Some would say the Union Budget 2017 did not have much for exporters. On the positive note, it didn't do any harm either. The only benefits that exporters received were indirect, in the form of increased expenditure on infrastructure and reduction in import duties on some inputs. But are these measures enough to give the country's falling exports the much-needed boost?
TDB INTELLIGENCE UNIT | March 2017 Issue | The Dollar Business
The Union Budget 2017 made many firsts-of-sorts. It was announced a month in advance, probably for us to digest it before the end of the financial year. Also, it combined the rail and general Budget, breaking a 92-year old tradition and in the process giving the Parliament one more productive day. This is also the first time that the Finance Ministry went paperless for a Budget. There were no hard copies of the circulars. What's more? The Economic Survey was released on the first day of the Budget session. More importantly the distinction between plan and non-plan expenditure was done away with in this Budget, reflecting the abolishment of the Planning Commission. But that was more or less the last of the major achievements of this Budget.
Small Mercies
The fact that the Budget would be a ‘Safe Budget’ was not a surprise. Despite that, the exporters’ community did pin a lot of hopes to the Union Budget 2017. The Budget, however, did acknowledge the challenges being faced by our exporters. Arun Jaitley, Union Minister of Finance and Corporate Affairs, noted the fact that the current monetary policy stance of US Federal Reserve to increase policy rates more than once in 2017 may lead to lower capital inflows and higher outflows. Add to that, there is a great amount of uncertainty around commodity prices, especially crude oil. Globally, pressures for protectionism are building up among economies and countries. The ascension of Donald Trump to the presidency of United States and Brexit have brought to fore the latent neo-nationalism movement. And these factors are likely to hurt exports not just from India, but from other emerging countries as well. This is not to say that exporters face a bleak future. There sure are few good things that the Budget did for the exporters. For one, it left exporters untouched. At least, the government was sensible enough to not announce unwanted sops and inadequate funds without proper analysis. While many may say that exporters were ignored in the Union Budget, we believe not announcing sops is a sign of maturity. The Budget is possibly not the best tool to give an holistic impetus to exports, the Foreign Trade Policy (FTP) is. The better part of the news is that the FTP 2015-2020 is under review and the power corridors are abuzz with discussions, lobbying and suggestions.
Yes, the Commerce Ministry is already a couple of months into consultations with export bodies and councils to re-assess growth potential. And, ahead of the announcement of the reviewed FTP 2015-2020, there is still scope and hope to arrest the year-on-year decline. Having said that, the Budget did announce an export infrastructure fund – Trade Infrastructure for Export Scheme (TIES) to bolster infrastructure for exports. Though TIES has been welcomed by the foreign trade fraternity, experts have their doubts as to the impact that it will have, given that the funds allocated for the fiscal is a mere Rs.200 crore.
“One of the key welcome proposals of the government is Trade Infrastructure for Export Scheme (TIES). However, the fund of Rs.200 crore allotted to the scheme is a cause of concern for us. In my opinion, keeping in mind the cost of restoring roads and connectivity to the ports, setting up accredited laboratories, effluent treatment plants, etc., the fund is insufficient,” says Ajay Sahai, Director General & CEO, Federation of Indian Export Organisations (FIEO). This and a few reductions in customs duties on some inputs (such as nickel and LNG) are the only direct benefits for those involved in export-manufacturing.
The Backdrop
But, as they say, hope is good only for breakfast. Let us have a look at the main course that will be dished out for the Indian exporters. The Economic Survey 2016-17 did hint at a few things. It made a case for more support for exporters in the labour-intensive sectors such as apparels, leather and footwear. Based on this, export unions and councils believe that there will be much to look forward to in the upcoming FTP review.
Trade Infrastructure for Exports Scheme (TIES), announced in Budget 2017, is expected to help states spruce of export infrastructure.
Concurring with this view, T. S. Bhasin, Chairman, Engineering Export Promotion Council of India (EEPC) tells The Dollar Business, “There is nothing specific in the Budget for exporters. While the Budget proposed TIES and corrected some inverted duties, unfortunately, it has not specially covered the exports sector. I hope the mid-term review of the Foreign Trade Policy 2015-2020 will address trade issues. In addition, I feel that there are some measures that can provide immediate benefits to exporters without any revenue implications for the government. These include roping in companies like TCS to handle DGFT and ICEGATE e-filing services. Similarly, simplification of rules and procedures is a long-standing demand. In addition, brand creation and technology upgradation should also be assessed and addressed adequately.”
