BUDGET 2021-22 SECTORAL ANALYSIS

 Our Honourable Finance Minister, Nirmala Sitharaman has unveiled the first post-pandemic Budget of India. The Union Budget 2021 aims to boost income for businesses, in a bid to revive economic growth that has slumped to the lowest levels since the COVID-19 outbreak.

To strengthen the Atmanirbhar Bharat Abhiyaan, the government proposed 6 pillars – health and wellbeing, capital and infrastructure, inclusive development, reinvigorating human capital, innovation and R&D, and minimum government & maximum governance.

The 2021 Budget emphasised primarily on healthcare and infrastructure sectors. Also, a host of substantial announcements were made on the disinvestment & foreign investment front. 

AEROSPACE AND DEFENCE

Defence continues to be a priority area for the Government considering the situation at the Northern frontiers. Moreover, when it comes to the defence sector, Government’s vision has been clear and unwavering – ‘Make in India’.

Both of these sentiments are reflected in today’s budget allocation for the defence sector. While the total defence budget for FY 21-22 increased marginally by 1.45% , there is a significant increase of almost 19% in capital procurement outlay, the enhanced capital outlay shall significantly impact future defence contracting and ensure streamlined acquisitions of key platforms like multi role fighter aircraft, light combat aircraft, unmanned aerial vehicles and future infantry combat vehicles.

The budget allocation is backed by a number of constructive policy changes brought into force in 2020. These policy reforms are:

• introduction of import embargo on defence items
• increase in automatic FDI limit in defence to 74%
• announcement of a revamped defence offset procedure and offset guidelines
• revised framework for micro, small and medium enterprises
• introduction of a draft overarching vision document on Defence Production and Export Promotion (DPEPP)

With the ban on import, the orders of about INR 400,000 Crore  shall be placed with the domestic industry in the next five to seven years. Of these, the likely orders of INR 130,000 Crore  with Army and INR 140,000 Crore  with Navy and remaining with Air Force shall be pursued.

However, one expected an earmarked amount for domestic capital procurement in line with draft DPEPP. Further, with no specific direct tax holidays/ production linked incentives announced for the defence sector and no reduction in 18% GST rate on procurements, achieving Government’s ambitious vision of achieving a turnover of INR 175,000 Crore including exports of INR 35,000 Crore in aerospace and defence goods and services by 2025 seems to be difficult.

AUTOMOTIVE AND INDUSTRIAL MANUFACTURING

•      Withdrawal of claim for depreciation on goodwill could be a dampener for various M&A deals already conducted in the past / to be undertaken and could result in substantial tax implications in the Industrial Manufacturing & Automotive sector
•  Imposing compliance of tax deduction at source on transaction relating to purchase of goods could pose severe compliance burden on the manufacturing sector.
•   Rationalisation of provision relating to carry forward of loss and unabsorbed depreciation to all categories of PSUs irrespective of their nature of business would be a key step towards the strategic disinvestment of PSUs
•   While measures for reducing compliance burden (e.g. GST audit removed), measures to complete enquiries in specified time would have a positive impact on the sector, some procedural amendments may negatively impact working capital. The overall impact of such provisions would thus be mixed.

Tax Implications :

DIRECT TAX

Deals and Investments

•  Goodwill depreciation regime overhauled and assessees would no longer be eligible to claim depreciation on goodwill. Acquired goodwill through slump sale / exchange also not eligible for depreciation.
• “Slump sale” regime amended to tax the transaction based on real substance. “Slump Exchange” transaction, which was claimed to be outside the purview of “slump sale” transaction, would now be taxable.

Tax deduction and collection at source

•  Section 194Q introduced for TDS on purchase of goods by buyer, at the rate of 0.1% of value of goods exceeding INR50 lakh. It applies to buyers whose turnover is more than INR10 crore in the immediately preceding financial year.
• Higher rate of TDS to apply in case payments are being made to persons-

1. who have not filed tax returns for consecutive 2 previous years, prior to the year in which tax is required to be deducted, and 
2. the aggregate of TDS/TCS exceeds INR 50,000 in each of the preceding 2 years.

   Dispute Resolution

• To further reduce human interface, faceless scheme for appeal before Income Tax Appellate Tribunal to be introduced
•  Constitution of new Board for Advance Ruling (BAR) replacing the existing Authority for Advance Ruling (AAR). Orders of BAR appealable before High Court
• Special Dispute Resolution Committee (DRC) for small and medium taxpayers having returned income of INR50 lakh or less and tax adjustment of less than INR10 lakh
•  Discontinue the existing Income-tax Settlement Commission and introduction of one or more interim board(s) to decide on the pending applications.

