The New 2014 Indian Budget in Foreign Investment and USD Terms

July 11, 2014 Posted by India Briefing Reading Time: 6 minutes

Infrastructure Development Is At Its Heart

Op-Ed Commentary: Chris Devonshire-Ellis

The new Indian Budget for the fiscal year 2014-15 was presented by Finance Minister Arun Jaitley yesterday. While many commentators thus far have concentrated on the lack of any significant changes in the existing tax regime, there are a number of interesting pointers as to trends that foreign investors would be wise to track as these are now set to become a longer term Government driven policy. These manifest themselves in numerous incentives as concerns national infrastructure development and the upgrading of numerous items from cattle stock to radio coverage, highway development and IT. India uses a financial system that measures in lakh (100,000) and crore (ten million); for the ease of our readers these figures have been translated into US Dollar amounts.

First though, the basic highlights are as follows:

Tax Related

There were no significant tax changes, although bad news for the tobacco and sugar industries. The health of Indians is also shown as becoming a State concern. There is welcome news for foreign investors in the food packaging, footwear, clean energy and LCD Television manufacturing sectors.

Clean Energy cess (a Government imposed surcharge on businesses) to be increased from US$0.83/tonne to US$1.66/tonne;
An additional 5 percent excise tax to be levied on aerated drinks with added sugar (cold drinks);
Tobacco products excise duty increased to 72 percent;
Reduction in excise duty for specified food packaging industry from 10 percent to 6 percent;
Excise duty on footwear reduced from 12 percent to 6 percent;
New initiatives to encourage the manufacture of LCD and LED TV panels;
Housing loan rebate increased from US$2,500 to US$3,330;
Proposal to increase limit for household investments and savings under Section 80C from US$1,670 to US$2,500;
Tax exemption limit for small, marginal and senior tax payers increased from US$3,330 to US$4,160. Senior citizens will face no tax on income up to US$5,000 per annum;
Tax rates remain unchanged.

Most commentary has been on the above, and as can be seen there are some very specific duty changes that affect certain products. Additionally, there has been no change in the overall tax rate at this time. However, the Minister did state that changes to the foreign investment regulations and overall fiscal tax collection could be expected in the next budget. Accordingly, the budget as presented as highlights above doesn’t appear that exciting. However, when one takes an in-depth analysis of the infrastructure related portions of the budget, a rather different story emerges. I highlight the budget’s infrastructure developments and planned funding below. Foreign investors in the areas marked should take particular notice:

Infrastructure Development

An Indian Customs One Stop Shop to be developed for facilitating trade, cutting bureaucracy and diminishing conflicting opinions;
All government departments and ministries to be integrated through E-platform by December 31 of this year;
E-visas to be introduced at nine airports in India;
Special Economic Zones (SEZs) to be set up in Kandla in Gujarat and the Jawaharlal Nehru Port in Mumbai;
Tuticorin Harbour to be developed. Tuticorin is India’s fourth largest container port and the second largest Port in Tamil Nadu, on the eastern Indian coast facing Asia. It services shipping to the United States, China and Europe;
Industrial Smart Cities to be developed in 7 key cities. These lie along the Delhi-Mumbai Industrial Corridor;
A National Industrial Corridor to be set up – US$167 million has been set aside for this.

Infrastructure Incentives

Transportation

US$6.3 billion allotted for National Highways;
US$167 million provided for rail connectivity in North-East India;
US$16.7 million set aside for river-linking projects;
US$700 million to be set aside for the Jal Marg Vikas project on the River Ganges, connecting Allahabad to Haldia, with over 1620 km of reconstructed waterways and ports capable of handling shipping;
Development of Metro rails in PPP mode; US$16.7 million set aside for metro schemes in Ahmedabad and Lucknow;
Scheme for development of new airports at tier-II and -III cities through the PPP mode. The PPP method refers to foreign investors partnering with the Indian Government in Joint Ventures and attracts significant tax incentives. India plans to build 200 low-cost airports in the next 20 years to connect tier-II and tier-III cities.

Communications

US$25 million for the communication needs of Andaman and Nicobar islands;
US$16.7 million set aside for Community Radio Centres; 600 new to be opened while existing ones will be further supported.

Energy

In order to complete the national gas grid, a further 15,000 km of additional pipeline to be developed through the PPP mode;
New and renewable “ultra-modern” energy power projects to be taken up in Rajasthan, Tamil Nadu and Ladakh, valued at US$83.5 million;
The Government also committed to providing 24/7 power supply to all homes, including feeder systems to get consistent electricity supply to rural areas.

Technology

US$16.7 million set aside for development of a Technology Development Fund.

Agriculture & Animal Husbandry

US$8.3 million set aside for the development of indigenous cattle breeds and a ‘blue’ revolution for inland fisheries.

Environment

The Government will initiate a scheme to provide a soil health card, with US$16.7 million set aside for the project;
US$9.3 million to develop soil testing labs across the country.

Finance & Banking

FDI in insurance to be increased to 49 percent;
RBI will create a new framework for licensing of small banks and differentiated banks;
The Government aims to provide all households with banking facilities to empower the weaker sections, with a goal of at least two bank accounts in each household.
EPFO will launch a unified account scheme for portability of Provident Fund accounts. This indicates the Government expects to see a mass on-going movement of rural Indians into the urban cities, in a similar manner to what occurred in China to push under-utilised agricultural labour into more productive factories.

Defence

FDI in defence up from 26 to 49 percent, but to remain under Indian management and control.

Professional Services

Urgent need to converge current Indian standard with international accounting standards. This may lead to a relaxation of the involvement of foreign audit and other professional firms in the Indian market at a later stage.

The budget sets in motion a series of much-needed commitments to the development of India’s infrastructure, and includes some rare reforms on Government efficiencies. Overall, the budget can be seen as a testing ground for how far the new Government can go to both finance and then execute the plans identified above. Foreign investment has been identified as a key component of development of larger projects in transportation infrastructure in particular. It is, in many ways, an infrastructure budget.

I would expect tax concessions and a more fiscal revenue-based budget next time around, but for now, this budget demonstrates there is plenty to be done in the India of the Modi-era Government, and firmly sets out the key areas of attention. Investors should be aware that following Government policy is always a good idea, and the budget as presented gives plenty of food for thought.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email india@dezshira.com or visit www.dezshira.com.

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