Interestingly, with the review policy consultations in the backdrop, the Federation of Indian Exporters Organisations (FIEO), in an official statement noted that the month of January 2017 saw positive growth in exports after two years of consecutive negative growth in January. The positive growth could either be owing to the special package announced for textile sector or the interest equalisation scheme announced for five years or more fundamental factors. Well, we probably will have to wait for more monthly numbers to flow in to be able to comment on the situation. “Though the numbers have started looking up, the ground is still shaky. To continue with the growth story, our exporters need more hand-holding,” says S. C. Ralhan, President, FIEO, referring to the January statistics. According to the data provided by Ministry of Commerce (GoI), the trade deficit in India widened to $9.84 billion in January 2017 from a $7.67 billion gap a year earlier and above market expectations of a $7.64 billion shortfall. Exports, lately though have signs of revival, with a growth of 4.32% to $22.2 billion in January 2017, following a 5.7% jump in December 2016. Imports also surged 10.7% to $31.96 billion, following a 0.5% increase in December. In January, oil imports jumped 61.1% due to higher oil prices while non-oil imports were flat and gold purchases slumped 29.94%. With oil prices likely to be higher on average than last year, the direction that our balance of trade will take in the near future is clear. Downwards! The only way a semblance of balance could have been restored in our Balance of Trade was if exports grew to touch the targetted $900 billion by FY2020. The present trend in exports clearly indicate that to be a rather long-shot. Rumours are that the numbers might be revised to $750 billion, but even that seems ambitious. But was there anything at all in the Budget that could get us near the target? Let us have a look at what the Budget means for our top exporting sectors.
Jewel in the crown
The erstwhile golden bird, India, might be battered and bruised, but the gems and jewellery sector, growing at 13-17% annually, continues to be the biggest contributor towards India’s total exports. Praveen Shankar Pandya, Chairman, Gem & Jewellery Export Promotion Council (GJEPC), decoding the Budget for the industry says, “Though TIES is a good move, but the idea is to have jewellery parks in India to boost exports.” He goes on to add that similar to the ecosystem suggested for the electronics and manufacturing sector, the gems and jewellery sector also needs sops since it employs a 3 million strong workforce. In the Budget, the tax for smaller companies with annual turnover upto Rs.50 crore has been proposed at 25%. This cut in corporate tax rates for MSMEs will benefit a large number of gems and jewellery exporters. The sector further seeks to promote Made in India jewellery amongst inbound foreign tourists.
The sector is also seeking zero or minimal rate of duty on exports of diamond under GST regime on the basis of equivalence principle. Also, gems and jewellery exporters want the government to relook at the international transfer pricing that currently applies only if one of the involved entities enjoys specified profit-linked deduction. Pandya also feels that carry forward of minimum alternate tax (MAT) should be allowed for more than 15 years since most of the companies in the trade have already crossed the 15-year cut off period. Voicing similar opinions, Ajay Sahai, Director General & CEO, FIEO said, “The extension of carry forward period for MAT, from 10 years to 15 years, is another apposite move by the government. But in my opinion, the extension should logically be for 20 years because one shouldn’t expect a company to clock the profit figures of the first 10 years in the following five years. Anyways, it is a good beginning.”
God Speed
While for the gems and jewellery sector the Budget was a mixed bag, the automotive industry, another major contributor to our exports, is rejoicing the government’s decision to promote last-mile connectivity. The marginally higher allocation of Rs.65,000 crore towards highway development seems to have given a ray of hope to the automotive industry. Also, under the Pradhan Mantri Gram Sadak Yojna (PMGSY), the speed of rural road construction has been accelerated to 133 km roads per day in 2016-17 against 73 km per day during 2011-14. The automotive industry believes that this will encourage last-mile connectivity, boost domestic demand and thus, leave scope as well as wherewithal to promote exports. Though this is some good news for manufacturers of heavy machinery and construction equipment, the automobile industry is disappointed as its demand for incentive-based fleet modernisation was not met.
