Five recommendations to give Atmanirbhar Bharat a boost
4 min read . Updated: 27 Jan 2023, 11:52 AM IST
Premium- The budget should streamline export incentives, ease liquidity constraints, make tax compliance simpler and incentivize newer sectors to give local manufacturing a boost and take India towards becoming a $5 trillion economy
As a fast-growing country that recently overtook the UK as the fifth-largest economy in the world, India has become an intriguing market for overseas businesses and investors. Despite global headwinds, particularly the covid crisis, economic slowdown, currency depreciation, global supply disruptions, soaring inflation and fear of a looming global recession, the Indian economy has been resilient. The World Bank has lately upgraded India’s gross domestic product forecast to 6.9% for 2022-23 from 6.5%. Economists expect that by 2030, India, with its strong domestic market and large talent pool, will become the world’s third-largest economy.
The government has a vision of making India self-reliant through its Atmanirbhar Bharat mission with an economy of $5 trillion. For this, its focus is on reducing import dependency and promoting local manufacturing. Here are five recommendations that can give the ‘Make in India’ and ‘Atmanirbhar’ initiatives a boost.
First, streamline the export incentives to boost export competitiveness and production opportunities for domestic manufacturers and service providers. There are multiple incentives extended by the central and state governments aimed at making domestic manufacturing more lucrative for investors. The production-linked incentives (PLI) scheme, which was launched in 2020, has found good traction, and this year’s budget may consider extending it to more industries. The government should consider simplifying the process and provide all the incentives through a single window.
Second, policies and frameworks that incentivize investments and enhance liquidity should be further promoted. The covid pandemic has sent business houses scrambling for liquidity. Benefits under the Emergency Credit Line Guarantee Scheme (ECLGS) should be extended for one more year i.e. till 31 March 2024. This would help create an enabling business environment for micro, small and medium enterprises (MSMEs) and would benefit lending to the sector.
Pooling of funds among group entities can ensure efficient utilization of resources within a group. Currently, loans and advances given by a private company to certain shareholders and group entities are deemed as dividend income in the hands of the borrower entity and, accordingly, may be taxed in India. On account of these tax distortions, companies may be forced to borrow funds from external parties, despite having surplus funds within the group. Necessary amendments should be brought in the law to allow the flow of funds in the group without additional tax cost.
To incentivize foreign lenders extending loans to Indian borrowers, the domestic tax laws provide for a reduced tax rate of 5% on these borrowings. There is, however, a sunset period that provides for the lower rate for any loan arrangement entered till 1 July 2023. Extension of this sunset period will help Indian companies maintain liquidity.
The government should also introduce incentives for the foreign investors to reinvest their income generated from an Indian investment back into India. It may come up with provisions for deferment of taxation in the hands of foreign investors on income received from Indian investments on the condition that such income is invested in India in specified sectors and instruments. This temporary deferment of tax subject to satisfaction of the precondition of reinvestment would encourage overseas investors to expand investments in India.
Third, ensure a stable and transparent tax and business regime. Tax certainty is a high priority for investors as it helps avoid vexatious litigation at a later stage—advance rulings, advance pricing agreements, safe harbour, where the tax positions are upfront blessed by tax authorities, go a long way in providing certainty to taxpayers, especially on complex transactions involving international tax treaties and their interplay with domestic tax laws.
The Finance Act 2021 has replaced the Authority for Advance Rulings (AAR) with the Board for Advance Rulings (BAR). However, the BAR is yet to be functional and thousands of cases have piled up. This is creating uncertainty and impacting business decisions. The government should come up with a strict framework for disposing off the matters in a time-bound and expeditious manner. Further, the advance ruling should be made binding on the tax authorities as well so as to avoid prolonged litigation.
Fourth, make tax compliance simpler. The recent amendment in the tax law mandating online filing of Form 10F on the income tax e-filing portal by non-residents needs reconsideration. To make the online filing, non-residents are required to create an account on the filing portal for which obtaining a Permanent Account Number (PAN) is necessary, which may create an additional compliance burden. Non-residents not required to have a PAN in India should be excluded from the requirement of online filing of Form 10F. While such exemption has been granted till 31 March 2023, it should be incorporated as an exemption in the Income Tax rules themselves. Alternatively, non-PAN-based login for non-residents should be developed for online filing of Form 10F.
Finally, and most importantly, incentivize newer sectors such as renewable energy, research-based projects, information technology, power, space, etc., to build a stronger future for an aspiring India. Further, strengthening of the start-up ecosystem and building capacity will help boost the Make in India and Atmanirbhar initiatives and aid India’s vision of becoming a $5 trillion economy.
The author is partner, Price Waterhouse & Co LLP. Hitesh Sawhney, partner, Price Waterhouse & Co LLP, contributed to this article