Compliance

•  Relaxation on applicability of interest under section 234C in respect of Advance Tax on dividend income provided entire tax is discharged in subsequent installment [except for deemed dividend under section 2(22)(e)]
•  Threshold limit for applicability of tax audit for entities with at least 95% of transactions in digital mode enhanced from INR5 cr to INR10 cr
• Due date for revised and belated return reduced by further period of 3 months i.e. all belated or revised return to be filed within 9 months from the end of the relevant financial year
• Time limit for issue of notice for scrutiny proceedings u/s 143(2) reduced to 3 months from end of relevant financial year in which the return is furnished.
• Time limit for completion of assessment proceedings for Assessment Year 2021-22 onwards reduced from 12 to 9 months from the end of assessment year
•   Time limit for issue of intimation u/s 143(1) reduced from 12 months to 9 months from end of financial year in which return is furnished.

Facilitation of strategic disinvestment for PSUs

• Splitting up or reconstruction of a public sector company, in the form of asset transfer to a resulting public sector company, shall be deemed to be a 'demerger' for income tax purposes.
• Benefit of carry forward of losses and unabsorbed depreciation on amalgamation and demerger which was only available to PSUs engaged in business of operation of aircraft, now extended to all available PSUs.

INDIRECT TAX

Amendments in custom duty rates impacting cost structures

•   Customs duty rates on various goods including raw materials and parts (relevant for Industrial Manufacturing and Auto sector) have been rationalised, with a view to promote domestic manufacturing, in accordance with Aatmanirbhar Bharat Vision of the Government of India. Key rate changes are captured in Annexure 1
•    Rationalisation of customs duty rates on more than 400 old exemptions by 1 October 2021 with an objective to incentivise domestic manufacturing and boost exports for specified sectors
•   New conditional exemption notifications shall be valid up to 31 March falling immediately after 2 years from the date of the notification. Current exemptions to expire on 31 March 2023
•   Changes proposed in the customs tariff classification of specified vehicles, parts and accessories in the first schedule of Customs Tariff Act, 1975 w.e.f. 1 January 2022, to align with the global changes in HSN 2022 as recommended by the World Customs Organization. Industry players would need to monitor possible changes in customs classification and/or customs duty rates
•    Agriculture Infrastructure and Development Cess (‘AIDC’) - New cess imposed on specified goods with effect from 2 February 2021. In the context of IM and Auto sector, it is relevant to note that AIDC @ INR 2.5 per litre on petrol and INR 4 per litre on diesel has been imposed as an additional duty of excise. Further, basic excise duty and special additional excise duty on these items have been calibrated to neutralise the additional burden on consumers.

BUILDING, CONSTRUCTION AND REAL

 ESTATE

• Increasing the safe harbor limit from 10 per cent to 20 per cent would boost demand in the real-estate sector and would enable the real-estate developers to liquidate their unsold inventory at a rate substantially lower than the circle rate and giving benefit to the home buyers.
•  Extensions in the additional tax benefit of INR1.5 lakh for loan taken to acquire affordable homes would not only benefit the salaried income group but also sustain the existing demand for affordable housing and in turn, reviving the residential real estate industry as a whole.
•  Looking to boost the sluggish housing sector, the government proposed to extend tax sops given to real estate firms for developing affordable housing/ affordable rental housing until next fiscal (31 March 2022). This will encourage developers to invest more into affordable housing/ rental housing considering the underlying demand occupying bulk of the sales within top metropolitan cities.
•   Removal of withholding tax on dividends to be paid by SPV to business trusts i.e. to REITs and InvITs, will streamline and align the taxability of dividend income in the hands of business trust and will provide additional liquidity in the hands of business trust. However, similar relaxation under the holding company structure has not been provided, which could block the funds and also increase the tax cost in case of Hold Co structures.
•   As urban land grows scarce, additional land is required to cater to the housing and commercial needs of the growing population. Unlocking the value of public lands available with AAI, railways, warehousing and sports related projects has been recognised as potentially significant source of finance for the government for upgrading urban and social infrastructure projects. Various estimates outline the extent of land held by various government agencies in excess of 5 lakh hectare, of which, over 160,000 hectares is held across various airports, seaports and railways. Land parcels like these can provide the much-needed relief to occupiers/ end users by controlling the real estate prices and can also bring around significant alteration in the residential or commercial landscape of major cities.
• Providing PLI for technical textiles and manmade fibre would help in driving investments into these segments and shall thereby help doubling the textile industry size to  by 2025-26. Such an initiative would assist in creating textile parks which are fully integrated, globally competitive manufacturing and exporting hubs.
• Non availability of depreciation on goodwill on business or profession and changes in slump sale taxability could impact the real estate and infrastructure transaction structuring and can also impact the IRR of the already concluded deals.
• Equalisation levy could be levied on all cross-border transactions by foreign entities except income which is chargeable to tax as royalty or fees for technical services in India.