"The reduction in duties on nickel and LNG should boost exports from Steel Sector"
Bitter Medicine
Yet another industry that feels that not enough has been done to give the much-needed push to exports, is the pharma sector. Kiran Mazumdar-Shaw, Chairperson and Managing Director of Biocon, soon after the Budget was tabled, regretted that no impetus was provided for exports and science & technology.She further went on to say that it is a safe and balanced Budget and could have been bolder. Nevertheless, the sector is rejoicing the removal of the Foreign Investment Promotion Board (FIPB) that was the single-window clearance for FDIs through the approval route in India. This could ease FDI inflow into India and boost the pharmaceutical industry. While the pharmaceutical industry is likely to get through its demands in the policy review, the textile industry, one with the maximum number of unorganised smaller units that need hand holding, has Sared better in the Budget.
Minor Gains
The Budget has certainly been kinder towards the textiles industry. Higher allocation towards skill development is likely to give the much-needed boost to the country’s textile industry. Experts believe that the sector has the capacity to touch $350 billion in the next few years. The overall allocation for the textile sector has remained unchanged. However, allocation for remission of state levies for exporters have been increased to Rs.1,555 crore for FY2018 from Rs.400 crore for FY2017. This is indeed good news for exporters as they are now likely to get their duty refunds faster, which in turn will improve their cash flows and help them export more.
The Cotton Textiles Export Promotion Council (TEXPROCIL) is upbeat about the Budget and the 5% cut in the corporate income tax for medium and small enterprises. However, the industry wants the government to restore incentives pertaining to interest subsidy for merchant exporters. Another sector that could be looking for similar incentives is the handicrafts sector that is flooded with MSMEs. This industry does not view the Budget 2017 as encouraging. Speaking to The Dollar Business, Vijay Sethi, Owner, Sethi Handicrafts Pvt. Ltd., says that there is not much for exporters in the Budget. “The tax reduction for MSMEs is not applicable for us as we are a 100% export house. I think the government could have increased the incentives and duty drawback for exporters. As there is huge competition in global markets, we have to fight hard to sell our products at desired margin. The duty drawback on our products is only 1.6%, which is very low. If the government wants to boost handicrafts exports, it has to increase the incentives and do away with certain taxes. That way, the exporters (from MSME sector) will be able to continue business for a longer term,” added Sethi.
Interestingly, China has industriously started creating Indian handicraft lookalikes and exporting them to the entire world. Chikankari work being churned out of Chinese machines is much cheaper than what we produce domestically. Ironically, the lights decorating Indian thoroughfares during Diwali, the festival of lights, are all imported from China. And this industry was hoping to see a rise in import duties on these products given the anti-China rhetoric that was flamed by some recently.
Apart from these established industries, there is yet another sector that is trying to lobby hard. Indian startups and entrepreneurs feel the need to have institutions that can be used for ancillary activities such as development of prototypes and research and development. Undoubtedly, such a support system will ensure that India is put back on the world map of innovations. But this Budget, unlike the one before, has failed to revitalise this segment.
Lost in Translation
With so little for exporters in the Union Budget 2017, it is no surprise that most exporters were disappointed. Indian exporters had many expectations from the Budget. While some seeked tax holidays, others wanted to have a supporting environment such as export hubs and yet others wanted the incentives under the Merchandise Exports from India Scheme (MEIS) scheme to be increased. Mobile makers want to produce cheaper consumer electronics and do not want the Apples of the world to be entertained for any sops. Other expectations ranged from creation of an export development fund to the extension of interest equalisation scheme for merchant exporters and exemption of service tax.
While those disappointed are many in number, the one sure gainer has been the MSME sector, a sector that contributes to about 40% of our exports. Sangam Kurade, President, Federation of Indian Micro and Small & Medium Enterprises (FISME) though hits the nail when he says, "MSMEs, like most businesses, approach the Budget with trepidation. In the last decades, hardly a Budget has gone by which has not given a few new bruises to nurse. This year’s Budget seems to follow a Latin dictum: ‘primum non nocere’ i.e. ‘first, do no harm’. However, people expected the Finance Minister to be more aggressive in giving relief to more sectors. He seemed to have held his plans back perhaps due to uncertainties in the global environment and the fall-out of the implementation of the GST. May be a right pragmatic approach." That aptly sums up the Budget 2017 for exporters.
