Looking deeper in to the budget 2017.
[An immediate official iSPIRT response to the budget was issued as a Press release on 1st FEB 2017. It is placed in media section. You can access it here.]
Budget can’t be construed as main stream policy making exercise. Yet, the policy analysts and experts, track it with utmost seriousness, to understand Government’s thought process in economic policy. Similarly, industry looks in to budget for the sectoral emphasis, allocations that will influence the demand/ supply, reforms and special provisions in the sector. A reminiscent of this in recent period of history is 2012-13 budget speech of then finance minister Pranab Mukherjee, when analysts were counting how many times he used “inclusive growth” as a phrase.
This budget speech was unique in many sense and very tactical. The proposed GST regime, the rigours of demonization and skepticism of coming state elections have all effected this budget. The usual rigmarole by media of comparing prices of commodities and consumer goods from cigarettes, electronics to automobiles is missing. GST being in pipeline, the indirect tax section, which was usually the largest section of finance bill is almost missing. Hence, allocation of resources and the direct taxes had all the share of FM’s mind in budget. The new item on the block is “Digital economy”.
We have been seeking attention of Government on:
- increasing domestic demand,
- promote innovation (Startups)
- ease of doing business and
- level playing field for Indian companies.
These four parameters impact our “product nation” focus. Let us briefly analyse how these have been taken care in the budget.
Influencing Domestic Demand function
The usual model of a demand stimulating economic policy has been based on consumption led demand relying mainly on sops and taxes for several years with doses of investment driven demand and growth from time to time.
Increased efficiency, transparency, formalization of economy and investment driven growth are four major thoughts embedded in this budget. The former three are additional determinants of demand function of emerging new economies and a means to achieving developmental agenda. Relying mainly on investment driven demand and growth is very need of the time of low sentiments.
A big measure towards increased efficiency is the change from plan and non-plan classification of expenditure. “This will give us a holistic view of allocations for sectors and ministries. This would facilitate optimal allocation of resources”, said the FM in speech.
The agriculture and rural sector of India cannot be ignored by any Govt. Hence, increased focus in budget on these two important sectors is about inclusive growth, and also in “Digital economy” perspective an attempt to avoid a digital divide.
Both continual emphasis on infrastructure investment and targeting doubling farmer income will provide an investment driven demand push and a consumption driven demand function at higher level.
What is most heartening on domestic demand side for ICT sector is the huge recognition of the “Digital Economy” in the budget. For past some years iSPIRT has been pursuing the “Digital economy” agenda at various forums. There was cautious optimism, but not full acceptability. Thanks to demonetization, “Digital” is now a mainstream concept.
Devoting a full section in his speech on “Digital economy” and dealing with it in ‘direct tax’ provisions speaks a volumes of the mind share this has taken at top in the present Govt. The finance minister stated in his speech, “Promotion of a digital economy is an integral part of Government’s strategy.”
Further, the finance minister said, “Government will consider and work with various stakeholders for early implementation of the interim recommendations of the Committee of Chief Ministers on digital transactions.” This is especially important for iSPIRT as Nandan Nilekani and Sharad Sharma of iSPIRT are special invitees on this committee.
The demand conditions for ICT sector can best be boosted by increased adoption of the ICT by masses and the businesses, especially the SME businesses. This throws open a number of opportunities for many new startups to emerge and contribute to the development of an ecosystem, friendly to “Software product”.
Following are the notable announcements in the budget on “Digital economy” Steps:
- Stepped up the allocation for BharatNet Project to Rs. 10,000 crores in 2017-18.
- Targeting high speed broadband connectivity on optical fibre in more than 1,50,000 gram panchayats, with wi-fi hot spots and access to digital services
- A “DigiGaon” initiative will be launched to provide tele-medicine, education and skills through digital technology
- No transaction above 3 lakh should be permitted in cash.
- Limit the cash expenditure allowable as deduction, both for revenue as well as capital expenditure, to Rs. 10,000. Similarly, the limit of cash donation which can be received by a charitable trust is being reduced from Rs. 10,000 to Rs. 2000.
- All indirect tax/ duty exempted on miniaturised POS card reader for m-POS, micro ATM standards version 1.5.1, Finger Print Readers/Scanners and Iris Scanners. Also components for manufacture of such devices exempted.
- Increased digital transactions will enable small and micro enterprises to access formal credit. Government will encourage SIDBI to refinance credit institutions which provide unsecured loans, at reasonable interest rates, to borrowers based on their transaction history.
- To make MSME corporate tax with annual turnover up to 50 crores will be 25%
- Presumptive income tax for SME tax payers whose turnover is up to 2 crores reduced from 8% to 6%.
- BHIM app with cashback and referral schemes
- exemption of service charge on railway bookings,
- Aadhaar based smartcards for Senior citizens
- Create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems.
Also Government has on mid the ‘indigenous’ in ICT sector. This is reflected by the proposal on metro rail policy for upcoming metro infrastructure across the country. The budget statement reads, “A new Metro Rail Policy will be announced with focus on innovative models of implementation and financing, as well as standardisation and indigenisation of hardware and software.”
Further in related electronic sector, the budget has exponentially increased the allocation for incentive schemes like M-SIPS and Electronic Development Fund (EDF) to 745 crores in 2017-18. The draft National Policy on Software Product already intends to have a synergy with the EDF in PPP model.
This is not enough on “Digital economy” if the Government itself does not implement the “Digital” in its own functions in pervasive manner. The thought process of the Government seems to be aligned in this direction also.
The Finance Minister has said in his speech, ”we are trying to bring in maximum use of Information Technology to remove human contact with assesses as well as to plug tax avoidance.”
Innovation and Startups
Both innovation and Startups still occupy the thought process at top leadership level. There are signals and clear provisions indicating this.
The income tax exemption window slider for Startups, approved under DIPP, has been increased for 3 years in five years to 3 years in 7 years.
Another new measure is promoting innovation right at secondary education level and in backward areas. “An Innovation Fund for Secondary Education will be created to encourage local innovation for ensuring universal access, gender parity and quality improvement. This will include ICT enabled learning transformation. The focus will be on 3479 educationally backward blocks”, mentions the Finance minister, in budget speech.
Ease of doing business
Ease of doing business is an important topic in PART-B of the content list of budget document. Hence, its importance in thinking process of Government.
iSPIRT has pursued a Stay-in-India-checklist with the Department of Policy and Promotion (DIPP) with an intent to remove various frictions faced by industry in funding, company formation, corporate regulation and taxation issues. A number of steps have been taken up by Government in past one year to sort out these issues.
Announcements like abolition of FIPB, rationalization of taxation (on FPIs, convertible instruments, long term capital gains, etc), lower rate of taxation of 25% for companies with revenue of less than 50 crores, rationalization of labour laws, carry forward of MAT for 15 years, etc. are all in line with the philosophy of iSPIRT’s Stay-in-India checklist.
Among key issues from the Stay-in-India checklist which were expected to be addressed in the budget but have been missed out are angel tax and tax parity between listed and unlisted securities etc.
Level Playing Field
There many ‘level-playing field’ issues that iSPIRT has been taking up with the ministry of finance. Most in taxation domain. None of these issues have been addressed in this budget also e.g. TDS on sale of software, service tax on B2C sales of domestic products.
We hope the proposed National Policy on Software product will crystallize ground for taking up specific ‘Software product’ industry issues with Government in future.
Conclusion
Overall the budget is very encouraging. The main take away for iSPIRT is “Digital economy” recognition. We have to further leverage this in our policy initiatives with different departments in Government and most importantly with MeitY to realize the dream of “Product Nation”.