January 28, 2020
India’s Finance Budget 2020 will be presented by Hon’ble Finance Minister Nirmala Sitharaman this Saturday (February 1, 2020). As the country ushers itself into a new decade of growth and opportunity, this year’s budget will be watched by industry and the international community with keen anticipation- especially given recent global political and statistical headwinds.
We all are aware of a global economic slowdown which is aggravated by key political factors. These include the U.S.-China trade conflict, U.S.-Iran military tensions, Brexit, widespread protests in developing nations, uncertainty in oil demand & supply, and more recently, health concerns in China & Southeast Asia due to the coronavirus outbreak.
All these developments have a direct or indirect material impact on financial markets, overall growth and other short-term economic indicators. In India, political unrest due to citizenship and population laws, border concerns with Pakistan, changes in the status of Jammu & Kashmir, pressure on tax collections, liquidity concerns in the real estate and telecom sectors (especially as a result of the recent court ruling on telecom AGR’s1) as well as overall health of the financial sector have put India Inc. slightly on edge. With revised GDP growth estimates lowered to ~5%2 as well as increasing inflationary trends, the Government is keen to present a budget that puts our economy back on track.
Sannam S4’s estimates that this downtrend is cyclical, and long-term fundamentals for the country remain excellent. Jumping into the top three economies in the world by PPP this fiscal year3, India continues to be one of the fastest growing economies despite opposing global factors. Stock markets continue a dream run and are at an all-time high, while the government’s steadfast focus remains to improve all socio-economic indicators for the country. These provide tremendous scope for foreign organizations to participate, trade and invest in India.
This year, the Government of India has slashed base tax rates for domestic companies to 22% (15% for new manufacturing companies), introduced new measures in the insolvency code to address liquidity concerns, and announced new initiatives for Higher Education, CSR4 and the SDGs5 . Additionally, the government continues its commitment to improve India’s overall ease in doing business—by reducing red-tape and paperwork, easing entity setup documentation & timelines, and internationalizing internal control and corporate governance standards. This government’s steadfast intent to adopt new technologies in taxation and financial systems has been highly appreciated by the international community. Given this trend, we at Sannam S4 keenly expect the following proposals in this year’s Finance Bill. All eyes on Budget 2020!
Lowering of GST6 rates: A phased reduction in GST rates has been on the cards since its inception in 2017. Various representations have also been made to government agencies to provide further clarity on GST in key sectors—such as Education & Not-For-Profit—as well as reduce grey areas and litigation related to GST on export of services. Our hope is that these clarifications will be made soon. A reduction or standardization in GST rates is necessary to boost international trade in goods and services and local production. We expect that the highest bracket of 28% GST for certain goods and services may be merged with the standard 18%, and we hope that the overall rate of GST on goods and services may be brought down to international standards.
Lowering of corporate tax rates in LLP’s7 and partnerships In line with the reduction in rates for corporates, we hope that LLP’s and partnerships will also see lowered tax rates from the standard slab of 30%. This will aid LLP’s to become a viable structuring option for international investors.
Reduction in personal tax rates for individuals: Like every year, the professional community in India keenly expects a reduction in income tax rates for the middle-class taxpayer. Given recent informal discussions with the Government, we expect that the Finance Minister may reduce tax rates, especially in the 10-20% base slab, and may also provide further opportunities in investment linked-deductions—such as Section 80C, long term capital gains exemptions etc. – which directly boost capital spending towards financial & real estate sectors.
Other tax incentives: Amongst other expectations, India Inc. also expects key sector and section-specific tax holidays to be extended or re-introduced – such as SEZ and EOU8 , R&D deductions, export incentives and more. It is also a key ask of foreign investors to reduce / remove Dividend Distribution Taxes (DDT) to mitigate the overall tax burden on profits.
Clearing FCRA9 woes: The not-for-profit and Education sector has been hit by FCRA controversies and litigation in recent times. Again, based on key representations made by industry (including Sannam S4), we expect the Government to announce a roadmap to align this regulation with international expectations.
Continued reforms in internationalizing Higher Education: The higher education sector would welcome increased allocation of funds to promote research and innovation, as India strives to improve its research output. According to NITI Aayog India needs to increase education expenditure to 6% of the GDP. There should be incentives for active private sector investment and philanthropy in higher education and skilling, with a focus on skills for Industry 4.0 and employment generation.
This list could be much longer, as there are many more expectations to be fulfilled come February 1, 2020. Last year, the foreign investment to GDP ratio fell to 1.1% from a high of 3.6 percent in 2014-15, which this Government is fully cognizant of, and should be committed to improving. By ensuring a dedicated approach to global stakeholders’ demands and needs, and ensuring that critical policies are aimed at improving foreign participation in India – this Budget can set the tone for unparalleled growth in the 2020’s, and align with India’s aim of becoming a $5 trillion economy.
Sannam S4 shall share the key budget announcements and implications for foreign organizations in India on February 3, 2020. For more information and questions, please reach out to us at Budget2020@sannams4.com.
1Adjusted Gross Revenues, for more information, read here: https://economictimes.indiatimes.com/industry/telecom/telecom-news/sc-dismisses-telcos-agr-review-pleas/articleshow/73299605.cms
4 Corporate Social Responsibility
5 Sustainable Development Goals
6 Goods & Services Tax
7 Limited liability Partnerships
8Special Economic Zones and Export Oriented Units
9 Foreign Contribution (Regulation) Act, 2010