"Exporters, across industries, do not view the Budget 2017 as Encouraging"
Come September
While there were small gains like a push for digitalisation of transactions and increased expenditure on infrastructure that will in some ways boost exports, let us make no bones about the fact that the Budget essentially ignored exporters. But that possibly is because they have another window of opportunity in the mid-term review of the FTP. Let us be clear that the Union Budget is not the only tool available to the government to give an impetus to exports. Neither should we place all eggs in the FTP basket.
The basic steps that need to be taken to improve exports today are not completely dependent on budgetary support. To begin with, even before we address the growth in exports, the share of the manufacturing sector needs to increase in the GDP. More so, for India missed the bus to industrial revolution not once but twice. First, since it was under the British rule and could not develop its manufacturing activity. Second, when most other countries were catching up on manufacturing, India shifted gears to the service sector directly.
The next is the need to go up the value chain in manufacturing and services. As long as 'Made-in-India' products are unable to create a brand and a differentiator, we will continue to fight with the lowest cost producer, and that as we all know is not a good position to be in. This means that exporters need to increase spending on R&D.
India also needs to work towards creating enduring global trade partnerships. Experts believe that as much as trade policy dictates foreign policy in these times, India has not leveraged its status as one the largest economies and democracies to further its foreign trade.
We however do agree that budgetary support to promote these activities will be more than welcome. September 2017, when the reviewed FTP is expected to be announced, gives the government another window for meeting the demands and expectations of exporters. What we expect from the government though is more. A rational, holistic and forward looking FTP. Is it too much to ask?
Ajay Sahai, Director General & CEO, FIEO
TDB: What were the major highlights of the Union Budget 2017 for our exporters?
Ajay Sahai (AS): One of the key welcome proposals by the government is Trade Infrastructure for Export Scheme (TIES). Inadequate infrastructure in states pushes the transactions costs of exporters upwards, impacting competitiveness of Indian goods in the global markets. TIES is expected to help states build infrastructure for exports. However, the fund of Rs.200 crore allotted to the scheme is a cause of concern for us. In my opinion, keeping in mind the cost of restoring roads and connectivity to the ports, setting up accredited laboratories, effluent treatment plants, etc., the fund is insufficient. However, the investment of Rs.3.9 lakh crore in infrastructure will definitely help exports, from the medium to long-term perspective. The carry forward extension of minimum alternate tax (MAT), from 10 years to 15 years, is another apposite move by the government. But in my opinion, the extension should logically be of 20 years because one shouldn’t expect a company to clock the profit figures of the first 10 years in the following five years. Anyways, it is a good beginning.
The Budget has also given ample indications that GST is on course with no change in excise and service tax. Alongside, the Finance Bill has tried to simplify and streamline the exim process and it has increased the duty-free embellishment for the leather sector from 3% to 5% of the FOB value. It has also made filing bill of entry and paying the duty mandatory within 24 on goods arrived at the ports. This move will significantly reduce the dwell time and improve the logistics performance.
TDB: What is your opinion on the Centre’s decision to reduce the duty on various raw materials?
AS: Although the duty has been reduced to benefit specific sectors, I am sure the move will benefit the Indian economy as a whole. Lowering the cost of production will benefit both manufacturers and exporters and we can expect a quantum jump in exports.
TDB: How do you think recapitalisation of banks will boost the exim trade?
AS: It’s a good move because unless the concerns of the banks related to the non-performing assets (NPAs) are addressed, they will not show interest in lending money to the manufacturing sector. In addition, after the demonetisation, I think the banks are flush with the fund. The only issue is how much of the fund will be under the bank’s custody.
TDB: Your demand for enhancing the rate and bringing merchant exporters under the interest equalisation scheme hasn’t been met. What’s your thought on that?
