the transfer pricing matters.  Therefore, it is proposed to amend the Act to provide roll back mechanism in the APA scheme. The APA may, subject to such prescribed conditions, procedure and manner, provide for determining the arm’s length price or for specifying the manner in which arm’s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding four previous years preceding the first of the previous years for which the advance pricing agreement applies in respect of the international transaction to be undertaken in future.  This amendment will take effect from 1st October, 2014. K. Characterization of Income in case of Foreign Institutional Investors  Foreign institutional investors currently facing difficulty in characterization of their income arising from transaction in securities as to whether it is capital gain or business income.  It is therefore proposed to amend the Act to provide that any security held by foreign institutional investor which has invested in such security in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 would be treated as capital asset only so that any income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain.  These amendments will take effect from assessment year 2015-16 and subsequent assessment years. L. Alternate Minimum Tax  Under the Act, the investment linked deductions have been provided in place of profit linked deductions. These profit linked deductions are subject to alternate minimum tax (AMT). Accordingly, with a view to include the investment linked deduction claimed under section 35AD in computing adjusted total income for the purpose of calculating alternate minimum tax, it is proposed to amend the section so as to provide that total income shall be increased by the deduction claimed under section 35AD for purpose of computation of adjusted total income. The amount of depreciation allowable under section 32 shall, however, be reduced in computing the adjusted total income.  These amendments will take effect from assessment year 2015-16 and subsequent assessment years. M. Taxability of advance receipt for transfer of a capital asset  It is proposed to insert a new clause (ix) in sub-section (2) of section 56 to provide for the taxability of any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset. Such sum shall be chargeable to income-tax under
  57. 57. © Confederation of Indian Industry 52 the head ‘income from other sources’ if such sum is forfeited and the negotiations do not result in transfer of such capital asset. A consequential amendment in clause (24) of section (2) is also being made to include such sum in the definition of the term 'income'.  Further, In order to avoid double taxation of the advance received and retained, section 51 is also proposed to be amended to provide that where any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset , has been included in the total income of the assesse for any previous year, in accordance with the provisions of clause (ix) of sub-section (2) of section 56, such amount shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.  These amendments will take effect from assessment year 2015-16 and subsequent assessment years. N. Rationalization of taxation regime in the case of charitable trusts and institutions  Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax exemption, it is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigations.  Similar situation exists in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. The provision of section 10(23C) also have similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.  Therefore, it is now proposed to amend the Act to provide specifically that where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)]. Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C).  These amendments will take effect from assessment year 2015-16 and subsequent assessment years. O. Cancellation of registration of the trust or institution in certain cases  The existing provisions of section 12AA of the Act provide that the registration once granted to a trust or institution shall remain in force till it is cancelled by the Commissioner. The Commissioner can cancel the registration under two circumstances:  the activities of a trust or institution are not genuine, or;  the activities are not being carried out in accordance with the objects of the trust or Institution  In order to rationalize the provisions relating to cancellation of registration of a trust, it is proposed to amend section 12AA of the Act to provide that where a trust or an institution has been granted registration, and subsequently it is noticed that its activities are being carried out in such a manner that,—  its income does not ensure for the benefit of general public;  it is for benefit of any particular religious community or caste (in case it is established  after commencement of the Act);

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