Reaction on UNION BUDGET 2016: KPMG in India

Sreedhar Prasad, Partner – Ecommerce and Startups, KPMG in India:

Union Budget 2016-17 puts focus on various enablers for e-commerce sector, which may sound indirect, but can have a large scale impact.  Multiple initiatives for digitally and physically connecting deeper India could assist in larger rural customer base as well as new sellers for the ecommerce market.  National Digital Literacy Mission scheme, Electrification of villages,  as well as the enhanced focus on building roads would assist this sector in its growth in rural India.

Enhanced focus on e-enabling the farm produce market is a welcome move considering the emphasis on the food sector in E-commerce.  This may initially sound as an initiative for just the rural India, but could be a transformational considering the need for reach of organic agricultural produce of India. Further, the progressive initiative of bringing in the farmers to the digital ecosystem is commendable, especially having Online procurement system by the food corporation of India, Portal for connecting breeders and farmers, and to get farm products online.

From a wish-list perspective, it would have been good to have clarity on the construct of marketplace models in ecommerce companies and taxation rules around different fulfilment models. Perhaps when GST is introduced, we will get more clarity on this.

Amarjeet Singh, Partner- Tax, KPMG in India:

The digitization agenda of the government in Budget 2016 relating to procurement through technology platform (in general and from farmers), digital literacy mission, expanding broadband footprint etc will allow the existing ecommerce companies in India to increase their market coverage to Tier 3/ 4 cities and also make their supply chain better in relation to select product ranges.

Arvind Mahajan, Head of Infrastructure and Government Services, KPMG in India

Budget 2016 - It is a growth oriented budget, balancing different priorities with great push towards Agriculture, Rural Infra, Infrastructure, Housing, and Healthcare. Overall good given weak global business environment & fiscal situation of the Government. Not tinkering with the laid down fiscal deficit targets have been received very well by the investors. 

As expected there is continued  rising government spending on infrastructure sector to get the investment cycle going especially the Transportation sector, and Rural Infrastructure.

The proposals to strengthen public sector banks along with the bankruptcy law will enable strategic restructuring of stressed & stalled infrastructure projects. Effective execution on this will be positive for the infrastructure sector & the economy. Focus on PPPs to start the private investment cycle by addressing key challenges through 3 point framework – Resolution of Dispute bills; guidelines for renegotiation of PPPs; and talk of new credit rating system for Infra projects is commendable. Implementation of these measures would be the key.

Anish De, Partner Infrastructure and Government Services, KPMG in India

The increase in coal cess will improve relative attractiveness of renewables, but increase the overall cost of power for utilities by approximately 10,000 crores, thus impacting retail tariffs and utility financial health. For renewables, the reduction of accelerated Depreciation is a negative that will cause wind tariffs in particular to go up for projects set up after March 2017.  All in all it is a mixed bag and the measures appear to be aimed more at shoring up government finances.

Narayanan Ramaswamy, Partner and Head of Education and Skill Development, KPMG in India:

Overall Education Sector perspective

The finance minister announced a budget which has largely aimed to maintain the budgetary allocations for education but with a few interesting ideas aimed at improving the quality of the overall system.
Education, Skills and Job Creation was named by the minister as one of the nine distinct pillars to “Transform India”.  However the overall allocation has unfortunately remained less than 4% of GDP ( similar developing nations have atleast 6% of GDP as education allocation)
The overall spend has increased from INR 68,306 crores (revised budget 2015-16) to INR 73,943 crores for the Ministry of Human Resource Development. The allocation for the Ministry of Skill Development and Entrepreneurship has increased from INR 1038 crores to INR 1804 crores.

Skill Development – How the Budget is supporting Skill India programme of the Government?

The finance minister announced the setting up of 1500 multi skilling training institutes and an allocation of INR1700 crores for the same. This would greatly benefit the last mile delivery of the skilling programs.

A National Board of for Skill Development Certification in partnership with the industry and academia is being set up and also to further scale up Pradhan Mantri Kaushal Vikas Yojna (PMKVY) to skill one crore youth over the next three years. This move would improve the speed of job creation in India.