AS: The total budget allocated to interest equalisation scheme is just Rs.1,100 crore, which I think is not sufficient. The government has limited budget and cannot extend the scheme to merchant exporters. But for the record, the merchant exporters contribute a significant figure of around 30% to the total exports volume annually. If we could have include merchant exporters under the scheme, it would surely provided a boost to exports from the country.
TDB: You had also asked for a bigger budget allocation for promoting India-made products in international markets. Has that been addressed?
AS: The budget for exports promotion is low and isn’t at par with other countries. One shouldn’t forget that India has a sizeable number of MSME exporters who do not have enough funds to market their products. Moreover, the size of the exports market is shrinking because of the dull global economic condition. So, unless we are aggressive, it will be impossible for us to gain a bigger share in the global market. And keeping these circumstances in mind, we think that the government should consider forming an export development fund.
TDB: What is your opinion on the corporate tax reduction? Do you think this will give a leg-up to the MSME sector?
AS: Corporate tax reduction is a good move. However, I think it shouldn’t be restricted only to the MSME sector. It should be extended to all proprietorship and partnership businesses as well. I would also add that trying to define the beneficial owner in imports is a great step towards bringing clarity in a hitherto grey area. Some importers associations, custom house agents and associations have already met Central Board of Excise and Customs (CBEC) and the CBEC is working on the budget proposal so that it can be implemented at the earliest..
TDB: And what do you think are the misses of the Budget?
AS: The Budget should have offered more support to automation and electronic data interchange among all the government departments involved in the exim trade. It will not only help in reducing the transaction time and facilitating exports and imports but also help us improve our ease of doing business ranking. One has to scrutinise why we are slipping on our ranking year-on-year. Such a downslide also shows that other countries are providing far more support to their exim trade than us. Electronic data exchange among government departments that deal with foreign trade is a necessity today.
NIHAL KOTHARI, CHAIRMAN, NATIONAL COUNCIL ON INDIRECT TAXATION, ASSOCHAM
TDB: What are the key takeaways from the Budget this year?
Nihal Kothari (NK): In the long run, I think the Budget will benefit the Indian economy in many ways. At the global trade level, there are many countries that are adopting anti-globalisation measures or protectionism. But, measures like the abolition of the Foreign Investment Promotion Board (FIPB) and the reduction in the corporate tax for the MSMEs will put us at par or above the global standards. The Budget also has put ample focus on measures such as Clean-up India, Digital India and JAM (Jan Dhan, Aadhar and Mobile). It has proposed Customs duty relief to point of sales (PoS) instruments to promote cashless transactions. And the initiative to expand the tax base is also in line with the idea of pumping funds for sustainable development.
TDB: Will the reduction in corporate tax be able to make the MSME sector more competitive?
NK: It will, but the government should also pay attention to the tax implications of companies with an annual turnover of more than Rs.50 crore as the effective tax rate of those companies works out at 40.88%. Another debate that continues is whether LLP companies should convert themselves into other corporate forms such as private limited because the effective tax rate for LLP companies is 34.61%, which is higher than the tax rate of corporate entities. I think the rate of MAT, surcharge and cess should also be given a second thought. And, in addition, there was an expectation on tax-breaks and a decrease in the effective tax rates from various sectors. But that has not happened in this Budget.
TDB: The government has tried to address many issues in the Budget. What was the biggest challenge that the government had to deal with in this Budget?
NK: The biggest challenge was to have a viable growth plan while maintaining fiscal stability. As a matter of fact, the fiscal deficit for the current financial year is 3.5%. However, the fiscal deficit will come down to 3.2% by March 2017 and eventually to 3% by 2019.
TDB: What is your opinion on the basic Customs and central excise duty waiver on inputs and raw materials?
NK: The duty amendments are in line with various measures related to rural India and schemes like ‘Clean India’ and ‘Make in India’. For instance, the Customs duty reduction on LNG will prove useful for power generation. The Customs Department is also focusing on reversing the inverted duty structure such that the duties on raw materials are lower than the those of the finished goods being imported. That should boost exports. Meanwhile, the rate of basic excise duty remains unchanged at 12.5%. However, the excise duty for solar tempered glass has been reduced to 6%. To promote manufacturing of PoS devices and card readers, the earlier excise duty and Customs duty exemption previously granted until March 31 has been extended by three more months till June 2017. This extension is also applicable on import of micro-ATMs and fingerprint devices – an obvious after-effect of the demonetisation initiative.
