The Union Budget 2017 will follow two epochal events in the economic history of India – the passage of the GST Bill and the demonetisation initiative. And for these very reasons the industry is awaiting the Budget with high hopes. Can Finance Minister Arun Jaitley empower India's export-manufacturing community and deliver a Budget that will mitigate the impact of these two mega events?

Ahmad Shariq Khan | February 2017 Issue | The Dollar Business

The Union Budget 2017 created history even before Union Finance Minister Arun Jaitley has made his opening statement, just by being tabled about a month earlier than usual. Does that symbolise that it is not business as usual? We will only know once the finance bill is tabled. But post demonetisation and the impending implementation of the GST, the industry has a lot of expectations from the Finance Minister.

Coming up just ahead of the legislative elections in seven major states, representing approximately 25% of Lok Sabha seats, many belive that the upcoming budget will have a populist overtone. But they do expect the government to announce measures to overcome the destabilising impact of demonetisation. Exporters also expect the government to create a better policy framework to help boost the rather lacklustre performance of exports from India. We spoke to a variety of industry leaders to gauge their sentiments and expectations around the Union Budget.

IT under threat

The IT-BPM industry has lately been in the news for all the wrong reasons. The sector, already under stress owing to the new H-1B visa policies being promulgated by the Trump regime in US, has many expectations from the Union Budget. The sector wants the government to review its decision to restrict the highest rate of depreciation to 40% in view of the quick pace of obsolescence of technology and equipment in this sector. The sector also wants the Finance Ministry to allow for weighted deduction on skill development expenditure as well as on software manufacturing expenditure. This they believe will give an impetus to research and development in the sector and allow them to go up the value chain. Going up the value chain is important for the sector in the face of competition from countries like Philippines, Indonesia and Malaysia. It will also help the sector mitigate the risk of being dependent on services alone. To keep exports competitive the sector also wants the government to restore the MAT exemption that was originally applicable to SEZs.

Rushabh Shah, President, Trade Association of Information Technology (TAIT), believes that there are reforms required for adoption of IT in the domestic industry as well. Shah says, “Taxation on software products is still very high in India. At present, there is dual taxation on software, and the government seems happy to milk both the cows – VAT at the state level and Service Tax at the central level. Nowhere in the world is a product charged twice – first VAT and then Service Tax. This has been going on for a relatively long span of time, and it’s high time that the anomaly is addressed in the upcoming budget. The prevailing price structure is so high that it is an impediment in the way of software adoption.”

The textile sector, a large contributor of foreign exchange to the exchequer, has been hit hard
by the demonetisation initiative, and expects mitigating measures from the Union Budget.

Demonetisation Devil

While the present crisis in the IT sector has mostly been triggered by external forces, an internal crisis, demonetisation, that the country is still reeling from was generated by government decree. Across the length and breadth of the country, sectors from real estate to automobiles and from consumer goods to handicrafts have been hit hard by the demonetisation initiative. The sector that was possibly the worst hit was the MSME sector. According to reports, many firms in the MSME sector that largely comprise of players in the informal sector and believes in cash as the preferred mode of payment, had to shut shop as they could neither pay their employees nor procure raw materials. Indeed, this segment that accounts for 45% of India’s manufacturing and 40% of total exports, has witnessed a huge drop in production across its factories and plants. And considering its importance, this segment is expected to find special attention in this budget and it is most likely to be offered the olive branch in the form of various budgetary sops.

So, what are the expectations of the MSME sector this time around? Federation of Indian Micro and Small & Medium Enterprises’ (FISME) Secretary General, Anil Bhardwaj, has recently submitted a memorandum of proposals for the consideration of the Finance Ministry. FISME believes that it will take at least another five to six months for the normalcy to return in cash supply. FISME also thinks that the disruption caused by demonetisation for that long a period is enough to inflict massive collateral damage to MSMEs and consequently to employment in the sector if remedial steps are not taken urgently.

Elucidating on the measures that he believes can help the MSME sector recover from the impact of demonetisation, Bhardwaj says, “To facilitate easier flow of credit, banks should be directed to enhance the asset leverage (to 5-6 times of the collateral) and reduce the interest rates (by 250-300 basis points). The banks should also extend the default period for consideration of NPA to six months to allow MSMEs to overcome the slowdown in the market. The government should also allow a guided fall of the rupee exchange rate to counter fall in exports. Also cash withdrawal limit of Rs.5 lakh for domestic enterprises should also be enhanced”.

