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India Budget 2011 - Analysis, Key Updates and Impacts

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Coming against the backdrop of inflationary concerns, potentially increasing deficit levels, signals of an incipient slowdown in growth and private sector investments and a general sense of policy making drift, there was hope, rather than expectation, that the Government may push the reform agenda forward more aggressively. While these hopes were, for the large part belied, the 2011 Budget seeks to emphasise that the Government is conscious of challenges confronting the economy and is committed to making a difference. Taxand India analyses the India budget 2011, key updates and impacts on taxpayers.

The Budget projects a nominal GDP growth of approximately 14 percent. With real GDP growth targeted at around 9 percent, inflation for the year has been projected, somewhat optimistically at around 5 percent. The fiscal deficit for FY 2012 has been targeted ahead of the FRBM targets, at 4.6 percent; this is predicated on a tax revenue growth of 18.4 percent while containing expenditure growth at only 3.4 percent. While the revenue estimates appear reasonable, and if achieved will produce a Tax to GDP ratio of 10.4 percent, the expenditure growth levels are the lowest ever targeted by the Government. The Government expects to achieve expenditure containment through better targeted subsidy delivery mechanism in the form of direct cash transfers and more generally through a more result oriented management of the economy. The expenditure target will likely be breached, and with it, so will the overall fiscal deficit target.

While reiterating the Government's intention to introduce the Direct Taxes Code effective April 2012, the Finance Minister was understandably more circumspect with regard to the implementation timelines for the Goods and Services Tax. However, Budget 2011 contains a number of policy, legislative and administrative measures which will facilitate the GST rollout, expanding the coverage of Service tax and making service provision liable to tax on an accrual rather than a cash basis, holding excise duty rates at their current 10 percent levels rather than raising them as was anticipated, reducing the number of items exempt from excise duty to bring their taxability in greater alignment from a future GST perspective, the proposed introduction of the Constitutional Amendment Bill in the current session of Parliament, working on a draft model GST legislation and developing the IT backbone for GST operations with the help of NSDL.

With a proposed 23 percent greater outlay, an area that received much attention was infrastructure. FII investment limits in infrastructure bonds with a residual maturity in excess of 5 years has been enhanced by USD 20 billion; specially notified infrastructure debt funds will be permitted to raise foreign capital with interest payouts being subject to tax withholding at 5 percent down from the normal 20 percent; tax rebates for investments by individuals in notified infrastructure bonds have been extended by a year to FY 2012 along with an enhancement in the limit for issuance of such bonds as well as broad basing of qualifying issuers. However, while seeking to address the resources end of the infrastructure equation, the Budget is silent on other critical policy reforms, most notably the legislation on land acquisition.

From a reform perspective, the only sector that appears to have received attention is the financial services sector. Seven bills, some of which have been pending for a number of years now, are proposed to be legislated during the year. The Reserve Bank of India is expected to announce guidelines for the issue of new private sector banking licenses during the course of March 2011. In a partial implementation of recommendations of the Ministry of Finance constituted Working Group on Foreign Investments, SEBI registered mutual funds are to be permitted to receive investments from any non-resident investor who meets SEBI prescribed KYC requirements, in their equity schemes. Although more was expected on FDI reforms, particularly in the context of an absolute decline in FDI investments in 2010, all that Budget 2011 provided was a tepid observation that discussions are underway to further liberalise the FDI policy.

In line with expectations, taxation changes are limited. The tax exemption level for individual tax payers has been raised modestly, while corporate surcharge has been dropped from 7.5 percent to 5 percent. SEZ developers and units in SEZs have been brought within the ambit of MAT a year ahead of such action proposed in the DTC. A one year window has been provided for reduced taxation of foreign dividends. Anti-abuse provisions have been proposed which would entail potentially punitive taxation of transactions with entities located in jurisdictions that the Government may notify as being non-cooperative. Customs, excise and service tax rates have been retained at current levels.

In a post-Budget interview, the Finance Minister averred that the real reform that underpins the budgetary exercise is in the functioning of the Government. This acknowledges both, the problem as well as the solution. As with the caveat that accompanies the sales promotion of financial products, one hopes that past performance is not an indicator of future performance.

Your Taxand contact for further queries is:
Bobby Parikh
T. +91 22 3021 7010
E. bobby.parikh@bmradvisors.com

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