India’s budget is good for growth

The Indian finance minister Arun Jaitley yesterday announced a progressive growth-oriented budget, concentrating on macroeconomic stability and increasing investment into the infrastructure and manufacturing sectors. The positive macroeconomic environment has helped in controlling inflation and the current-account deficit.

By Mr Jaitley’s estimates, the Indian economy will witness a GDP growth rate of 7.4 per cent in the April 2014 to March 2015 fiscal year, making it the fastest-growing large economy in the world. This is further expected to reach 8-8.5 per cent in the 2015-2016 fiscal year.

Mr Jaitley has further taken an onerous task of keeping the fiscal deficit under strict control, targeting 3.9 per cent for 2015-2016, 3.5 per cent for 2016-2017 and 3.0 per cent for 2017-2018.

Mr Jaitley has carried on from last year with his agenda of providing a simplified tax regime. For the first time in several years there has been a proposal to reduce the corporate tax rates from 30 per cent to 25 per cent over the next 4 years. This is an attempt in the right direction. Further, it is expected that the long-awaited goods and services tax (GST) – which is aimed at bringing in efficiency in indirect tax regime in India – may be put in place by April next year.

There have been a few favourable proposals from a foreign investor’s perspective, such as the granting of a tax pass-through status to some alternative investment funds, which means tax is levied on the funds’ investors rather than the funds themselves.

The budget also proposes to tweak permanent establishment-related tax norms to help fund managers remain in India. It also recommends changes to the minimum alternate tax provisions for foreign institutional investors, in a move that ends a hotly contested debate.

Another major reprieve brought about by the budget defers the controversial General Anti-Avoidance Rule by another two years and makes it only apply prospectively – to investments made on or after 1st April 2017. This is a win for Indian companies, as the law has been criticised as encouraging legal uncertainty and witch hunts.

The announcement on exploring the possibility of a legislation that introduces a regulatory mechanism to replace the need for multiple permissions for doing business India may also help attract foreign and domestic investment. This is essentially aimed at shifting the focus from an approval route to self-compliance model.

Mr Jaitley also announced introduction of comprehensive Bankruptcy Code in 2015-2016, another effort in making it easier to do business in India. Additionally, Mr Jaitley indicated that exclusive commercial divisions in various courts in India will be set up for the quick resolution of commercial disputes. This could help with the ever-growing litigation and dispute cases in the country as its economy develops.

The budget proposes reforms to the service portion of the proposed goods and service tax regime. They include an increase in the service tax rate by about 2 per cent and eliminating excluded services to the tax. Thus, service industries need to adjust themselves to ensure smooth transition.

While keeping his eyes on the growth strategy for the country, Mr Jaitley has proposed elaborate measures to draw back money stashed outside India. A slew of measures have been proposed in this regard, and one would have to see the impact it may create.

India is a youthful democracy, still in its building stages. With its geographical size and burgeoning population, the basic requirements of health and hygiene are still critical issues. This budget has effectively addressed these matters in addition the challenges of employment and education. The government has also allocated a large amount of public funds towards roads, railways and power projects.

Mr Jaitley has made a successful attempt at addressing the various challenges that the Indian economy is facing today. The proposals are aimed at making India an attractive business destination. The budget is pragmatic, growth-oriented and promotes the ease of doing business in India.

Richard Rekhy is the chief executive of the tax advisory firm KPMG in India.

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