The issue that has plagued the MSME sectors efforts to become part of the formal economy is the cost of Social security (PF, ESI, etc). Small enterprises find it difficult to bear the cost of these mandatory requirements and regulatory compliances. Bharadwaj says, “Paying them through cheque means bringing such employment on record, hence a scheme could be devised which facilitates existing employment not recorded hitherto to be shown on record and related cost of the social security be borne by the government for few years and phased out in a graded manner. It’s time that a promise made in the previous Budget for providing an option to employers/ employees for PF and ESI other than the existing institutions, be redeemed.”

Bhardwaj also highlights one anomaly in government’s ongoing push towards a ‘less cash or cashless economy’, saying, “The transaction fee charged for using instruments like debit and credit cards to the extent of 2-3% of the value of the transaction is a big dampener. On the one hand, we want to encourage digital banking, on the other hand, we penalise people who use it. All electronic transaction should be without charge.”

Apparel woes

Another sector which has borne the brunt of demonetisation and seen export performance fall is the apparel sector. Indeed, many firms that export textile and apparel also come under the MSME sector. On his expectations for the Budget 2017, just like Bhardwaj, Ashok G. Rajani, Chairman, Apparel Export Promotion Council (AEPC), is of the view that the government should urgently address demonetisation woes. The situation is still very grim in the informal sector. With little cash in circulation, it’s hard to keep running factories. A large number of workers have also gone back to their hometowns. In the coming budget, government must take urgent steps to increase cash in circulation,” says Rajani.

Further, while lauding the government’s special package for the textile sector, and saying that he does not have any specific expectations from the Budget this time around, Rajani strongly urges the government to have a long-term vision while formulating and executing any policy. “Uncertainty with policies remain an area of concern for us. For example, the Scheme for Rebate of State Levies on Export of Garments 2016 (ROSL) became operational on September 20, 2016 and will remain in operation for a period of three years, should not get modified or discontinued for any reason – be it the introduction of GST or any other abrupt policy changes. Abrupt changes in policies play havoc with cost structure of exporters,” cautions Rajani. Most exporters across sectors share the same sentiment on frequent policy changes. They believe both exports and FDI have suffered because of a lack of clarity and consistency in policies and incentives.

A pinch in the shoe

Another of the country’s largest forex earners, the leather sector which is a $17.85 billion industry (exports – $5.85 billion; domestic Market – $12 billion) has a lot of expectations from Arun Jaitley this time. Talking to The Dollar Business, Rajesh Sehgal, Vice President, Agra Footwear Manufacturers and Exporters Chamber (AFMEC), whose city churns out a major chunk of country’s total footwear exports, says, “Exporters should be entitled to higher depreciation on plant & machinery at 30% instead 15% as they become obsolete in view of fast changing technology. Also, weighted deduction of 150% should be given on Sample Development Expenses (SDE) to boost exports. And in the case of exporters of footwear, capital gains arising out of sale of land and buildings that have been used for manufacturing and exports of footwear for more than three years should be exempt from tax, provided the consideration is invested into acquisition of new land and building for modernisation and expansion in the same city within two years.” The leather industry is obviously looking at the Union Budget with a lot of expectations, in terms of tax breaks to make products from the industry globally more competitive.

GST Conundrum

And when it comes to taxes, can talk about the GST remain far behind? The leather industry, like many other export oriented industries, is also wary about the impending implementation of GST. They believe that exporters need to get immediate clarity on the administration of GST, the process and time frame for receiving duty drawback on exports under the new tax regime. Merchant exporters across sectors are also worried about the impact of the GST regime on their cost and cash flow structures.

These exporters are presently exempted from VAT or CST, while taking goods for exports. However, under the GST regime, these exporters now will be subject to IGST, which will block their capital and thus reduce their competitiveness. Exporters through Federation of Indian Exporters Organisation (FIEO) have suggested that the government through the Union Budget should allow exemption from IGST to merchant exporters against a running bond, which may be debited while taking supplies, and credited when proof of exports is provided. FIEO believes that since GSTN and ICEGATE will be linked, this can be easily implemented.

Corporate Tax

Taxes, whether it be the newly fangled GST or the omnipresent corporate tax has always been the subject of discussions when it come to Union Budget. Gopal Jiwarajka, President, PHD Chamber of Commerce, feels that going forward corporate tax rate should come down to no more than 25% from the headline rate of 30% and 34.6% with cesses and surcharges. Many believe that the incidence of high corporate tax have made goods produced in India less competitive in the global markets.

