On February 5th 2018, AMCHAM’s Tamil Nadu Chapter, with Deloitte at the knowledge parter, held a breakfast meeting on the impact of Union Budget 2018 on the manufacturing and technology sectors at the Hotel Westin in Chennai. The meeting was chaired by Mr. Rajan Aiyer, Vice Chairman – Tamil Nadu Chapter, AMCHAM and Country Head, Trimble Information Technologies, India. The meeting began with an overview of the Union Budget 2018 by Mr. P.S. Easwaran, Partner Consulting, Deloitte in Chennai. Mr. Easwaran said that the budget represents prudent management as the focus was clearly on enhancing the health and overall status of the workforce.
The government’s agenda of ‘transform, reform and perform’ in the budget focused on implementation of the recent reforms. Hence there were no big bang announcements. The budget addressed needs of agricultural sector and MSMEs, through which agenda of inclusive growth, formalization of economy and boost of employment generation were targeted. The FM’s promise of reducing the corporate tax rate from 30%to 25% for companies remained limited to the MSMEs leaving the large tax payers to wait for another year. However, 99% of MSME’s with turnover of up to INR 250 crores would benefit from the rate reduction. Unfortunately, the large corporates will now carry a slightly higher tax burden from an increase cess of 1%. Rationalization of long term capital gain taxation may be inopportune in terms of timing as their ability to raise funds through IPOs and FPOs may be impacted due to market sentiments changing.
Mr. Easwaran said that the budget was presented against the backdrop of slower economic growth, rising crude oil prices and growing protectionist tendencies in some countries. The GDP growth for the current fiscal year (April 2017 to March 2018) was estimated to be around 6.5% as compared to the growth rate of over 7% registered in the last 3 financial years. The slower economic growth was generally attributed to the recent bold reforms undertaken by the government including implementation of goods and services tax (GST) regime to replace the multiple indirect taxes and demonetization. Mr. Easwaran added that the Indian Railways was potentially a growth sector and has a substantially higher focus on ‘make in India.’ Railway production units have now embarked on use of technology and innovation rather than just metal working. On inflation, he stated that it would be in the region of 6% and corporates were advised to budget for a slightly higher rate of inflation.
The session on direct taxes was presented by Mr. Rajesh Srinivasan who said that on personal taxation there was no change in income slabs, tax rates or surcharge. On other direct taxes he said, the education cess of 3% was now substituted with the health and education cess of 4%; withdrawal from NPS – 40% of the withdrawals from National Pension System (NPS) was tax exempt for employees. This has now been extended to all assesses. Standard deduction of INR 40,000 or the amount of salary received, whichever is less, has been introduced. Exemptions currently available for transport allowance amounting to INR 19,200 per annum and reimbursement of medical expenses amounting to INR 15,000 per annum were proposed to be withdrawn. Transport allowance exemption for differently abled persons to continue. The other proposals were: increased deductions for health insurance and treatment relating to senior citizens; benefits to senior citizens and PF contributions for new employment for those drawing up to Rs 12,000 per month.
Highlights on Corporate Tax included:
The corporate tax rate reduced to 25% (plus applicable surcharge and cess) for domestic companies with total turnover or gross receipts not exceeding INR 2,500 million for assessment year 2017-18. Education cess of 3% removed and replaced by health and education cess of 4% scope of accumulated profits widened for purposes of deemed dividend; for non-residents, the provisions of section 115JB would not be applicable when the income is computed on presumptive basis in terms of the provisions of section 44B, section 44BB, section 44BBA or section 44BBB.
The definition of the term “business connection” under section 9 proposed to be expanded and aligned to the scope of agency PE under the BEPS/MLI provisions. Business connection to include significant economic presence – significant economic presence shall mean: transaction in respect of goods, services or property carried out by a non-resident in India including provision for download of data or software in India (if payments exceed threshold to be prescribed); or systematic and continuous soliciting of its business activities or engaging in interaction with number of users (as may be prescribed), in India through digital means – the existing tax treaties would not be impacted by the concept of significant economic presence, however attempts will be made to include this concept in the future Indian tax treaties.
Budget proposals for manufacturing and technology —- in a move to boost local value addition in domestic electronics manufacturing, customs duty on mobile phones have been raised from 15% to 20% while duty on smart watches and wearables has been doubled to 20%. The budget outlines 372 point plan for states for promoting the ease of doing business. The central government will evaluate the performance of states supported by feedback from industry. Looking ahead, the government is targeting to be among the top-50 countries in the overall ease of doing business rankings.
The budget proposals have an impact on manufacturing through direct demand generation and increased consumer demand through its focus on rural India especially the fisheries, animal husbandry and agriculture sectors. The budget proposals aimed to increase income levels in rural India which will reflect in increased sales in goods such as mopeds and washing machines.
With the introduction of GST, there were not many tax proposals in indirect taxation. And all changes to the GST was being done through the GST Council. The meeting concluded with Mr. Rajan Aiyer thanking Deloitte for the very detailed presentation.
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