To mentor entrepreneurs, Entrepreneurship Education and Training will be provided in 2200 colleges, 300 schools, 500 Government ITIs and 50 Vocational Training Centres through Massive Open Online Courses.  This would assist the “Start Up India” program of the government.

Service tax on the services provided by way of skill/vocational training by training partners under Deen Dayal Upadhyay Grameen Kaushalya Yojana being exempted, with effect from 01.04.2016. This was due considering NSDC & NCVT affiliated training partners were already exempted from ST and DDUGKY is GOI’s one of the flagship schemes rolled-out by private players.
Higher Education

The finance minister announced that a scheme will be formulated to enable a regulatory architecture to ten public and ten private institutions to emerge as a world class Teaching and Research Institution. This is a positive move aimed at improving the rankings of the Indian Institutions.

A Higher Education Financing Agency (HEFA) will be set up with an initial capital base of Rs. 1000 crores. The HEFA will be a not-for profit organization that will leverage funds from the market and supplement them with donations and CSR funds.  These funds will be used to finance improvements in infrastructure and be serviced through internal accruals. This is an innovative funding mechanism for institutions to borrow and while the allocation is small in size, this is a move in the right direction.

The finance minister has proposed to establish a Digital Depository for School Leaving Certificates, College Degrees, Academic Awards and Mark sheets, on the pattern of a Securities Depository. The aim is to create a body similar to NSDL and would aim to tackle the menace of fake / forged certificates and marksheets.

Primary Education

The finance minister announced that 62 new Navodaya Vidyalayas will be opened in the uncovered districts. 

The government has announced an allocation of Rs 28,010 crores to National Education Mission out of which Rs. 22,500 crores is allocated to Sarva Sikshya Abhyan.  An additional Rs. 9,700 crores have been allocated to the National Programme of Mid-day meals in schools. The government has also announced an allocation of Rs.16, 120 crores for the Integrated Child Development Scheme (ICDS scheme).

Having achieved the universalization of primary education throughout the country, the focus will move to improving of the quality of education. The finance minister could have allocated specific funds to implement the improvement in learning outcomes.

New IITs/ IIMs etc.

There is an increasing need for higher education institutions to reach the GER target of 30% in 2020 (currently at around 23.5%).  However no new IITs / IIMs were announced in this year’s budget which was a big change from the last year. This could be due to the fact that many of the announced institutions are yet to commence operations.

Numbers at a glance

2015-16 Budget
2015-16 Rev. Bud
2016-17 Budget
Center Allocation
Higher Education
School Education
Skill Development & Entrepreneurship
State Allocation
Higher Education
School Education
Grand Total

Parizad Sirwalla, Partner and Head of Global Mobility Services - Tax, KPMG in India on personal Tax:

Over all reaction from Personal Tax perspective

The key pillars on which Budget 2016 focussed from a tax perspective are relief to small tax payers, moving to a pension based society, thrust on affordable housing, simplification of tax compliance processes and increased use of technology.
Overall the tax bill for high income earners has increased (super-rich).  Additional revenue collection measures are in the form of increase in surcharge for higher income group, tax on large dividend earners, Voluntary Disclosure Schemes (VDIS) for undisclosed income etc.

There is a welcome clarity on taxability of only 40 per cent of National Pension System (NPS) withdrawals and super annuation schemes. Currently the entire withdrawals were taxable.  However, the tax on 60 per cent of withdrawals from Employee Provident Fund (EPFO) in respect of contributions made from 1 April 2016 (in respect of employees with salary above specified threshold) is probably an effort to bring taxation of various retiral schemes (e.g. NPS, super annuation and Employee Pension Scheme) on par.
The increase in tax exemption for employer contribution to Rs. 1,50,000 per annum on super annuation scheme from the existing Rs. 1,00,000 per annum is again a good move. However the employer contributions to Provident fund which were currently exempt upto a specified percentage of salary will now be taxable over and above Rs. 1,50,000 per annum. It seems that the tax provisions on all retirement products have been sought to be made similar.

Job Creation
Finance Minister has provided incentive to employers (by funding employer pension contributions for new low wage earners and deductions for creating new jobs in non-manufacturing sectors as well).

