Changes should have been announced to minimise import duty exemptions granted to subsidise products consumed by the rich. Gains made should be used to increase incentives offered to Indian exporters.

Steven Philip Warner | April 2016 Issue | The Dollar Business

There can be no full stops to hope. Those who trust that the ‘Dream Budget’ will one day be revealed in this sphere of mortals can vouch for that. Even as the afternoon clock struck one on the last day of February this year, the wait for this very gathering of optimists was extended by another year. Not to say that Budget speeches have forever failed to inspire, but sometimes you expect more than a recital that is only “just satisfying” for the masses. For once, it’s not totally illogical to expect an “inspiring” hour-and-a-half display of full-hearted economic rhetoric once a year, one laden with proposals that are far from being outcomes of back-calculations crafted to achieve numerical targets and stitched neatly to win your nation some temporary theoretical victory (something like a triple-A rating by S&P is motivating, isn’t it?). To expect some thunderclap of cheers on a clear morning is one fair expectation in a nation from whom the world expects much.

Some words of praise did trickle in alright, but the decibel levels didn’t tear across the skies on Budget Day.

Those living in close proximity to foreign trade were expecting a greater act of generosity from the FM. Picture this: since the incumbent government came to power, for whatever reason – global headwinds or domestic tremors – India’s performance in both exports and manufacturing has looked more discomforting by the day. Between May 2014 and January 2015, India’s monthly exports fell by 15%. And that gradient hasn’t changed polar orientation in time. It has only become steeper. As compared to May 2014, exports in January 2016 fell by 25%! And to talk about manufacturing, the recently announced Index of Industrial Production (IIP) figures were a sore. Even the RBI chief has called the numbers “disappointing”. As per the Ministry of Statistics & Programme Implementation, while Overall IIP fell by 1.5%, manufacturing sector production index fell y-o-y by 2.8%. Interestingly, about half of the 22 industry groups that form a part of the manufacturing sector index showed negative y-o-y growth in January 2016.

So last month, when our FM walked into the Parliament with his brown leather suitcase, expectations – of India’s foreign trade community – were high. What was commendable about the Budget was that it contained a well knocked-in pro-poor agenda and aimed to provide socio-economic security to the underprivileged. “I have outlined the agenda of our Government to ‘Transform India’ for the benefit of the farmers, the poor and the vulnerable,” said the FM in the closing minute of his speech. And that brought about a casual thought – a question – in my mind, “Should this Budget have aimed to first transform India and then use that macro change to make differences in the lives of the underprivileged? Or should it have been the other way round – work at micro and local levels first to transform India as a whole?” I think the difference between the thoughts appears little, but when looked at carefully, may be an explanation of why the Budget failed to score high on creativity.

Harsh words these, you think? Look, the world’s in trouble. India’s macroeconomic indicators or even its bourses are not so heroically defiant. And in such a scenario, something more offbeat – outlandish you may say – would have been desirable. Something to give India’s exports and manufacturing the desired launch pad to win the world and which in turn would have given birth to greater employment, making India’s BPL headcount shrink by the hour. Symbolic, but yes, India is hosting the Twenty-20 World Cup this year, a game that’s far removed from the five-day-long format! A year of defensive play will not win you the trophy.

Let’s explore some highlights of the Budget and evaluate what it means for stakeholders of India’s foreign trade.

The words “poor”, “farmer” and “vulnerable” were spoken about 50 times during the speech. Agreed. Provisions like interest subvention, irrigation funds, smoother flow of credit to cultivators, decentralisation of procurement aided by an online procurement system, etc., will help increase India’s farm output and facilitate exports. But if a key agenda of the Budget was to uplift the poor and support the “export sector”, the FM could have made bolder moves to minimise exemptions granted to subsidise products that are consumed by the rich, and in turn given incentives to encourage exports of processed agricultural and non-agricultural products. For instance, how about stemming the tide of revenue losses caused through application of effective rates of duty (ref. Customs Notfn. 12/2012) on items that are imaginably not made for the poor or the lower income class? Passing on benefits to the rich or to companies that import these products at subsidised duties for manufacturing of products (that again, are inarguably meant for the upper middle and rich class) is beyond logic. Why should basic duties on sun dried dark seedless raisin stand reduced from 105% to 30%? [When was the last time you saw any poor popping a raisin into his mouth?] The same is true for cranberry products and juices, soya protein concentrate, patent leather, non-industrial diamonds other than rough variety, and other products. The government can think of raising revenues by taxing these imports at tariff rates and passing on the gains made by offering incentives for exports. That will encourage manufacturing and create millions of jobs. It is understandable if the duty relaxation is given for raw materials which can be either consumed directly by the farmers and the underprivileged or need further processing for exports like unprocessed precious stones (rubies, diamonds, etc.), urea, compounds for making of fertilizers, unwrought forms (dore bars) of gold and silver, etc. FTAs till date have caused enough damage to the exchequer. No point throwing exemptions to non-FTA nations by subsidising imports that are ‘not’ meant for consumption of the underprivileged. And MNCs or those of the gentry should have no problem in shelling out duties at tariff rates.

