India: Indian Economic Update – February 2015

The new Indian Government, led by Prime Minister Mr. Narendra Modi, assumed office in May 2014 with the election promise to deliver on reviving economic growth, investor confidence and bringing consumer demand back on track. The key stated goal is to move away from a control-and-command economy towards a market economy.

The intent and policy announcement for reforms is significant and widespread across the framework of regulations and law. Most expect that the reforms would not be able to weave an overnight and create immediate success story and that it would be nearly 12-18 months before it translates into investment on the ground, even though the sense of optimism is all pervading.

The Reforms agenda includes both fiscal and macro-economic policy reforms that will inspire both foreign and domestic investors. Also, the tax policy and administrative reforms have to address the ease of doing business in India. In the past month, several high profile reform initiatives in the areas of insurance, land acquisition and mining have been set in motion with an increasing trend towards using the Ordinance route (the current Government does not have majority in the Upper House i.e. the Rajya Sabha) which would have an overarching impact on several sectors. It is anticipated that the spate of reforms would also have an impact on manufacturing, power, cement and steel industries followed by capital market reforms in order to implement the recommendations of the Financial Sector and Legislative Reforms Commission.

Apart from the big ideas on the Reforms agenda, some of the big socio-economic reforms that have been launched are:

Jan Dhan Yojana Make in India Swachh Bharat Death of Planning Commission Digital India Smart Cities
Scheme for comprehensive financial inclusion New national program designed to transform India into global manufacturing hub Clean India Mission To be replaced by an organization that can strengthen federal structure and state governments Integrate the government departments and the people of India and to ensure effective governance by reducing paperwork Uses digital technologies to enhance performance and wellbeing
The Reforms Agenda seems endless in what needs to be accomplished to restore business confidence to boost the campaigns which have a far reaching impact. Additionally, the followingreforms would have a significant impact on the manufacturing sector.

Recently, the Labour Ministry, intending to provide impetus to the ‘Make in India’ campaign and push policy reforms, launched a trio of key initiatives i.e. a single window system for labour law compliance, provident fund (welfare contribution) number portability and a revamped inspection system for companies.

‘Reform is the art of the possible’, maintains the Finance Minister Mr Arun Jaitley explaining that it is better to go with reforms that are palatable to a wide section of people than trying to push through changes that will find no popular support. This is probably the reason why the Government is approaching labour reforms in a phased and gradual manner – it appears to be mindful of the need to take the masses along, to create a flexible policy that creates jobs and is labour-friendly.

The Government has shown its intent reduce wasteful subsidies by de-controlling petrol and diesel prices. An expenditure management commission has also been appointed to look into rationalizing various other wasteful subsidies. To address the vital issue for land aggregation for justified end use, the Government purportedly intends to make it easier to buy land for infrastructure and industrial projects. A comprehensive land reforms policy is on the Government’s drawing board. Moreover, the Law Commission has suggested repealing obsolete laws. Consequently, nearly 77 laws have been put forward, some of them approximately 100 years old and not relevant in the current environment, to be repealed.

At a macro level, investment needs to increase, capital formation as a % of GDP needs to improve drastically and everyone expects that in order to propel investments, infrastructure must take centre-stage. The list seems endless and in the mean time, expectations are that high intensity action from the Government will follow. At the time of election, it was good to build up great expectations as a strategy, however, it is expected of the Government to now deliver on these election promises.

TAX DEVELOPMENTS

This Section highlights key developments in the tax world in the last month – transfer pricing applicability to share transactions and an update on the much awaited Goods & Services Tax (GST).

Direct Taxes

Transfer Pricing Applicability to Share Investments – Bombay High Court Decision in case of Shell The Bombay High Court ruled in favour of energy giant Shell on a transfer pricing issue involving Shell’s investment in India in 2009. The case involved the largest claim ever made in a tax case pertaining to transfer pricing. The dispute was on account of difference in the approach for valuation adopted by Shell and the Indian revenue authorities in respect of such investment in shares of the Indian subsidiary.

The Court ruled that the issue of shares by Shell India does not result in income in its hands and the difference in the purported valuation as derived by the revenue authorities is not covered within the purview of the Transfer Pricing regulations in India and as such is not subject to tax.

As per media reports, the Government does not intend to contest this decision of the High Court before the Apex Court (Supreme Court of India). This judgment and the recommendation of the Government to the Tax Authorities not to contest this decision should instill confidence amongst the business community about the improving business environment in India and reflect the purported intention of the Government to move towards a non-adversarial tax regime in the country.

Indirect Taxes

Goods and Service Tax (GST) Update

According to one of the leading Industrialists in Mumbai, as soon as GST is implemented, GDP growth will increase by 2 per cent the very next day. The winter session of the Parliament began on 24th November 2014 and it is expected that the Government will attempt to introduce the Constitutional Amendment Bill on Goods and Service Tax in this session. The GST rollout has missed several deadlines because of lack of consensus among States over certain crucial issues. It is understood that the Government is in final stages of talks with States on amendments to the proposed Bill.