Tax rates/ slabs etc.
There is no change to basic slabs or rates of tax.  Small tax payers have been provided a relief by enhancement of tax rebate to Rs. 5,000 from Rs. 2,000 (savings of Rs. 3,090 p.a.)
Taxpayers in the Rs. 1,00,00,000 per annum plus income bracket to pay increased tax on account of enhancement of surcharge to 15 per cent from the existing 12 per cent.  Consequently the highest maximum marginal rate enhances to 35.54 per cent from current rate of 34.62 per cent. This translates into an increased tax liability for these super rich individuals to the tune of approx. Rs. 96,500 p.a.  
There will also be additional tax liability @ 10 per cent on individuals receiving dividends in excess of Rs. 10,00,000 per annum.

Voluntary Income Disclosure Scheme (VDIS)
With the thrust on bringing undisclosed income in the tax net, the Finance Minister has also introduced a VDIS scheme for taxpayers to pay 45 per cent (tax of 30 per cent plus 7.5 percent of interest and plus 7.5 per cent penalty).

Enhancement of deduction available under 80C of the Income Tax Act, 1961
Apparently there is no change in the much awaited crowded deduction under Section 80C.

Announcement made V/s Easwaran Committee recommendations
Many recommendations of the Committee have been accepted including rationalization of TDS rates and introducing of presumptive taxation for professional taxpayers.

TDS rates
Broadly seems that all changes are in line with Easwar Committee recommendations however one will need to read the fine print to watch out for any additional impact.

Individuals who stay in rented houses and don’t have any component of house rent allowance in their salaries, can have some respite as the rent deduction has been enhanced from Rs. 24,000 per annum to Rs. 60,000 per annum. This will lead to tax savings in the range from Rs. 3,708 per annum to Rs. 12,793 per annum.
New home buyers to get additional deduction of interest of Rs. 50,000 per annum if the house cost is less than Rs. 50,00,000 and the home loan is  sanctioned in the  Financial Year is not exceeding Rs. 35,00,000.

Standard Deductions
No changes.

Medical Insurance
No changes.

Service tax
Overall increase of 0.5 per cent in the rate of service tax from 1 June 2016.

Santhosh Jayaram, Director , Climate Change and Sustainability, KPMG in India:
The response on the section 135 of the act has been moderate during the first year of implementation mainly because of setting up the governance structures and also designing of the projects.  In taking the view that corporate India is now working to create an inclusive, clean and better India through the CSR projects, which are priorities for both the central and state government, there can be some mechanism by which the government should acknowledge the same.  These acknowledgements by way of easing the conduct of business will encourage for a better response from the corporates.

Rajeev Singh, Head of Automotive sector, KPMG in India:

The focus was largely to revive rural demand and pump money in infra. This will help drive consumption in rural market and support slowing core sectors such as steel & cement.

From an Auto sector perspective, there will be an increase in demand for CV and Tractor Industry. 2 wheelers will also get a bit of boost due to likely increase from rural market indirectly aided by increased allocation to MNREGA. However, PV will have a significant negative impact due to Infra Cess ranging from 1% (small vehicles), 2.5 % (medium size vehicles) to 4% (large vehicles and SUVs).

Also the announcement to deduct TDS on luxury vehicles with more than 10 lacs will dampen their demand in the short term. Ideally the government could have considered that the infra cess being collected on vehicles, to be used for giving subsidies on buying back of old vehicles (read BS2 & 3 complaint) and get them off road!

Other measures likely to negatively impact automotive companies include: benefit of deductions for Research that would be limited to 150 % from 1.4.2017 and 100% from 1.4.2020. However Extension of weighted deduction under section 35CCD for skill development will continue until 2020. Excise Duty benefits extended for parts of Electric and hybrid vehicles will continue in the next fiscal year.

Apart from increased infrastructure spending on roads,  amendments being  made to Motor Vehicle act will enable entrepreneurs to build and operate buses and also open up the road transport sector in the passenger segment. An enabling eco-system will be provided for the States which will have the choice of adopting the new legal framework. This is likely to benefit first generation entrepreneurs as well as improve last mile mobility in semi-urban and rural areas.