Announcements made with respect to the infrastructure sector are encouraging not only for manufacturing units across the country but also for the exim community. Plans to revitalise projects under PPP formats and outlay on roads, railways, airports, and national waterways are needed for more efficient transport formats in the years to come. Talking further of investments, in case of FDI, allowing 100% through the automatic route in marketing of food products produced and manufactured in India is a handsome development for the food processing industry and one that could help boost India’s export potential in times to come. This will also enable quicker establishment of the 42 Mega Food Parks that was announced earlier by the government.

The Budget was also an attempt to bring in tax reforms, albeit change on a small scale. Increase in turnover limit under Presumptive taxation scheme (u/s 44AD of IT Act to Rs.2 crore) ‘could’ bring relief to about 50 lakh MSMEs. Reduction of Corporate tax for small enterprises and new manufacturing companies is one way in which this Budget has contributed to support Make in India. New manufacturing companies will be taxed at 5% lower rates if they avoid claims like profit-linked or investment-linked deductions. And for FY2016-17, relatively small enterprises (with turnover not exceeding Rs.5 crore in FY2015-16) will be taxed 1% lower. The big news for start-ups (set up between FY2016-17 to FY2018-19) is that they will now be allowed 100% deduction of profits for three out of first five years. But continued applicability of MAT (at 18.5%) was a dampener! If the idea was to really fuel the start-up environment, something like a flat, reduced rate of (you could call it) SMAT (Start-up MAT) on book profits could have been proposed, say at 5%, equivalent to the lowest (start-up) category of tax rates applicable to individuals.

India is a nation that scores low on R&D still. Only 8% of our product exports are "high-technology" – even Azerbaijan, Barbados, Burkina Faso, Kazakhstan, Latvia, Mongolia, Mozambique, Niger, Sao Tome and Principe, Solomon Islands and Timor-Leste have better numbers! Think hard – when did you last use a high-tech product made in any of these 12 nations? Really, India needs to wake up. And if that’s the situation the country’s labs are faced with, what logic defines a reduction of incentives in R&D? The benefit of tax deductions for R&D by companies stands reduced to a maximum of 150% from FY2017-18 and 100% from FY2020-21. Should the government – in doing exactly the opposite – not have increased the limit from the existing 200%?

SEZ units and developers too feel that the Budget was a mixed joy. There was no discussion on MAT or DDT removal or giving a boost to manufacturing and employment generation across operational SEZs by allowing something like exports to DTAs at FTA customs rates. The announcement however signalled more than just hints of phasing out of deductions for SEZ developers and units. No income tax benefit under section 10AA of the IT Act shall be allowed for SEZ units that begin manufacturing or start providing services on or after 1st April, 2020. Also, those SEZs which are notified but are not operational yet will not be eligible for the 10 year-long tax holiday under section 80-IAB of the IT Act if these do not become operational by or before 31st March 2017. These are signals indicating the end of incentives era for India’s SEZs that contribute to 27% of our exports. Why are we trying hard to make the future of exports so uncertain? Aren’t global headwinds enough trouble?

While the new deferred sunset clause for SEZs does weaken India’s stance on Make in India, certain aspects of the indirect tax recommendations look a mixed bag. Suitable modifications in customs and excise duty rates on certain inputs, intermediaries and even finished goods (like golf cars, aluminium products, imitation jewellery, e-readers, etc.) to improve competitiveness of domestic industry in sectors like IT hardware, capital goods, defence, textiles, chemicals, petrochemicals, petroleum, MRO of aircraft and ship, etc., were proposed. There were some surprising recommendations that didn’t quite fall in line with the idea of supporting domestic manufacturing. Increase in BCD of Primary Aluminium from 5% to 7.5% was one. First, the metal is used extensively in high-tech industry (from aviation to auto, IT hardware, consumer durables, etc.), and with Make in India, the use is bound to skyrocket. Secondly, India consumes 96% of this metal ore that it produces. With an annual excess stockpile of just 0.16 MMT, and the threat of rising input costs, why would the government want to make imports of this basic input difficult? Then, while on one hand, exemptions of BCD (10%), CVD (12.5%) and SAD (4%) on accessories of mobile phones when imported into India have been withdrawn to encourage Make in India, the government is imposing an excise duty on these very components that are domestically manufactured and supplied to mobile phone manufacturers as OEMs. So mathematically, if you’ve increased the price of Made in China cellular phone charger from Rs.200 to Rs.256.20p, you have increased the price of Made in India product from Rs.250 (assuming the price of Made in China to be lower by ‘just’ 20%) to Rs.281.25p. So by prescribing imposition of excise duty of 12.5% (this tax being indirect, it will ultimately be borne by the final buyer), you’ve burnt the chance to give the pricing edge to the Made in India charger!

