In the long term, both demonetization and GST are bound to have positive structural effects not only on the dynamics of conducting business in India but also on India’s consumption economy which accounts for 60% of its GDP.
Seeking answers to how the government deals with both these moves make Budget 2017 one of most awaited ones in recent times. Here are some expectations from this year’s Budget:
Modification in income tax slabs and rates: This is on top of every citizen’s list. Many are expecting the tax exemption slab to be increased from Rs 2.5 lakh to Rs 3 lakh. This way, the consumers would have more money in their hands, which is likely to lead to a greater consumption demand. There may also be a reduction in the tax rates, which currently stands at 10 % for incomes above Rs 2.5 lakh, 20 % for incomes above Rs 5 lakh and 30 % for incomes above Rs 10 lakh. It may also encourage more people to file taxes.
Increase the tax base: As per various data sources, only 3% of India’s population files for taxes and 1% currently pays taxes. While increasing the tax exemption limit would be a good idea to encourage spending, the government would also be keen on expanding the tax base by bringing more people into the tax net.
Clarity on corporate tax rates: India Inc would be looking forward to a clear roadmap towards reducing the corporate tax rate to 25%. The government would want to balance this move with phasing out of incentives to ensure best results for both.
Tax issues pertaining to indirect transfer of Indian assets: The Central Board of Direct Taxes (CBDT) in December last year had said that the Foreign Portfolio Investors (FPIs) were subject to provisions relating to the indirect transfer of Indian assets. This had raised concerns among FPIs about being taxed for such transactions in previous years and also about being taxed multiple times for the same income. Even though the government has put the December circular on hold, FPIs, Foreign Institutional Investors (FIIs) and Venture Capital Funds (VCFs) would be seeking for stability and clarity on this matter. Favorable announcements on this front would go a long way in rekindling foreign interest in the country as an investment destination.
Encourage ETFs as an alternate investment option: Globally, the ETF market has grown by over 50% over the last 3-5 years to over $3 trillion of assets under management (AUM) due to multiple features characteristic of an ETF such as cost efficiency, liquidity, diversification, etc. In the Indian capital markets, the Central Public Sector Enterprises (CPSE) ETF launched by the government in April 2014 had an overwhelming response, demonstrating the appetite for such products domestically. Its success has forced the government to come up with a Further Fund Offer (FFO) as a source to meet its disinvestment target. Further push to such products via increased investment limits by Employees Provident Fund Organization (EPFO) – currently at 10% of incremental inflows (estimated at $2 billion) – would go a long way in deepening the market for ETFs and offering retail investors another investment instrument.
Passporting of funds in other Asian countries: Passporting is a unified regulatory mechanism that will allow Indian mutual fund (MF) schemes to be sold in other Asian countries without the need for exclusive regulatory approvals from the latter. Securities and Exchange Board of India (Sebi) is working with the International Organization of Securities Commissions (IOSCO) and regulators in other Asian countries to make this happen. Passporting of funds is a common practice in Europe through the Undertakings for the Collective Investment of Transferable Securities (UCITS), a regulatory framework of the European Commission that creates a harmonised regime for the management and sale of MFs. If the government can facilitate formation of a similar mechanism for cross-listing of funds in Asia, it would simplify the process for domestic investors interested in building a global portfolio by taking exposure to other Asian funds and vice versa.
Increasing investment limits for overseas investment: Currently, the aggregate ceiling for investment by mutual funds in overseas ETFs that invest in securities is $1 billion subject to a maximum of $50 million per mutual fund. For investments in other overseas investments, the aggregate ceiling for overseas investments is $7 billion and within this overall limit, mutual funds can make overseas investments subject to a maximum of $300 million per mutual fund. These limits have remained unchanged since 2008. As mentioned earlier, ETFs have gained a lot of traction as an investment instrument in the past 3-5 years. The government should look to increase this limit the $1 billion limit for ETFs and also the cap on individual mutual funds for investment in ETFs and overseas investment.
The writer is chairman, ZyFin Funds