Manish Aggarwal, Partner and Head of Energy and Natural Resources, KPMG in India:

Overall Energy Sector perspective
Overall positive intent for the sector except the adverse impact of increase in national environment cess (which is doubled to Rs. 400 / ton). The budget refrained from big bang measures and focused on consolidation to achieve ‘energy security’ for the Country. Intent to have a ‘comprehensive generation plan’ over next 15 to 20 years for nuclear power brings this important resource to mainstream focus apart from Renewables, which is good as it would remove India’s ‘fascination with single fuel’ and bring a holistic view required to achieve Energy security. Budget also provided for an outlay of Rs. 3000 cr per annum for nuclear power.

Permitting ‘calibrated market pricing’ for new discoveries / exploration for deep-water and difficult gas basins is real positive as that has been long standing demand of industry given the current low oil price scenario.

Disappointed to not have concrete measures to resolve stressed assets issue directly. Expectation was to have a ‘specialised turnaround stressed fund’. Though budget reiterated the intent to resolve commercial disputes, and talked of having guidelines for ‘re-negotiation of PPPs’, and enhanced power of institutions under the SARFEASI Act, these may not lead to faster resolution of stressed asset problem in short term.

Increase in Clean Environment Cess is going to impact the sector negatively. While good from overall environment perspective, this goes against (intuitively) stated intent to reduce ‘cost of power’ to industry (per unit impact of additional increase would be roughly 12 to 16 paise per unit).

Target of 100% village electrification would be achieved by May 1, 2018 (earlier then envisaged), which when seen together with RURBAN initiative launched recently to create growth centres in rural areas may lead to increase in demand of power from these unserved clusters over medium term.

Another interesting resource generation measure for making new investments pertains to divestment of assets by Central Public Sector Enterprises (CPSEs). If implemented well, this can lead to significant generation of resources outside the normal equity divestment window.

Little dampener for the Renewable sector as accelerated depreciation benefits gets restricted to 40% from April 1, 2017. However, this is in line with the overall direction outlined by FM in respect of reduction in corporate tax rates while doing away with various tax exemptions.
Renewables / Solar
The increase in Clean Environment Cess by Rs. 200 per tone would help to push more funds to the Renewable sector and provide impetus to realise ambitious government vision to this sector.
Little dampener for the Renewable sector as accelerated depreciation benefits gets restricted to 40% from April 1, 2017. However, this is in line with the overall direction outlined by FM in respect of reduction in corporate tax rates while doing away with various tax exemptions.

Oil & Gas
Permitting ‘calibrated market pricing’ for new discoveries / exploration for gas basins is real positive for oil & gas sector as that have been long standing demand of industry given the current low oil price scenario.
Provision of LPG connections to roughly 1.5 crore BPL households is a big positive; budget has provided for Rs. 2000 cr allocation towards the same.

Jaideep Ghosh , Partner and Head  - Transport and Leisure, KPMG in India:

Continuing on the reform agenda, Union Budget 2016 is built on sharp forward-looking themes towards achieving economic growth.
I expect a positive impact of various initiatives  announced on the tourism & hospitality sector.

Significant investment allocation of Rs. 97,000 crore to expedite expansion of highways & rural roads will be one of the strongest boosts to our economy and thereby facilitate rapid growth of the tourism sector. Significant funds allocated in Rail Budget in improving passenger amenities, technology enabled travel, catering and overall customer experience enhancement initiatives will boost passenger growth. Cruise tourism is also expected to be augments, though at a slower pace, once Sagarmala is under implementation.

Development of under-served airports and airstrips will facilitate deeper connectivity has the potential to augment passengers traffic including tourists. Enabling a seamless ecosystem for road travel for passenger across states has been a long-standing ask and will reinforce public transport, provided relevant states quickly agree to a common framework. Proposed simplification of customs procedure for international passengers’, in addition to already-existing e-visa for several countries, is expected to result in faster achievement of international travellers.

Tourism sector is among the highest employment generation and skill development and rural development steps announced will benefit the sector over a longer period of time.

Besides, overall initiatives announced for rural & social sectors, investments in physical infrastructure, job creation, tax reforms, technology reforms, and enhancements in Ease of Doing Business will have a positive impact on the tourism & hospitality sector.