Next, Drawback Rates. The DBK schedule announced a few weeks before the Budget had sweet somethings. Ceiling of Drawback for gear boxes – India’s largest exported product in auto components – was increased from Rs.13 to Rs.17 per unit, with the DBK rate being kept unchanged at 2%; in the case of brakes, bumpers and drive axles – the next big export bestsellers – ceilings were raised from Rs.16 to Rs.17/unit, Rs.36 to Rs.61/unit, and Rs.13 to Rs.61/unit respectively. Plus there were some products added at the 6 and 8-digit levels. But for the FM to declare that the DBK scheme has been “widened and deepened to include more products and countries” was not realistic. Two arguments here: (a) Since when did DBK rate depend on a list of countries?; (b) If we take a look at the Customs notification (22/2016), HS code for bumpers (of vehicles other than railway or tramway) is stated as 870801, brakes as 870803, gear boxes as 870804, drive axles as 870805…and so on. The notification also recommends changes in HS Codes 630101, 630102 and 630199. Try looking up on these HS codes in any present day Customs Tariff manual and you’ll realise the joke – these HS Codes are non-existent! So much for a “widened and deepened” DBK schedule that was proudly announced during the Budget speech as one of the “measures to support the export sector”.

Then there were other announcements worth taking a note of. Allowing deferred payment of customs duties for a certain class of exporters and importers with proven track record may not be a very good idea, unless the definition of "proven track record" is made clear. Else this provision will end up pumping more volume into the grey area in India’s foreign trade. However, rationalisation of interest rates on delayed payment of Customs duty under section 28AA at 15% from the current 18% is sensible. This rate needs to go southwards in order to protect parties who may subsequently have the decision going against them in ongoing cases. The government’s announcement to reduce litigation and simplify the existing Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 is welcome. Hopefully, the near dozen new benches of CESTAT will affect quicker resolution to existing cases of Customs, Excise and Service Tax and make India’s foreign trade environment appear more conducive for foreign investors, importers and exporters. The government is working hard to improve on the country’s Ease of Doing Business rankings and in this regard, providing certainty in taxation along with rationalisation of tax rates will help.

Moving on to India’s gateways to the world, while allowing increased free baggage allowance for international passengers is a good move to encourage forex earnings through the aviation sector, some deadline should have been shared with India’s import-export stakeholders as far as putting to practice of the much-talked about Customs single window clearance is concerned. All that we are told is that it’s still a work in progress and will remain so until the beginning of FY2017-18. [As per CBEC Circular 10/2016, dated March 15, 2016, online clearance under Single Window Project has been rolled out so far only at main ports and airports in Delhi, Mumbai, Kolkata and Chennai.]

When we talk of ports, we can’t miss sight of our precious stockpiles at the warehouses. Change in procedure to provide for a shift from physical control to record-based control for customs bonded warehouses is welcome, but at the same time, the reduction in investment-linked deduction (u/s 35AD of IT Act) is a move that's hard to explain. Reduction of tax exemption from 150% to 100% in the case of a cold chain facility, warehousing facility for storage of agricultural produce, 100-bed plus hospitals, and production of fertilizers w.e.f. April next year is harsh. At a time when we talk of wasted agri-produce, lack of storage spaces, making India a hotspot for medical tourism, why should the government look to discourage incentives that come with greater investments?

One year back, it would have been too early for India’s foreign trade community to expect a bouquet of good tidings from the Budget. Then, the new Foreign Trade Policy was due and the incumbent government had barely been in office for over ten months. This time, it was different. When our FM started with the words, “Madam Speaker…”, millions of Indians listened in startled silence. When he ended his monologue, a big chunk of those millions wondered what had whizzed past.

Perhaps next time, we will hear some things bigger and bolder for capitalists small and large, and especially those who wish to take the world by storm.

After all, there can be no full stops to hope.