TDB: The Budget missed out on giving clarity on the progress of GST implementation. Why?
NK: The Finance Minister obviously did not want to disturb the proceedings on the GST by commenting either on the development phase or the implementation date. He wants the clarifications to come directly from the GST Council. Hence, there is no mention of GST in the Budget.
Samir Gandhi, Partner Transfer Pricing, Deloitte HASKINS & SELLS
TBD: The Union Budget 2017 has garnered both criticism and appreciation. What's your take?
Samir Gandhi (SG): It is a forward-looking Budget. I think no one can solve all the issues that the economy is facing at one go. After the Finance Minister Arun Jaitley’s Budget speech in the Parliament, Prime Minister Narendra Modi rightly said that the impact of the announcements made in this Budget would stretch beyond March 2018. I think we’ll see a follow-through Budget in 2018. The Finance Minister has rightly said that the Budget always has to be a “spend more kind and not save more type”. Through this Budget, he is putting more money into the consumers’ hand.
TDB: What according to you were the highlights of the Budget?
SG: The reductions in the income tax slab for the middle class and pruning the corporate tax for MSMEs are indeed praiseworthy. In addition, infrastructure status assigned to the affordable housing will bring spillover benefits to varied sectors such as cement production, steel market, employment, etc. It will thus aid industrial production throughout the country and boost our exports.
TDB: Why did the Budget not give any clarity on GST?
SG: It’s true that there was nothing much on GST in the Budget. And it’s because the GST Council is now authorised to take a call on GST-related affairs. I think the whole ecosystem is very much in place and is being improved upon. And speaking about the Centre-State tug of war on revenue, the differences will be sorted out soon because both parties want a simplified, robust and efficient tax structure.
TDB: How prepared do you think our tax personnel are for the GST rollout?
SG: GST is such a path-breaking reform. There will be some hiccups. But, I believe, efforts are on to make it a success. A few days back, Central Board of Excise and Customs (CBEC) Commissioner informed us that the VAT Department of the state government of Maharashtra was getting trained. I understand that similar training sessions are taking place across the country. I do not think training will be a handicap for GST.
Vipul Jhaveri, Chairman, National Council on International Taxes, Assocham
TDB: What kind of impact will the Budget 2017 have on the MSME sector?
Vipul Jhaveri (VJ): The reduction in the corporate tax will create a level-playing field for MSMEs – they will now be in a better position to compete with bigger companies. However, it is debatable as to whether the reduction in the corporate tax addresses the issues raised during demonetisation. The reason being, the tax had no role to play in demonetisation, a policy which aimed at bringing more people under the purview of taxation. In addition, with Goods and Services Tax (GST) on the anvil, it is becoming increasingly necessary for MSMEs to get into the mainstream economy, especially if they want to compete with the bigger companies. Let’s consider this, in the GST regime, each MSME company will be eligible for input credit on the indirect tax imposed on the inputs but they still prefer to be in the informal sector. Therefore, their buyers may no longer want to do business with them. The Budget and the GST are parts of the larger ecosystem envisioned by the Finance Ministry, but the Ministry also needs to be aware of the ground realities that MSMEs face.
TDB: Do you believe indirect taxes lack a clear roadmap?
VJ: As GST is around the corner, it’s not logical to introduce many changes in the indirect taxes. I am happy with the direction envisioned and propagated in the Budget. One of the key aspects of any tax law, or any law for that matter, is stability. If a law is subject to frequent changes, it’s of no use.
TDB: Some of Assocham's recommendations were implemented in the Budget. Are you happy with those incorporated in the Budget?
VJ: I would say that the government is quite receptive to our suggestions. Many of our proposals have been incorporated, like those related to the capital gains and foreign institutional investors (FIIs). This time we held several one-on-one discussions with the government, which has led to some legislative amendments. All suggestions cannot be incorporated. The government also has its priorities. And even if the government wants to offer some concessions, it does not always have the resources for the same. It is a catch-22 situation for the government and people need to understand that.
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