Sachin Menon, National Head of Indirect Tax, KPMG in India:

“It seems the focus of the budget is to address the fundamental issues plaguing agriculture, infrastructure (Roads, Rail, power), banking  and social sectors. The government expenditure in these sectors would kick start economic activity in the midterm. While there has been no major policy announcement like GST, a number of measures have been taken from an ease of doing business perspective in the form of rationalization of Credit rules, introducing provisions for faster dispute resolution, etc.
Also, in line with the Make In India initiative, changes have been made in customs and excise duty rates on certain inputs to reduce costs and improve competitiveness of certain domestic industries like Information technology hardware, capital goods, defence production, etc.

On the flip side, instead of abolishing Swatch Bharat cess to as a precursor to GST, an additional  new cess by the name Krishi Kalyan Cess  is proposed to be levied @ 0.5% on all taxable services (whose credit would be admissible for payment of output cess), taking gross service tax to 15% from 1 June 2016 onwards. The widely expected increase in service tax rate to 16% did not figure in the budget proposals.

Last but not the least, as against the industry expectation as regards concrete announcement on roadmap for GST, no specific timeframe has been committed by the FM , may be because it is beyond his control. “

Statement from Vikas Vasal, Partner – Tax, KPMG in India:

“A pragmatic approach has been adopted to boost socio-economic development in the country.  Focus has been to provide impetus to agriculture and rural economy, and steps to help infrastructure, real estate and healthcare. On tax front, the focus has been on tax reforms to simplify the procedural aspects and to reduce litigation.”
 Union Budget: A mixed bag for the real estate sector

The Union Budget 2016-17 was a mixed bag for the real estate sector. The targeted reforms in REITs/INvITs, Affordable Housing and additional tax benefits for 1st time home buyers are expected to support the growth in the real estate sector. However, the budget was silent on the some other key demands such as removal of Minimum Alternate Tax on Special Economic Zones; exemption of service tax to Joint Development Agreements and developers agreements; Clarification on taxation of JDAs; allowing developers to raise funds through External Commercial Borrowings (ECBs) etc.

The Dividend Distribution Tax on REITs and INvITs SPV was the main issue hampering the emergence of REITs in India. With removal of DDT on REITs SPV, the REITs structure of India is now at par with global regulations. REITs take-off is expected to improve liquidity situation in the real estate sector as it would ease exit for developers from completed properties. 

The exemption of service tax on housing units of less than 60 sq. meters is a positive move for the development of affordable housing sector.”

Jaideep Ghosh, Head  of Transport and Logistics, KPMG in India:
 “Transport & Logistics sector has demonstrated a strong growth in the current year within the backdrop of a rather challenging global economic situation.
Continuing on the reform agenda, Union Budget 2016 is built on sharp forward-looking themes towards achieving economic growth. This will provide a strong impetus to the transport & logistics sector.
Significant investment allocation of Rs. 70,000 crore to expedite creation and expansion of highways will be one of the strongest boosts to our economy. Additional investment of Rs.27.000 crore (along with the state governments) in rural roads at a rapid speed would significantly augment the economic growth. This, along with allocation of funds to railways is likely to grow the transport, warehousing and logistics businesses rapidly over the medium term.
While there were no major announcements to boost the disappointing growth in ports traffic in the current financial year, initiating implementation of Sagar-Mala will boost the port and associated sectors over a period of time.
Development of under-served airports and airstrips with Airports Authority and state governments will facilitate deeper connectivity that would facilitate passengers (including tourists) and cargo traffic. However, readiness of these airports and willingness of commercial carriers to commence operations need to be ascertained quickly.
Enabling a seamless ecosystem for road-passenger travel across states has been a long-standing ask and will reinforce public transport, provided relevant states quickly agree to a common framework. This need to be cautiously implemented through an empowered multi-state task force.
Proposed amendments in the PPP framework around re-negotiation and dispute resolution mechanisms is likely to improve the otherwise discouraging PPP situation; however rapid implementation of these initiatives is a must.

