INDIAN BUDGET 2016:

Its impact on Indian Industries

Course Instructor:
Prof. S.P. Das

Submitted by:
Asutosh Patro
(UM15321)

Acknowledgement

I would like to express a whole-hearted gratitude to all those who have helped me with the report
or have been associated with the report in any way and made it a worth-while experience.
I am greatly indebted to my batch mates and my seniors for having shared their invaluable
experience that went a long way in the successful completion of my report.
I am also grateful to Prof. S.P. Das, who has given me the opportunity for working on such a
project; and incessant support & guidance leading it to successful completion.
Asutosh Patro

Table of Contents
1. Introduction ........................................................................................................................1
2. Importance of Union Budget ............................................................................................1
3. Introduction to Indian Manufacturing Industries .........................................................3
4. Key Challenges ..................................................................................................................3
5. Governments current mission ...........................................................................................4
6. Expectation from Industry ................................................................................................4
7. Policy Updates ....................................................................................................................4
8. Key Announcements ..........................................................................................................5
9. Direct tax proposals ...........................................................................................................6
10. Indirect tax proposals .......................................................................................................7
11. Phasing out deductions and incentives .............................................................................8
12. Other proposals ..................................................................................................................8
13. Impact on companies .........................................................................................................8
14. Conclusions .........................................................................................................................9
15. Future Expectations ...........................................................................................................9

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Introduction
Economic development is the primary objective for any nation. This truth is accepted almost
without any controversy. Rapid growth in Indian economy can only be achieved through
industrial development and this has become a matter of serious concern for the planners and
policy makers. Industrialization plays a vital role in the development of developing countries
because they can solve their problems of poverty, unemployment, social backwardness,
technological backwardness, low production, low productivity and low standard of living etc. It
is equally important for developed countries as it helps them not only to maintain their existing
growth but also to enjoy still higher standards of living and to decouple from business cycles.
Therefore, rapid industrial growth has been a major objective of planning in India.
In 1951, with Jawaharlal Nehru as prime minister, India chose the path of Industrialisation as a
driver of Indian economy. Based on the perception of Soviet Union success, it was thought that
the key strategy for development was to focus on large and heavy industries under state control
and central planning. Hence the planning commission was formed in March 1950 to design the
road map of strategic growth of the country every year. Every year planning commission comes
up their plan and expenditures which is a part of Indian annual union budget.
Importance of union budget:
Union budget is a comprehensive statement of the government's finances including spending,
revenues, deficit or surplus, and debt, for the fiscal year that runs from April 1 to March 31. The
budget is the government's main economic policy document, which shows how the government
plans to use public resources to meet policy goals. During the budget the Finance Minister puts
down a report that has Government of India's revenue and expenditure for one fiscal year.
The budget aggregates revenues from all sources and expenses of all activities undertaken. It
comprises the revenue budget and the capital budget. It also has estimates for the next fiscal year.
The budget has to be passed by the House before it can come into effect on April 1st; the start of
India's financial year.It is preceded by an Economic Survey which outlines the broad picture of
the budget and the economic performance of the country. Economic survey comes in handy to
analyse the budget and its outcomes. This exercise is important for the government to maintain
fiscal discipline, to power economic growth, and improve centre-state relationship.
For the present Narendra Modi led government, the budget is crucial as it will provide clarity on
how the government wishes to pursue its economic agenda to stimulate economic growth, jobs,
investment and a more conducive business environment in the country. Hopefully, given the
high expectations from investors, both domestic and global, the Budget should focus on the twin
objectives of triggering higher growth and sharply improving efficiency of public expenditure
and government flagship programmes to benefit the common man.

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Indian Union Budget 2016-17 at a glance

Revenue Receipts
1
Tax Revenue (net to centre)
2
Non-Tax Revenue
Capital Receipts
3
Recoveries of Loans
4
Other Receipts
5
Borrowings and other liabilities
Total Receipts

1377022
1054101
322921
601038
10634
56500
533904
1978060

Non-Plan Expenditure
6
On Revenue Account
of which,
7
Interest Payments
8
On Capital Account
Plan Expenditure
9
On Revenue Account
10
On Capital Account
Total Expenditure
11
Revenue Expenditure
12
Of Which, Grants for
creation of Capital Assets
13
Capital Expenditure
Fig 2: Expenditure
Receipts

Fig 1: Revenue Receipts

Revenue Deficit (17-1)

354015

(2.3)

Effective Revenue Deficit (20-18)#

Fiscal Deficit {16-(1+5+6)}
Primary Deficit (22-11)

187175
533904
41234

(1.2)
(3.5)
(0.3)

