india

Updated: Aug 24, 2019 09:06 IST

Finance minister Nirmala Sitharaman on Friday announced measures to revive growth, boost consumption and uplift investor and consumer sentiment, including rolling back the surcharge on tax on foreign portfolio investors (FPIs) announced in the budget, but stopped short of the full-blown fiscal stimulus many sections of industry have been seeking.

The measures include the upfront recapitalisation of state-owned banks (which could enable credit up to Rs 5 trillion) and steps to boost demand in the stressed auto sector. Specifically they addressed five issues: Infrastructure spending; concerns on tax terrorism; improving the lot of small and medium enterprises; boosting the prospects of the auto sector; and improving credit flow.

The finance minister also promised two more instalments of similar measures, one targeting the ailing real estate sector, in coming weeks. Stock markets rose in anticipation of the package after news of a press briefing called by the finance minister at 5pm filtered out. BSE’s benchmark Sensex rose 0.63% to close at 36,701.16.

The Indian economy grew by 5.8%, the lowest in five years in the January-March quarter of 2018-19. GDP growth has declined consistently since last year. The auto sector, a weathervane of economic sentiment and also industrial health, has been especially hard hit with passenger car sales in July falling 30% compared to a year ago. Against this background, the clamour for a revival package rose.

“Enhanced surcharge on FPI goes... surcharge on domestic investors also goes.. In other words, the pre-budget position is restored,” the finance minister said while announcing measures to achieve higher economic growth. The government was under pressure to roll back surcharge on high-networth individuals on July 5 that also impacted Foreign Portfolio Investors (FPIs) investing in the country through trusts. The controversial tax measures saw foreign investors pulling money out of Indian markets. The BSE Sensex fell 8% or 3,040 points between July 5, the day of the Union Budget and August 22.

High-networth individuals (HNIs) earning over ~2 crore a year will, however, continue to pay the enhanced surcharge as announced in the budget. The government may review the same after 75th anniversary of India’s independence, she said. The roll-back on FPIs will cost about ~1,400 crore to the government.

Sitharaman said she was confident that the tax departments would meet their revenue targets without resorting to any kind of coercion. “On or after 1st October, 2019, all notices, summons, orders, etc by the income-tax authorities shall be issued through a centralised computer system and will contain a computer-generated unique Document Identification Number (DIN) and any communication issued without computer-generated DIN shall be non est in law”, she said, adding that from October 1, all notices to be disposed off within three months from the date of reply. The finance minister also announced that the angel tax (the dreaded Section 56(2)(viib) of the IT Act would “not be applicable to start-ups registered” with DPIIT.

Homebuyers, particularly of the national capital region (NCR) and Mumbai, can expect more sops and policy reforms soon as the finance minister will announcement another stimulus package next week. “This is only the start... Next week again we shall be coming for one more set of announcement,” Sitharaman said, adding that the announcement could take place in the middle of the next week.

Sitharaman announced a relief package for the distressed automobile sector, which was resorting to layoffs and output cuts. The package included allowing additional 15% depreciation on vehicles, deferment of one-time registration fee, lifting ban on purchase of vehicles by government departments and the launch of a scrapping policy for old vehicles. Coupons could be given to those scrapping their vehicles to be redeemed while purchasing a new vehicle, she said. This is similar to the cash for clunkers programme the US launched in 2008 in the wake of the economic crisis.

In order to allay customers’ fears that the BS-IV vehicles will be phased-out once BS-VI will be introduced, the finance minister said the BS-IV vehicles will remain operational for the entire period of registration if purchased on or before March 31, 2020. The clarification will help to clear BS-IV inventories as automakers will be selling BS-VI emission compliant vehicles only from April 1, 2020.

In order to resolve liquidity problems of micro, small and medium enterprises (MSMEs) she directed the Goods and Services Tax (GST) authority to clear all refunds within 30 days. “GST refunds [for MSMEs] pending since its launch [July 1, 2017] must be cleared within 30 days from today and all future refunds should be cleared within 60 days,” she said, adding that banks will issue improved one-time settlement plan for MSMEs.

The government departments and central public sector enterprises (CPSEs) have also been instructed to clear all pending payments of vendors, particularly MSMEs, she said. Delayed payments from them will be monitored by the Department of Expenditure and reviewed by the Cabinet Secretariat, she added.

The finance minister also announced measures to improve credit flow -- the lifeblood of an economy.

The front-ending of the recapitalisation of state-owned banks -- the government has already announced in the budget that it will invest ~70,000 crore in them -- will catalyse potential credit flows of almost ~5 trillion. Sitharaman also said banks will pass the benefit to consumers taking loans linked to the policy rate of the Reserve Bank of India. RBI has so far cut its policy rate by 1.1 percentage points since February and, according to the central bank’s own estimates, only 0.29 percentage points of this has been passed on to the customer.

Aadhaar-based KYC will be permitted for opening of demat accounts and investing in mutual funds, Sitharaman said.

She announced an additional ~20,000-crore liquidity support to the struggling housing finance companies (HFCs), a move aimed at enhancing their lending capacity. The ~20,000 crore is in addition to ~10,000 crore support announced earlier by the National Housing Bank (NHB).

Sitharaman proposed the creation to establish an organisation to provide credit enhancement for infrastructure and housing projects with an aim to enhance fund flows towards such projects. She also promised a review of arbitration awards.

The minister also said that violation of Corporate Social Responsibility (CSR) obligations would not be treated as a criminal offence and only as a civil liability.

Daksha Baxi, head-international taxation partner, Cyril Amarchand Mangaldas, said that the removal of higher surcharge on capital gains from equity is a welcome move. “Maintaining its position that reform is a continuous process, and witnessing significant downturn in the capital markets due to many FPIs withdrawing from their Indian investments, the FM has announced removal of higher surcharge on capital gains from equity and units for both domestic and foreign investors. This should help calm the nerves of the capital markets,” she said.

Dinesh Kanabar, CEO, Dhruva Advisors, added: “The roll back of higher surcharge on capital gains is indeed welcome. The peculiar situation now is that earned income faces higher surcharge and unearned income does not!! Wish, the higher surcharge would have been fully rolled back.”

“Angel tax matter being buried for start-ups registered with DPIIT is welcome. Will remove unnecessary litigation. The grant of refund of GST to MSME will ease the pressure they face of working capital. Grant of additional depreciation on vehicles is a smart move. It accelerates the overall allowance without burdening the exchequer and should boost off take in the short run,” he said.

State Bank of India (SBI) chairman Rajnish Kumar said that announcements will act as major “enablers” for growth. “SBI has already started benchmarking its loans to repo and now other banks are likely to follow suit. This augurs well for domestic demand,” he said.

Rajiv Chugh, national leader, Policy Advisory & Speciality Services, EY India, said: “The current announcement will further pacify the start-ups that angel tax is not a hindrance to further investments coming in and their ability to fund growth. It is a positive step as the panel will now look at the circumstances of every case before initiating any inquiry.”