Besides, overall initiatives announced for rural & social sectors, investments in physical infrastructure, job creation, tax reforms, technology reforms, and enhancements in Ease of Doing Business will have a positive impact on the sector.”
Rahul K Mitra, National Head, BEPS & Tax Dispute Resolution, KPMG in India:
“The budget would need to be viewed from a long term perspective, where the Finance Minister has tried to go for fiscal consolidation and put India on a growth path in the domestic market.”
Girish Vanvari, National Head of Tax, KPMG in India

Budget 2016, an incremental move in the backdrop of global uncertainty.  Maintaining a fiscal deficit of 3.5% a very credible step for the financial markets, robust outlays for infrastructure, agriculture, rural and socio economic schemes, however, one can argue that more could be provided for recapitalization of Banks.  No change in capital gains tax regime for listed stocks a positive for the stock exchange,  however an additional tax 10% on dividends in excess of 10 lakhs and increase in STT on options  a dampner for the markets. No change in individual slabs, POEM deferral, GARR confirmation,  Action point on BEPS master file and country by country report,  road map to reduction to lower tax rates and phase out of exemptions along expected lines.  Introduction of  Amnesty scheme can be questioned.  Further, many provisions to build confidence with the tax payers with a view to reduce litigations and commitment to no retrospective amendment. All in all,  in the backdrop of the prevailing global scenario, Budget 2016 a good pragmatic balancing act.

Naveen Aggarwal , Partner - Tax , KPMG in India:
·        Driving fiscal prudence without compromising development agenda to invigorate growth and investment in critical sectors like agriculture and infrastructure. 

·        On Tax simplification
Justice Easwar Committee’s recommendations for simplification of tax laws has found favour with the FM.  Extending the limit of presumptive scheme to taxpayers with annual turnover of Rs 2 crores from present limit of Rs. 1 crore is a welcome step.

Implementation of Justice Easwar Committee recommendations by rationalising deductible expenditure on dividend earning instruments, extending presumptive scheme for professionals and other taxpayers, automatic stay of demand at first appellate level with 15% part payment reinforces the Government’s commitment towards a simplified and less litigious tax regime.

·        On Penalty
Simplification of penalty provisions is a welcome move and showcases government’s intention of simplifying and bringing certainty in tax laws.

·        On Retrospective Taxation
Retrospective amendments not to be made going forward; special regime to settle past disputes on indirect transfer tax, showcases Government’s commitment towards creating a stable and predictable tax regime in India. 
·        On GAAR
Government has reaffirmed its commitment to making GAAR effective from 1 April 2017. This is likely to align Indian tax laws with legislation of BEPS action plans.

Dr. Jaijit Bhattacharya, Partner – Infrastructure and Government Services, KPMG in India:

The Union budget is sharply focused on a few key themes, which were already declared by the FM earlier. The budget focused on an efficient and effective government, rationalisation of taxation, heavy focus on rural with funds for de-stressing rural economy, Soft and hard infrastructure with over Rs. 2.2 trillion for combined rail, road, airports & waterways, focus on human resource development and de-stressing of the financial systems, including bank. It is also a welcome step to move from a fixed fiscal deficit target to a range, which will provide necessary fiscal headspace to the government. Overall the budget appears to focus on building the fundamentals of the economy and the economic & financial institutions

Nabin Ballodia, Partner – Tax, KPMG in India on social security:

A well balanced budget with focus on maintaining fiscal deficit, boost to infrastructure, governance  and  social security as well as attempt to address pain points around tax dispute and uncertainty. Overall, well directed to boost the growth trajectory of the country. 

Rohan Phatarphekar , Head of Transfer Pricing , KPMG in India:

As expected the Transfer Pricing documentation norms would now include Country by Country reporting for multinationals having global revenue exceeding Euro 750 million as recommended by OECD/G20 Base Erosion Profit Shifting reports. This an absolute new format of reporting which is now becoming a  global norm and while it will bring in transperancy, it will result in initial challenges for the tax payers of putting together this report and an overall increase in the compliance burden.

Naveen Aggarwal, Partner – Tax, KPMG in India on Implementing of Easwar Committee recommendation:

Implementation of Justice Easwar Committee recommendations by rationalising deductible expenditure on dividend earning instruments, extending presumptive scheme for professionals and other taxpayers, automatic stay of demand at first appellate level with 15% part payment and enhanced interest for delayed refunds beyond 90 days, reinforces the Government’s commitment towards a simplified and less litigious tax regime.

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