 CONSUMER MARKET & E-COMMERCE

•      Continuity in MSP system will ensure that farmers have a steady income and are protected from the vagaries of market forces. Focused approach on rural consumption has been key as suggested by significant investments announced around rural infrastructure - roads, public transport, ports and railways. Increasing credit to farmers could help in reducing the input costs, thereby ensuring profitability
•   Investments in fishing harbours, fishing centres and seaweed farming indicate the government’s thrust on new and emerging sectors within the agriculture ambit. This could further provide large scale employment and additional sources of incomes
• Investments in Agriculture Infrastructure Fund could help APMCs to augment storage infrastructure facilities, thereby helping reduce costs. With the goal to double farmer income, raising custom duties on cotton and silk and investments in storage facilities are likely to boost agriculture and allied activities in FY22
• Keeping farmers’ well-being at the centre, the budget aims to enhance farmers’ income, thereby also rekindling rural consumption and provide the much-needed stimulus to growth.

EDUCATION AND SKILL DEVELOPMENT

• Taxation in Education sector

1. Increased tax exemption limit will provide relief to smaller educational institutions with turnover of less than INR 5 crore without need for specific approvals from the tax authorities
2. Clarity on issues of application of income will reduce tax litigation and disputes considering increased reliance on corpus funding and borrowed funds to undertake activities in the education space.

• Research and higher education

1. Research in universities got a boost with the INR 50,000 crore funding for National Research foundation and also the "Glue Grant" to bring synergies with standalone research labs
2. Formation of HEC will be crucial to implement NEP
3. Collaborations with foreign universities will enhance and will be more meaningful with regularisation of twinning and dual degree programmes
4. Funding, especially capital requirement for higher education institutions, would be crucial and this has not been addressed in this budget.

• School Education

1. There is much needed emphasis on standards and development for teachers. It is heartening to see this budget highlight this is in multiple sections
2. This budget could signal the beginning of the end of the role learning era. 
3. Marginalised and disadvantaged sections of the society
4. While these are some point measures, allocations for large implications of implementing NEP on infrastructure, curriculum revamp across school education, assessment, digital enablement etc are missing.

• Skilling

1. Much needed impetus has been given to the apprehenticeship programme. It is important for the industry to consider this and proactively reach out to the skilling institutions.
2. The formal vocational education programme spearheaded by industrial training institutes, Industrial Training Centres, Polytechnic needs a big push to be in sync with rapidly increasing demand from the industry.

FINANCIAL SERVICES

•   Banking, especially Public sector banks, has been given significant support through measures around capitalization, setting-up of Asset reconstruction to handle bad loans and divestment of 2 PSU Banks. It would be required to review finer details of structure and operations of Asset Reconstruction and management company handling the Bad Loans/ Assets
•   Divestment of PSU Banks – Few steps forward – will bring greater focus on low performing PSU Banks, autonomy and capital optimization. This will also lead to consolidation in banking and NBFC sector. We look forward to RBI’s expected guidelines on Ownership of Banks
•  Increase in FDI limit to 74% in Insurance will help revive growth capital in smaller and mid-sized Insurance players. Insurance sector may see heightened interest from foreign investors considering liberalization including realignment of stakeholders. However, the level of interest may be calibrated depending on the ability to control versus own
•   Suggested Amendments to LIC Act around governance and surplus distribution key enabler for a LIC IPO. This will have a greater impact on the Insurance industry and make products of private insurers more competitive and at par with LIC with prospective effect.
• Reduction of limit for NBFCs for collection under SARFAESI Act from INR50 lakh to INR20 lakh will enable NBFCs in NPA recovery especially in MSME sector
•   Setting up of DFI with capability to finance Rs 5 lakh cr within 3 years is a positive development
•   The proposed launch of securities market code consolidating multiple securities related laws and creation of new investors’ charter is expected to be beneficial for protecting investors’ interests. Need to understand the specifics on how this will improve efficiency, costs and compliance related aspects.
•  Fin-Tech hub at the GIFT will further strengthen India’s position in global fintech landscape. Mobilizing right talent pool and creating conducive ecosystem is critical to sup   
• Announcements related to Digital payments, digital census and investment in AI/ML is a definite next step in Digital India movement which will primarily aid the growth of Start-ups and Fintechs 

