In a bid to improve ease of doing business in India, finance minister Arun Jaitley announced several measures on Saturday, including setting up of a expert committee to prepare a draft legislation for obtaining regulatory clearances expeditiously. “I intend to appoint an expert committee... to examine the possibility and prepare a draft legislation where the need for multiple prior permissions can be replaced with a pre-existing regulatory mechanism,” Jaitley said in his budget speech.

The move is in line with Prime Minister Narendra Modi’s aim to improve India’s position to the top 50 in the World Bank rankings on the ease of doing business from the current 142. India had slipped several notches in the ranking after the previous Manmohan Singh government imposed retrospective taxes on companies, a move that was criticized by foreign investors.

Ease of doing business was mentioned five times in his speech that lasted nearly one-and-a-half hours. Jaitley said investors spent a large amount of time and resources in getting multiple permissions. The government, he said, has recently launched an e-biz portal which integrates 14 regulatory permissions at one place to facilitate businesses.

If we really want to create jobs, we have to make India an investment destination which permits the start of business in accordance with publicly stated guidelines and criteria,” Jaitley said. Jaitley said that the online central excise and service tax registration will be done in two working days. The tax assessees will be allowed to issue digitally signed invoices and maintain electronic records. These measures will cut down on paper work and red tape, he added.

Jaitley also abolished the wealth tax on Saturday and replaced it with an additional surcharge of 2% on the super-rich with a taxable income of over Rs.1 crore per year to improve tax collections and tax the more affluent. He has also done away with the distinction between different types of foreign investments, especially foreign portfolio investment and foreign direct investment.

The budget also proposed to merge the Forward Market Commission, which regulates commodity markets, with the Securities and Exchange Board of India, the capital markets regulator. There are also proposals for speedy resolution of disputes with the introduction of a public contracts (resolution of disputes) bill to streamline the institutional arrangements.

It also proposes to bring in a bankruptcy code to facilitate easier exits by investors. For quick resolution of commercial disputes, the budget has proposed to set up exclusive commercial divisions in various courts in India.

The budget also proposes to defer general anti-avoidance rules (GAAR) provisions—intended to deter tax avoidance—by two years and increase the domestic transfer pricing threshold to Rs.20 crore from Rs.5 crore, along with a gradual reduction in the corporate tax rate over four years from 30% to 25%, with the phase-out of industry specific exemptions. Companies welcomed the proposals.

The resolve shown to cut red tape has been long overdue. The PM is targeting a rank of 50 in the “Doing Business” rankings, but according to a World Bank report, India has slipped. So while the intent shown in the budget is a good start, we look forward to much more action on the ground; red tape must be cut vertically, not diagonally,” said Pawan Munjal, vice-chairman and managing director, Hero MotoCorp Ltd. Kiran Mazumdar-Shaw, chairperson of Biocon Ltd, said the success of these measures will depend on how well they are implemented.

The reduction in corporate tax, commitment to GST implementation, deferment of GAAR and easier norms for overseas investors to invest in AIFs are expected to improve the investment climate in the country. Overall, the budget is a clear roadmap for investment and growth.

However, we must ensure implementation and delivery of all these proposals to take us to the promised destination,” she said. Corporate tax Jaitley proposed cutting the basic rate of corporate tax to 25% and phasing out exemptions over four years starting in fiscal year 2017, saying the reduction would help boost investment and create jobs. But companies were not enthused.

In the year starting 1 April, companies will pay a higher tax because of an increase in surcharge to 12% from 10%. Companies earning more than Rs.10 crore will pay 34.6% tax in 2015-16 compared with 33.99% in the current year.

While it is not clear how and when the basic corporate tax rates will eventually go down to the 25% level from the current 30% levels over next four years, the surcharge on tax leviable on income of domestic companies for FY15-16 exceeding Rs.1 crore is increased from 5% to 7% and if income exceeds Rs.10 crore it is increased from 10% to 12%,” said said Sunil Kapadia, corporate tax leader at accounting firm EY.

In a report, Deutsche Bank AG said on the revenue side, the phased cut in corporate income tax while eliminating exemptions starting from 2016-17 will have no revenue impact in 2015-16. R. Chandrasekaran, executive vice-chairman, Cognizant India, said reduction in corporate tax from 30% to 25% over four years, in lieu of progressively eliminating and rationalizing exemptions, will reduce tax disputes.

However, the abolition of wealth tax and the introduction of a 2% additional surcharge may, in effect, increase the corporate tax. The 1.5% increase in service tax is also an area of concern,” Chandrasekaran said. Pawan Goenka, executive director at Mahindra and Mahindra Ltd, puts it more bluntly. “We don’t see any benefit, at least in fiscal 2016; in fact the surcharge will be higher,” said Goenka Rahul Bajaj, chairman of Bajaj Auto Ltd, said “some may consider this a pro-corporate budget but in reality it is a budget for growth, savings, industrial development and for the middle class”.

Bankruptcy law Jaitley has also proposed to introduce a new bankruptcy law. “The legislation would enable professional liquidators to gain control over companies on behalf of creditors and work towards a systematic winding down of companies. Presently, most of the redressals, ie, BIFR (Board for Industrial and Financial Reconstruction) or SICA (Sick Industrial Companies Act), were legislations but plagued with delayed tactics which made resolution impossible,” said Abizer Diwanji, partner and national leader, financial services, EY .

