With an aim to ensure uninterrupted supply and give an overall boost to the food sector, the Government has proposed various agrarian driven measures.
The Finance Minister had macro challenges to address such as achieving fiscal deficit targets and working towards attaining the GDP growth rate of 7.6%, ahead of the Union Budget 2016, against a backdrop of a slowing down global economy. Therefore, quite expected, there have been number of proposals addressing issues surrounding agriculture, rural and social sector and employment. Some of the reforms impacting the FMCG sector are outlined below:
• Measures for Make in India
True to its commitment to the Make in India campaign, the Government has brought several measures to provide a fillip to the same.
Rationalization of investment allowance on new plant and machinery
Companies engaged in manufacture of FMCG goods were entitled to claim an investment allowance of 15% of the value of the new plant and machinery of Rs 25 crores or more, acquired and installed in a tax year. Many companies used to face hardship to claim such investment allowance as the dual condition of acquisition and installation of the new machinery in the same tax year had to be satisfied that is now removed by allowing the benefit of the investment allowance in cases where the new machinery has been acquired in a tax year and installation of the same is done on or before 31 March 2017.
New manufacturing companies to be taxed at lower rates
The FM in the previous budget had proposed that tax incentives would be phased out for companies with a simultaneous reduction in corporate tax rates. In the current budget, the FM has proposed that new manufacturing companies, incorporated on or after 1 March 2016 will have an option to be taxed at 25% provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation. Given that the major tax incentives are expected to be phased out from 1 April 2017 onwards, the option of getting taxed at 25% would provide a simplified way to declare taxable income.
Key indirect tax changes
Customs and excise duty rates have been rationalised on certain inputs to reduce costs and improve competitiveness of domestic industry in various sectors such as textiles, chemicals & petrochemicals, paper, electronic products, etc. However, refund of blocked input credits on account of inverted duty structure has unfortunately not been addressed. Similarly, reduction in Central Sales Tax rate (from current 2%) on inter-state procurements has been unattended resulting in cascading effect of taxes in the supply chain.
A 100% deduction of profits for 3 out of 5 years for startups set up during April 2016 to March 2019 is proposed in the current budget.
It is also proposed to provide long-term resident permits instead of 5 years business visas to foreign investors that would be in line with other foreign countries.
In addition to the tax and policy reforms, the Government has allocated an amount of Rs 1,804 crores to the Make in India Scheme for Investment Promotion and Amended Technology Upgradation.
• Measures to support agriculture and farmer’s income
With an aim to ensure uninterrupted supply and give an overall boost to the food sector, the Government has proposed various agrarian driven measures such as implementation of irrigation projects, promotion of organic farming, approval of crop insurance schemes, ensuring adequate and timely flow of credit to farmers and introducing schemes to support farmers in the aftermath of natural calamities.
There is also a budgetary allocation of approximately Rs 360 billion for agriculture and farmers’ welfare that is proposed to double farmers’ income by 2022, which should create the much required transformation growth in rural India.
• FDI relaxation for food processing industry
With a view to provide an impetus to the food processing industry and generate employment opportunities in this Sector, the Government proposes to allow 100% FDI through FIPB route in marketing of food products produced and manufactured in India. By allowing 100% FDI in this Sector, the farmers will be able to obtain the right prices for their produce and the same will reach the markets at the right time.
• Preferred tax regime for income from patents
In order to incentivise the development of indigenous patents, the FM has proposed a concessional tax regime of 10% from the worldwide exploitation of patents developed and registered in India. This preferred tax regime is in line with Action point 5 of the OECD BEPS project.
• Employment generation linked incentive
Currently, the employment generation linked incentive is only available for taxpayers engaged in manufacturing activity. Budget 2016 in order to broaden and liberalize the said tax incentive, proposes to extend the same to all taxpayers, subject to certain conditions.
• Other amendments
Allowing local retail shops to remain open all days of the week
In order to provide level playing field to the unorganized retail stores, the Government proposes to introduce a Model Shops and Establishments Bill for the states that would allow local shops to remain open all seven days a week, on an optional basis.
Increase threshold for presumptive tax scheme
Budget 2016 proposes to increase the threshold for presumptive tax regime available for SMEs from Rs 1 crore to Rs 2 crores. This proposed amendment will reduce the compliance burden for small tax payers to maintain books of account and get the same audited.
Indirect tax measures
The basic indirect tax rates have remained unchanged. However, a new cess “Krishi Kalyan Cess” at the rate of 0.5% of the value of taxable service has been introduced from 1 June 2016 (making the effective service tax rate 15%) - this could be a cost for the manufacturers and traders.
On a positive note, the provisions relating to reversal of CENVAT credit have been simplified and rationalised to improve flow of credit and mitigate ligations. Additionally, only common credit which is not specifically attributable to exempted services/ goods and/ or taxable services/ goods is required to be reversed on a pro-rata basis. Provisions have also been made to enable transfer of input services credit to outsourced manufacturers which is a welcome move.
In order to boost exports, refund of service tax paid on services used beyond the factory which are exported outside India shall be allowed retrospectively.
With a thrust on ease in business, manufacturers have been allowed to revise returns, there is a cap on the interest rates at 15% and an Indirect tax Dispute Resolution Scheme, 2016 has been introduced to conclude the proceedings with safeguard from prosecution.
While some of the tax and policy measures outlined are welcome and positive towards the FMCG Sector, there are certain tax amendments such as removal of accelerated depreciation, no weighted deduction of R&D spends, higher excise duty on certain products, no change in individual tax slabs, etc that could provide a road block to the growth of the Sector. To summarize, the FM in this budget has walked a tight rope to manage the fiscal deficit and provide a boost to the crucial FMCG Sector.
Author is Tax Partner, EY India.
Miti Shah, Director – Tax & Regulatory Services, EY India contributed to this article
(Views expressed are personal)
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First Published on Mar 1, 2016 01:41 pm