Tab 1: Budget at a Glance

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1428050
1327408
492670
100642
550010
403628
146382
1978060
1731037
166840
247023

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Introduction to Indian Manufacturing Industries:

The 'Make in India initiative launched 18 months ago has since been successful in
capturing the mind share of stakeholders across the world. However, there are several
reforms - including land and labour laws, and Goods and Service Tax COST) - that are
still expected to take shape, to improve ground level manufacturing

Challenging economic environment in both global and domestic markets have pushed
manufacturing sentiments to levels bordering skepticism. Several direct economic
indicators, such as capacity utilisation, productivity and employment generation, and the
level of Non-Performing Assets (NPAs) (primarily in manufacturing sector) portray a
different picture when compared with healthy GDP growth rates

Primarily, both low demand and softening commodity prices have hampered the Indian
manufacturing industry to a great extent. The drop in global commodity prices has
benefitted some sectors to control their input cost, but for others, it has been neutralised
by diminishing output prices. The market is also going through a tough price competition
locally, and witnessing pressure on imports from countries, such as China, which has
excess capacity

Having made a brilliant start with the 'Make in India campaign, the Budget was
expected to address all operational elements with an aggressive road map to implement
the necessary initiatives/reforms

Key Challenges

Despite continuous emphasis on developing infrastructure, it is still considered to be

one of the major bottlenecks for the manufacturing sector
A flat demand curve, coupled with falling output prices, is leading to lower sales
realisation
There has been an increase in cost-effective imports of products, such as steel and
chemicals, from low-cost countries, mainly China. (E.g., steel imports from China rose
by approximately 70 per cent in FY2015-16 from the previous yearl has led to increase in
margin pressure on domestic companies)
There have been no fresh investments in green field or brown field projects by domestic
companies
Delay in implementation of GST has resulted in continuation of complex tax laws
Significant debt-burden, followed by unfavourable market conditions, is making it
difficult for companies to repay debts. (As per analysts, Indian steel producers alone are
carrying a debt of INR3 lakh crore)
Complex tax laws and land acquisition policy are considered as key challenges for
companies planning to/investing in India.

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Governments Current Mission

The government is committed to promoting the manufacturing sector as an engine of growth.
The launch of 'Make in India initiative, aimed at creating millions of jobs opportunities and
making the country a global manufacturing hub, was the primary step toward it. To accomplish
the target, the government is focusing on improving the countrys infrastructure by increasing
investments and improving ease of doing business by simplifying tax laws and labour reforms
Recently, the government has launched a series of other initiatives, such as

Smart Cities
Skill India
Start-up India

These initiatives are meant to propel the 'Make in India programme directly or indirectly.
Expectations from Industrialists

Incentivise investments from domestic and global players by formulating lucrative

policies for their benefit
Focus on building common facilities to facilitate industry cluster increasing the level
of integration across industries which can help in achieving economies of scale
Creation of infrastructure facilities to reverse the bottleneck in terms of inbound and
outbound logistics
Improve global competitiveness by incentivizing innovation and Research and
Development (R&D) on manufacturing
Drive early implementation of GST that would simplify the tax structure and facilitate
smooth inter-state movement of goods
Simplify labour laws and further improve the ease of doing business to attract
investments in the manufacturing sector
Promote Micro, Small and Medium Enterprises (MSME) segment by providing
incentives, easy access to finance and manufacturing input, which would help them
withstand the highly competitive environment.

Policy Updates

100% FDI will be allowed through the FIPB route in marketing of food products
produced and manufactured in India. This will benefit the farmers and also will give
impetus to food processing industry.
1500 Multi Skill Training Institutes will be setup across the country under the 'Skill
India mission. National Board for Skill Development Certification to be formed in

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partnership with the industry and academia to skill one crore youth over the next three
years to support manufacturing sector.
Hybrid instruments to be included as one of eligible FDI instruments for the purpose of
raising funds from overseas.
Proposal to introduce a Centre State Investment Agreement to ensure fulfillment of the
obligations of the State Governments under the Bilateral Investment Treaties entered by
India with other countries