Diwanji said with lenders having the ability to appoint a liquidator who would act in the best interest of creditors, realizations would increase and there would be a real threat to defaulting borrowers. It also resonates the Reserve Bank of India governor’s comment that defaulting borrowers had no business to be part of turnarounds where their default was established.

This is clearly the way forward for effective resolutions and would augur well for ARCs (asset reconstruction companies) and bankers as SR (security receipts) and cash deal valuations will increase with reduced resolution timeframes. However, the stringency and effectiveness of the law remains to be tested. Going by overseas experience and indeed, experience of Indian subsidiaries of global corporations that went into bankruptcy, if the law is modelled around those existing in US or UK markets, they may be very effective,” Diwanji added. Kaushal Sampat, president and managing director, India, Dun and Bradstreet, said the proposal to unveil a bankruptcy code would go a long way in improving the ease of doing business.

Arindam Guha, senior director, Deloitte India, said resolving insolvency (India’s rank was 137 in the World Bank rankings) was the other parameter where the budget has indicated the formulation of a new comprehensive bankruptcy code which would shortly replace the existing bankruptcy procedures. On the ease of doing business, the budget has primarily focused on the parameters which are under the administrative jurisdiction of the government of India and where India features towards the bottom of the list in the World Bank’s Doing Business 2015 report.

Accordingly, for enforcing contracts (India was ranked 186 out of 189 countries), the finance minister has announced the setting up of dedicated benches/forums in existing courts for adjudicating commercial disputes to clear the pending backlog of cases.

Proposed new regulations for public contracts (dispute resolution) and regulatory reforms in infrastructure sectors were also announced,” Guha said. Ajay Singh, founder, SpiceJet Ltd, said the budget appears to lay a roadmap for lower taxes, simplification of process and ease of doing business and investment in infrastructure sector.

The proposed bankruptcy law, which I expect will be akin to Chapter 11 provision present in US, will help unshackle massive investments which are stuck in stalled projects,” Singh said. What is there for investors? Srichand P. Hinduja, global chairman, Hinduja Group, said the thrust towards infrastructure bodes well for the future of the economy.

Higher capital spending proposed to build physical and social infrastructure—irrigation, power, electronic connectivity, roads, rail lines, ports, education, skill development and healthcare—will bring supply-side improvements, create jobs, promote entrepreneurship and rejuvenate the economy with moderate stable inflation and alleviate poverty. This will also boost NRIs’ (non-resident Indians’) confidence and appetite for investment into India,” Hinduja said.

On 2 September, Mint had reported that Hinduja Group had committed to invest $10 billion in infrastructure in India, with a focus on distressed power and road projects. This is the third big attempt by the group to invest in India, after unsuccessful attempts in 1991 and 2010. Nitesh Mehta, executive director, Walker Chandiok and Co. Llp, pointed out that the budget has cleared a major roadblock for the success of Real Estate Investment Trust (REITs) by amending the taxation rules for sponsors.

According to the REIT regulations, sponsors who are holding shares of real estate special purpose vehicles (SPVs) are permitted to swap their shares for units in REIT. According to the current tax regime, the swap is not considered a taxable event but sponsors are subject to a higher rate of tax when such REIT units are sold.

Sponsors were therefore under a tax disadvantage compared with other investors who are entitled to concessional tax treatment of nil-15%. The budget proposes to remove this disparity and extend this beneficial tax regime to the Sponsors’ units obtained on swap of their shares in SPV. This is a welcome change and should encourage more real estate players to opt for REIT structure,” Mehta said.

Ajit Gulabchand, chairman and managing director, Hindustan Construction Co. Ltd, said the promise to create and deepen the debt bond market in India so that the private sector can raise long-term money is a step in the right direction, and addresses a long felt unfulfilled need. “A bill to help settle disputes, the amendments to the arbitration act and the procurement law will go a long way in making contracting robust.

 Recognising and taking on the sovereign risk on PPP (public-private partnership) concessions, where the risks were earlier cast upon the private sector, is a step in the right direction,” Gulabchand said. C. Sasidhar, managing director, Krishnapatnam Port Co. Ltd, said the government’s strong intent to boost infrastructure development in India with the National Investment and Infrastructure Fund, along with the introduction of tax- free infrastructure bonds for projects in railways and roads, are commendable.

The clarity provided to foreign investors on the tax regime, as also the potential ease of making investments, will only encourage infusion of much-needed funds in Indian infrastructure industry,” Sasidhar said. Tarun Khanna, Jorge Paulo Lemann Professor, Harvard Business School and director, Harvard South Asia Institute, said there are appropriately major investments planned in physical infrastructure.

As long as this is accompanied by transparency in the allocation of projects and clean governance of the projects, this can provide a medium-term windfall to India. Finally, another benefit also will come from reassuring private investors, and unlocking the private capital, local and global, that has been sitting on the sidelines anxiously awaiting pro-business signals from the Modi government,” he said.

Source: LM