A review of the Budget’s impact on exports–imports and foreign investments

D K Aggarwal, Chairman, SMC Investments & Advisors Ltd.

  The global economic situation is a major determinant of export performance of any country, thus export growth cannot be viewed separately. With the global economy continuing to be volatile, India’s export growth performance in the last one and a half years has been much below as compared to the previous years. This is because of India’s heavy dependence on petroleum products and Gems and Jewellery. The recent Union Budget tabled by the Union Finance Minister, is perceived to be a pragmatic budget in accordance with the current Indian Economic Scenario, which set the pace for addressing long-pending issues. This path-breaking budget, clearly spells the vision of the Modi-led BJP government. The budget tried to give clarity of long-term vision and stability of fiscal policies in a potentially high-growth environment. Budget 2015 took significant steps in the direction of boosting economic growth by giving significant boost to infrastructure spending and phasing out sick PSUs. The government’s decision on creating a fiscal council as recommended by the Finance Commission’s is prudent. The new Monetary Policy Framework Agreement between the finance ministry and the Reserve Bank of India will contain inflation. Moreover, it would also help to meet the challenge of an increasingly complex economy as it would decrease the uncertainty around the decision-making process. This framework is expected to add to the credibility and predictability of monetary policy decision, benefiting the overall economy. Budget impact on Export and import The recent initiative in the budget by the Finance Minister to bring transparency in the taxation system is appreciable. A firm date of GST and move towards it by raising the service tax from 12% to 14% is sure to help the export sector to get some relief on state taxes which has been putting pressure in respect of VAT. This may give an additional 1-2 percent GDP push to the economy. As per the recent data, India’s trade deficit narrowed to US$ 112.5 billion in April-December 2014 from US$ 116.9 billion in April-December 2013. The earnings from export are increasingly insufficient to cover import requirements. Now after the implementation of Goods and Services tax (GST) w.e.f 1st April, 2016, this would provide the relief to the exporters and will also reduce the trade gap. Besides reduction of customs duty and special additional duty on some of key inputs, online excise and service tax registration in 48 hrs, increase in availing of CENVAT Credit from 6 months to 1 year, and exemption of service tax on transportation of exports goods from factory to land customs station will add to competitiveness of exports resulting in many a dollar coming into the country. Additionally, government’s planning to Corporatize 12 out of 13 ports under the Companies Act, 1956, will help in effective movement of goods across the borders, which in turn, will boost the exports of the country. Now, movement of export goods from factory to ports/airport/land customs station through road has been exempted from Service Tax. And this would provide relief to the exporters from the burden of service tax. As a part of its 'Act East Policy' initiative, the government has announced facilitation of manufacturing hubs in CMLV (Cambodia, Myanmar, Laos, Vietnam) countries and this would help India to enter into Regional Value Chain. This would support exports from India as part manufacturing will be done in India and part in CMLV countries for exports to such countries with whom CMLV have Free Trade Agreements. Initiative to attract more foreign fund The postponement of implementation of the widely-disliked general anti avoidance rules of taxation (GAAR), and waive of minimum alternate tax (MAT) has cheered the foreign investors. Actually, the MAT was originally brought into play to bring into the tax net large domestic corporate who did not pay taxes by making use of various incentive schemes. Furthermore, the market cheered and welcomed clarification that there will be no PE “Permanent Establishment” on presence of fund managers. This is likely to allow a fund manager to work from India, without resulting in adverse tax consequences. The recent union budget tries to seek to improve India’s business and investment environments by improving ease of doing business in the country. Under its “Make in India” vision, the government is calling on foreign business to manufacture in India. Despite low operating costs, present India has one of the highest corporate tax rates in Asia that make its domestic industry uncompetitive. Reduction of corporate tax from 30% to 25% in the next 4 years is going to benefit. Moreover, the government has announced in the budget that it has specific plans to rationalize the regulatory process and a new bankruptcy code and this would help increase the ease of doing business in India, attracting more funds. To make it easy and simple, the Finance Minister has also announced to allow foreign players to invest in private equity funds, which is also known as Alternative Investment Funds (AIFs). These initiatives are a huge boost for investments coming from Singapore and Mauritius as FIIs would continue to benefit from double tax avoidance treaty. It is good to see that this budget has cleared a lot of uncertainties and anxiety created due to the recent tax notices to FPIs asking them to pay MAT. Beside these initiatives, the government has also made it easier for foreign fund managers to set up base in India by fine-tuning the permanent establishment (PE) norms. All these initiatives would improve business confidence in India and help attract global fund flows. The Foreign Institutional Investors were already renamed as FPIs last year under a new regulatory regime that has made it easier for them to invest in India. No doubt, this time the Finance Minister seems to have heard the voice of the industry and aims to foster a stable taxation policy. Foreign players looked very cheerful with deferment of GAAR by two years, merging of FIIs and FDI limits, decision on domicile issue and removal of MAT. The deferment of GAAR has come as a relief to foreign investors who route their investments into India from tax havens. On the contrary, it seems that GAAR, when introduced in future, would be adjusted to the international practice and protocol on the same. Moreover, the deduction in corporate tax rate and phasing out of the exemption in a planned manner clearly shows a move towards a more stable and matured tax regime.  Overall, the budget 2015 lays down a blue print for a stable tax regime that can lead to growth in the economy in coming days. Prime Minister Narendra Modi's visits abroad both for bilateral and multilateral meetings have had a positive impact on India's investment climate. At home, government has been trying every round to boost the investment. Since Modi government is in the centre, it has taken many initiatives such as allowing 100% FDI in the telecom sector and single-brand retail. It has also raised FDI limit to 49% from 26%. Moreover, it has also raised FDI limit to 74% in credit information & 100% in asset reconstruction companies. FDI in commodity exchanges, stock exchanges & depositories, power exchanges, petroleum refining by PSUs, courier services under the government route has now been brought under the automatic route, and this will bring huge investments. Now, Foreign Portfolio Investment up to 24% is permitted under automatic route. FDI beyond 49% is also allowed on a case to case basis with the approval of Cabinet Committee on Security. Furthermore, construction, operation and maintenance of specified activities of Railway sector opened to 100% foreign direct investment under automatic route. But it would be too early to comment on the impact of the export import business. We would get the clear picture when government would announce the Foreign Trade Policy (FTP) in coming days. It is expected that the new policy expected to announce policy measures for exporters under Make in India. At present, there are export incentives like duty drawback, duty exemption/remission schemes, focus products & market schemes under this campaign.