Key Announcements

An investment of about INR 97,000 crore on road construction (including rural) has been
made to develop 10,000 km of national highways in FY17, 50000 km of state highways
are to be converted to national highway (NH) roads and the development of new
greenfield ports are expected to address the logistics bottlenecks, and could trigger the
demand for basic commodities, such as cement and steel
Increase in clean environment cess to be levied on coal, lignite and peat from INR
200 per metric tonne (PMT) to INR 400 PMT. In effect, the steel industry using coal
(both coking and non-coking, including imported) may have to bear an additional
financial burden of INR 200 per tonne of coal purchased. This could adversely affect
the iron and steel industry, including the sponge iron, pig iron, ferro-alloys units
The government also plans to amend the Companies Act, 2013 that would enable
registration of new companies in one day and would remove the difficulties concerning
ease of doing business in the country
To improve ease of doing business, the government has proposed to introduce a Contra
State Investment Agreement, which would ensure the execution of investment treaties
signed by India with foreign countries
The government is planning to set up 1,500 multi skill training institutes across the
country, under the 'Pradhan Mantri Kaushal Vikas Yojana. This could help the Indian
manufacturing sector to overcome the issue of unskilled labour in India.
Policy for rationalization of freight tariff has been proposed in the budget. Clarity in
terms of setting / rationalizing the freight tariff potentially including rate stability over a
period of time, system of reward and penalty mechanism built in for transit guarantees,
reduction of freight tariff overtime, different tariffs for non-congested routes, and longterm contracts, etc. is desired
Measures are being undertaken to modernize ports and increase their efficiency. To this
effect, Sagarmala project has been rolled out and Greenfield ports are proposed to be
developed in Eastern and Western parts of the country

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Direct tax proposals:

There has been no change in the corporate tax rate, except for the same applicable to
new eligible manufacturing companies which are taxable at 25 per cent without claiming
specified deductions, allowances, depreciation, and companies having a turnover or
gross receipts not exceeding INR5O million, taxable at 29 per cent
In all other cases, base tax rate and MAT rate to remain unchanged at 30% and 18.50%
respectively
Newly set-up domestic manufacturing companies incorporated on or after 1 March 2016
can opt to be taxed at 25% plus surcharge and cess, provided they do not claim any
profit-linked incentives, investment-linked incentives, accelerated depreciation,
investment allowance, expenditure on scientific research and certain deductions covered
under Chapter VI-A
Dual condition for acquisition and installation of new assets for claiming deduction u/s.
32AC of the Income Tax Act has been done away with, and now deduction u/s. 32AC of
the Income Tax Act can be availed in respect of new assets installed up to 31 March
2017
Accelerated depreciation to be limited to maximum of 40 per cent
Income by way of royalty in respect of patents developed and registered in India by a
resident in India is to be taxed at the rate of 10 per cent (plus surcharge and Cass) on a
gross basis. The income will not be subject to MAT
Place of Effective Management (POEM) with effect from 2016-17 (instead of FY201516) .The government needs to notify income computation mechanism in case a foreign
company is said to be resident in India due to it having a POEM in India
Hundred per cent deduction for a period of three consecutive years out of the initial five
years for eligible _start-ups which are set-up before 1 April 2019 and whose turnover
does not exceed INR25 million in any FY from 1 April 2016 to 31 March 2021
GAAR to be applicable with effect from 1 April 2017
In order to reduce the disputes relating to quantification of disallowance of expenditure
relatable to exempt income, the disallowance shall be limited to 1 per cent of the average
monthly value of investments yielding exempt income, but not exceeding the actual
expenditure claimed (Amendment proposed in the Budget speech, however, not
mentioned in the Finance Bill)
A buy-back tax is applicable to any buy-back of unlisted shares under the provisions of
Companies Act,1956 and is not restricted to Section 77A of the Companies Act, 1956.
The rules are to be prescribed to compute the distributed income under different
scenarios, including shares issued under tax business re-organisations and in different
tranches. The amendment is to be applicable from 1 June 2016.
Long Term Capital Gain (LTCG) derived by non- residents from the transfer of shares
of a closely held private limited company is taxable at the rate of 10 per cent

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In line with the recommendations contained in the Organisation for Economic Cooperation and Development (OECD) report on Action 13 of the BEPS Action Plan, the
three-tiered (i.e. master file, local file and CbyC reporting) transfer pricing
documentation structure has been proposed to be adopted for specified companies

Indirect Tax Proposals

On indirect taxes front, while there are several thrust areas, the primary focus of proposals
appear& to be towards promoting 'Make in India and 'Ease of Doing Business initiatives of
the government.
General:

No change in peak rates under Service tax, excise duty and customs duty
Custom and excise duty rate structure re-aligned to give boost to domestic manufacturing
of several products.

