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The road to a $5 trillion economy in Budget 2019: Reform, Perform, Transform

The road to a $5-trillion economy in Budget 2019: Reform, Perform, Transform

The road to a $5-trillion economy in Budget 2019: Reform, Perform, Transform
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By Rajiv Chugh  Jul 8, 2019 6:26:24 AM IST (Updated)

While Budget 2019 seems to be well thought and has addressed most sectors, it will be interesting to witness its far-reaching impact on the projected sluggish industrial growth.

The words Reform, Perform, Transform outline the vision of the government to achieve a $5 trillion economy and the budget proposals seem to be set upon the underlying philosophy, to promote domestic de-regulation and trade liberalisation; encourage and motivate FDI; and achieve macroeconomic stabilisation by reducing fiscal deficits with special emphasis on “Ease of doing business in India”.

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Uplift of the masses by strengthening the capital markets, banking and financial service sector along with the promotion of ‘Digital India’ and pollution-free India is noteworthy. The proposal to rationalise the archaic labour laws into four labour codes is commendable and shows the intention of the government to promote labour and youth welfare.
The government’s initiative to tap external savings in the external currency will ease pressure on domestic savings and interest rates. This will facilitate the better transmission of the repo rate reduction to the lending rates and boost credit growth. The government shows substantial reliance on off-budget resources and public-private partnerships (PPPs) to enhance infrastructure investment. Concrete plans for enabling the ambitious 5-year infrastructure program with an investment volume of Rs 100 lakh crore will await recommendations from an expert committee that will examine long-term development financing options.
Level Playing Field For Domestic Firms
On the tax proposals for corporates, the FM has provided a level playing field for almost all domestic companies, which will now be taxed at 25 percent if the turnover/ gross receipts are up to Rs 4 billion as against earlier threshold of Rs 2.5 billion. This increased threshold will cover 99.3 percent of domestic companies. Unfortunately, the base rate for LLP’s continues to be 30 percent.
To propel economic growth and ‘Make-in-India’ initiative, investment-linked income tax deduction under section 35 AD will be given for mega-manufacturing plants set-up in sunrise and advanced technology areas such as semi-conductor fabrication, solar photovoltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers, laptops, etc. This will directly enable job creation, bring in new technology and upskilling of manpower.
The Modi government in its first full term made concerted efforts by digitising the tax administration and creating a framework for easing compliances for taxpayers. The e-assessment regime, which has been announced on Friday, is set to bring paradigm shift by the implementation of faceless scrutiny assessments (i.e. without human interface and not disclosing specifics of assessing officer). This will aid in a substantial reduction of time spent in assessment matters.
Slaying Angel Tax
Angel tax has gained much attention from the startup community due to the uncertainty prevailing in the tax treatment. The FM today announced eligible startups shall not be scrutinised on “Angel Tax” issue upon the filing of requisite declaration and information in returns in respect of valuation of share premiums.
This will set aside the controversy, which has been raging for quite some time over startups that have gained maturity and are attracting investors with fancy valuations. Special administrative arrangements are expected for quick redressal of grievances and tax issues faced by startups. Conditions for carrying forward and set off losses for eligible startups have been relaxed (i.e. carried forward of losses allowed even where shareholders continue to beneficially hold 51 percent voting power).
International Financial Services Center (IFSC) has always found special status in the past budgets. Keeping this trend intact, among other incentives, 100 percent profit-linked tax deduction will be given to an IFSC in any ten-year block with a fifteen-year period including exemption from dividend distribution tax amongst others.
The IT/ITES sector has become one of the most significant growth catalysts for the Indian economy. Export revenue of the industry is expected to grow 7-9 percent year-on-year to $135-137 billion in FY 2019. The industry is expected to grow to $350 billion by 2025. The sector which is expected to contribute at least 10% percent to the ‘$3 trillion’ economy, has not found much favour in the budget proposals and it will have to now await its turn hopefully to gets it long sought-after tax holiday in Budget 2020.
While Budget 2019 seems to be well thought and has addressed most sectors, it will be interesting to witness its far-reaching impact on the projected sluggish industrial growth and whether it propels Corporate India to spring forward. The government continues to track high-value transactions. It is expected that the above measures will lead to a widening of the tax base and eventually an increase in the tax -GDP ratio.
Rajiv Chugh is partner and national leader, Policy Advisory and Specialty Services, EY India. With inputs from Ankur Singla, Director, Policy Advisory and Specialty Services, EY India
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