This becomes even more important this year as US President Donald Trump has promised to bring down corporate taxes by 20% in US, and going by the way he has followed through on his campaign promises, he might do just that. And once the world’s leading force in trade takes such a decision, many other countries may follow suit. If India remains a high tax regime, it would mean losing out on exports as well as FDIs and FIIs. Many feel that a tax break for the corporate sector is just the medicine that the economy needs in these trying times. While bringing down corporate tax drastically across the board will be a severe drain on the exchequer, the government should consider tax breaks for the corporate sector – if not for all, at least for some sectors that have lost or are losing their competitiveness in the global markets.

The leather industry expects the Union Budget 2017 to come up with measures
that will make exports from the industry globally competitive.

Access & Incentives

While a reduction in corporate tax will benefit companies across sectors, exporters also expect that the Finance Minister will support their efforts through special incentives and funds. Ajay Sahai, Director General & CEO, FIEO, has said a more aggressive export marketing strategy needs to be introduced for which the government must establish an export development fund with a corpus equivalent to 0.5% value of India's total exports.

Sahai said that this was becoming more and more important as many of our competitor countries are aggressively promoting exports in our traditional markets. FIEO believes this will encourage small and medium enterprises to easily enter the market and sell their products. Batting for merchant exporters, who contribute to 40% of the country’s exports, Sahai said that the 3% Interest Equalisation Scheme, available now to small and medium manufacturing units, must be extended to merchant exporters. FIEO has also suggested the raising of the limit of the Credit Linked Capital Subsidy Scheme (CLCSS). The CLCSS has been instrumental in helping the small scale sector to modernise and expand its production. The CLCSS limit was fixed at Rs.1 crore about a decade back, and while cost of equipment have increased multifold since then the limit has not been raised. Exporters want Jaitley to enhance the CLCSS limit from Rs.1 crore to Rs.5 crore, keeping in mind the ground realities. 

Will he? Won’t he?

Every year just before the Union Budget, exporters and their associations put forward their proposals to the Finance Ministry. Some find place in the budget some do not. This time around we believe that owing to the impact of demonetisation, the Budget will feature some reforms for the MSME sector.

A corporate tax reduction for the MSME sectors seems very much on the cards. The digitisation drive may also see some reductions in customs duties on equipment that facilitate digitisation. And while the government will tom-tom the GST bill, clarity on its administration as demanded by exporters seems a distant dream during the Budget 2017.

As for the other well-meaning suggestions of exporters, we will have to wait and see if they find their way through to the Budget. But in the face of the threats that both merchandise and service exports from India face, if the government is serious about ‘Make in India, Sell Anywhere’ exporters need all the policy support that the government can give.

Rajesh Sehgal

Vice President, AFMEC

Workers are not willing to contribute their share of EPF and ESI, the whole liability of payment (employees share plus employers share) is usually borne by footwear manufacturers and exporters. In case of exporters, the rate should be reduced to employers share only and contribution of employees should be made optional. We also want that a tax concession of 5% should be given to exporters.”

Rajib Saha

President and CEO, Indepay Networks

For Fintech players, this budget would be seen as a very critical and crucial one. The push for cash-less and digital is great news for many in this area, but a central point is being largely missed. Cash can be replaced by any device, tool, process, or system only when that alternate can address all advantages that cash offers. A removal of service tax in the case of all card-based transactions is essential.

Rajib Saha

President and CEO, Indepay Networks

For Fintech players, this budget would be seen as a very critical and crucial one. The push for cash-less and digital is great news for many in this area, but a central point is being largely missed. Cash can be replaced by any device, tool, process, or system only when that alternate can address all advantages that cash offers. A removal of service tax in the case of all card-based transactions is essential.

K. K. Lalpuria

Executive Director, Indo Count Industries Ltd.

Government currently is paying EPF contribution only for employees who don’t have UAN number, but the irony in my trade is that workers keep on switching jobs. We produce exports-ready, high-quality items which only skilled employees can produce, who have a UAN number. This catch 22 situation results in no incentives for us. We hope the forthcoming Budget offers some solution to this.

Ajay Goel

Director, Brite LED Pvt Limited

Lack of a long-term vision while drafting and introducing policies is hurting the SEZ players like us. Given the gloomy business environment we are currently operating in, it is imperative that any abrupt policy changes be avoided. We hope this Budget addresses these concerns. A sudden policy change shakes the confidence of investors and subsequently, they shy away from new projects.

R. K. Arora

Chairman, Supertech Ltd.

We expect Budget 2017 to streamline taxation structure of the country through successfully rolling out GST. The new tax regime is expected to lessen the tax burden on developers on input items such as cement and steel by removing multiple tax layers and instituting a tax credit system. We also expect it to further boost the system of single window clearance so that projects are completed on time.