Customs:

Facility of deferred payment of customs duty to be extended to specified importers and

exporters
Eleven new benches of customs, excise and service tax Appellate Tribunal to be
created to clear backlog of cases
Customs single window project to be implemented at major ports and airports from
next financial year

Excise:

Excise returns can now be revised by the end of month in which they are submitted
Period Of limitation Seeking recovery of excise duty in specific cases extended from one
year to two year
Penal rate of interest under central excise reduced from 18 per cent to 15 per cent

Service Tax:

'Krishi Kalyan cess to be imposed at the rate of 0.5 per cent on all taxable services and
infrastructure cess imposed up to 4 per cent on Specified motor vehicles
Interest on service tax fixed at 15 per cent for all default& except in case where service
tax is collected and not deposited where interest shall be 24 per cent
To avoid overlap between Service tax and excise/customs, new exemption Notification
introduced in relation to IT Software recorded on a media in respect of which Retail Sale
Price (RSP) is required to be declared under the provisions of Legal Metrology Act.

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Phasing out deductions and incentives:

New SEZ units to commence operation on or before 31 March 2020 to avail tax holiday
benefits as per section 10AA
For specified business under section 35AD, weighted deduction of capital expenditure at
the rate of 150% will be reduced to 100% from FY 2017-18
Weighted deduction of 150% on expenditure incurred on skill development under section
35CCD will be available only for four years up to 31 March 2020. With effect from 1
April 2020, the same is restricted to 100%
From 1 April 2017 to 31 March 2020, weighted deduction in relation to contribution to
scientific research association / National Laboratory / in-house R&D expenditure will be
restricted to 150%. With effect from 1 April 2020, deduction is further restricted to 100%
of the expenditure

Other proposals:

Provisions relating to claim of additional deduction under section 80JJAA for new
employment is extended to all assesses who are subjected to tax audit. The minimum
number of days of employment reduced from 300 days to 240 days to determine the
eligibility of new workmen. Further the requirement of minimum number of workmen
has been done away with
Period for getting benefit of long term capital gain regime in case of unlisted companies
is proposed to be reduced from three years to two years
General Anti Avoidance Arrangement to come into effect from 1 April 2017
In accordance with the Base Erosion and Profit Shifting plan, a specific reporting regime
has been provided in respect of Country by Country (CbC) reporting, applicable to an
international group having consolidated revenue above a threshold limit to be prescribed
Penalty rates to be at 50% of tax in case of underreporting of income and 200% of tax
where there is misreporting of facts. Other penal provisions rationalized
Provisions to fast track the tax refunds have been introduced
Stay of demand to be granted by the tax officer upon payment of 15% of the disputed tax
amount

Impact on Companies

Below mentioned are examples on impact of this budget on industries

Overall we believe the budget is very positive for companies that cater to the road sector
which include L&T and Reliance Infrastructure.
L&T is already working on the Dedicated Freight corridor and stands to gain from higher
spend in the Railways space
The allocation of Rs 3,000 crore for Nuclear Power power opens up new order
opportunities for L&T, Alstom and Thermax

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The bond issuance by NHAI, PFC, REC and other companies in this field will help them
garner funds to boost the capex in this space.
The Higher defence capex is a positive for companies like BEL, L&T and Bharat Forge
The 7th pay commission payout is a positive for Voltas and Bluestar, while the reduction
of indirect taxes on refrigerated containers is a positive for Snowman Logistics and
Gateway Distriparks

Conclusion:
The Union Budget largely focussed on agriculture, rural development and improving the
countrys infrastructure. Investment in road and rail can help the manufacturing Sectors
Significantly. This should debottleneck inbound and outbound logistics challenges that
manufacturing companies go through today.
Investments in infrastructure could spur the demand in allied manufacturing Sectors such as
cement, steel and construction equipment.
Furthermore, a strong focus on developing the agriculture sector and developing the rural
economy of India is likely to put money in the hand of rural India that would drive the demand
across different Sector.
Future Expectations:

GST implementation: The manufacturing sector was expecting an early implementation

of GST, which was supposed to simplify taxation
Land acquisition reforms: The success of 'Make in India initiative is significantly
dependent on an effective land acquisition policy.
Incentives for domestic/local investments in manufacturing: No significant
announcements were made on promoting/supporting domestic investments
There was no announcement on the creating common facilities for an industrial cluster

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References
[1] http://indiabudget.nic.in/
[2] Deloitte India Report on Budget India: Impact on manufacturing
[3] Deloitte India Report on Budget India: Impact on infrastructure
[4] KPMG Report on Post budget analysis of Industrial sector
[5] KPMG Report on Post budget analysis of Transportation and Infrastructure
[6] http://indianexpress.com/article/business/budget/union-budget-2016-17-what-industryleaders-expect/
[7] http://www.dnaindia.com/money/report-a%20sector-wise-break-down-of-the-budgetsimpact-2184522
[8] PWC report on India Manufacturing Barometer 2015

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