HEALTHCARE

•   Healthcare, in all its aspects – preventive, curative and causative – has been one of the predominant themes of the Budget, with unprecedented allocations as well as new programmes and projects, including in related areas like air pollution mitigation, water supply and sanitation in urban areas.
•  The healthcare sector witnessed the launch of a new centrally sponsored health programme (PM- AtmaNirbhar Swasth Bharat Yojana) with an outlay of INR64,180 crore over six years, which is in addition to National Health Mission. It will provide support for both urban and rural health centres, establish 12 central institutions, and strengthen the NCDC
•   Continuing on the agenda of health and well-being, the allocation of INR35,000 crore for development of COVID-19 vaccines is expected to move the focus from mass health screening under Ayushman Bharat Health & Wellness Centres (HWCs) and primary centers, towards preventive care by undertaking mass vaccination drives.
•  The introduction of the National Commission for Allied Healthcare Professionals Bill, along with the soon to be introduced National Nursing and Midwifery Commission Bill, is expected to bring about transparency, efficiency and governance regulation to the 56 allied healthcare professions.
•  Operationalisation of Public Health Units and strengthening them at Points of Entry by setting up of Health Emergency Operation Centers and mobile Hospitals will ensure robust surveillance and containment strategies and will help in screening passengers, especially when tourism and travel resume in the coming months.

MEDIA AND ENTERTAINMENT

• Media and Entertainment industry has suffered one of the worst impacts of the COVID-19 pandemic and perhaps for the longest period of time. While movie theatres and cinema halls were shut down for the most part of the year, OTTs had a stellar year. As movie theatres try to lure movie watchers back to the cinemas and struggle to coexist with OTT, Union Budget of 2021-22 was expected to play a pivotal role on how the entertainment industry of India shapes up, however the budget had a muted outlook towards the sector.
•   While there have been no direct reliefs or reforms for the sector, one hopes that the increased spending on infrastructure and healthcare services along with, the push for privatisation and support to start-ups is likely to increase in the spending power of the customers which will help in M&E uptake. Also one hopes that the focus on corporate recovery strong will help create strong opportunities for advertisement growth thereby benefitting the M&E industry’s advertisement revenue
•   Exemption of customs duty on temporary import of costumes and props by filmmakers in India will help reduce the cost burden of M&E industry
•    However, clarifications on the scope and applicability of Equalisation Levy may have wide ramifications for the sector and one needs to review applicability in the light of specific fact pattern
•  Further, the amendments relating to depreciation on goodwill and meaning of slump sale may have a bearing on the M&A transactions in the M&E space
•  The new TDS / TCS provisions will further increase the compliance burden for taxpayers.

TELECOMMUNICATION

• The clarifications on the scope and applicability of EL may have wide ramifications for the sector and one needs to review applicability in the light of specific fact patterns.
•  The relaxation in the time limit for re-opening of assessment proceedings is a welcome move. However, the threshold of INR 50 lakhs appears is likely to breached with ease in the case of telecom sector.

Overall, despite huge expectations, the Union Budget 2021 has been muted towards the sector. While the spend allocation towards telecom infrastructure creation is a welcome move (given the vast gap in infrastructure funding requirement), significant investments would be further required both at private and public level to enable a robust future proof communication infrastructure. Further, with the spectrum auctions on the anvil, and debt laden financial health of the sector, there were significant industry expectations towards reduction of the regulatory and taxation levies on the sector. However, one hopes that keeping the long-term sector perspective in mind, the government will support the industry’s growth by supportive post budget policies including favorable PLI guidelines and reduced spectrum auction pricing.

TRANSPORT AND LOGISTICS

A measured budget for the transport & logistics sector, with emphasis on enhancing core infrastructure investment, divestment, and private sector participation

• Allocation of a cumulative amount of INR2.3 lakh crore covering ports, roads, railways, and inland waterways is a welcome move for the development of the Indian transport and logistics sector
•  Notable allocation of INR1.18 lakh crore for road infrastructure development, the highest ever outlay for Ministry of Road Transport and Highways
•  The railway sector will be buoyed by an INR1.1 lakh crore allocation, with emphasis on infrastructure development and passenger safety. Continued focus evident on enhancing the modal share of railways to 45% from the existing 28% levels
• Seven privatisation projects across major ports worth more than INR2,000 crore to improve operational efficiency is a welcome move
•  The budget assigned an outlay of INR1,624 crore over five years to promote flagging of merchant ships in India by providing subsidy support to Indian shipping companies in global tenders floated by Ministries and CPSEs. This initiative aims to improve the share of Indian companies in the international shipping market
• Under the Recycling of Ships Act, the budget promises to bring more ships to India from Europe and Japan.  It expects to double the recycling capacity to 4.5 million Light Displacement Tonne (LDT) by 2024 and generate additional employment of 1.5 lakh jobs
•  Government plans to add 20,000 buses under a new scheme and innovative PPP models to provide the necessary boost to the urban mobility logistics across metros and non-metros

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