Measures to Boost Economy – Part 1 | Announcements by Finance Ministry

Measures to Boost Economy
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Announcements made by the Hon’ble Finance Minister during the Press Conference held on 23 August 2019

The Indian Parliament had passed the Finance Act (No. 2), 2019 during July 2019. Being the first Budget presented by the Government after a sweeping majority in the recent elections to the Lower House of the Parliament, the focus was on stabilising the economy and undertaking structural macro-economic reforms to inter alia derive benefits from the demonetisation exercise conducted in November 2016 and the introduction of Goods and Services Tax in July 2017.  The budget was also focussed on tax optimisation, increasing the tax base and focus on all-round sustainability.

Since the dawn of 2019, the global economy has been severely crippled by ongoing trade wars, economic sanctions, interest rate hikes, political uncertainties, natural calamities etc.

The impact of global factors coupled with the reduction in domestic consumption and tepid investments has led to panic calls across the Industry. Corporate earnings have witnessed reduced growth rates and the stock markets have dived.  The panic started off with the automobile sector, which later on extended to FMCG, Banks, Financial Institutions, Engineering, Metals and other core sectors.

Co-incidentally, the growth rate of Gross Domestic Product (‘GDP’) of Indian economy for the period April 2019 to June 2019 has fallen to a 6 year low of 5% from a QoQ growth rate of 5.8% and a QoY growth rate of 8%.

In order to address the concerns raised by global as well as domestic investors and provide assurance to the Industry at large on the Government’s commitment to steering the economy to growth, the Hon’ble Finance Minister Smt. Nirmala Sitharaman (‘FM’) made an hour-long presentation on 23 August 2019, in what can be termed as a ‘mini-budget’ in itself. The FM made a corporate style presentation, listing down measures taken by the Government thus far announced and to be taken in the future. The announcements ranged from equity markets to auto sector to Micro, Small and Medium Enterprises (‘MSMEs’) and overall are focussed to help the economy overcome the impact of a global slowdown.

The Finance Minister has reiterated that the Government respects wealth creators and would undertake various reforms and simplification of laws by making life easy for Taxpayers. As already announced in the Budget, these measures would be announced soon. 

In addition, the government has also announced various structural reforms, cross-sector co-ordination, simplification of processes, measures for expansion of credit and domestic demand, increased investments into capital markets etc.

The key announcements on various subjects are summarised below:

1. Income Tax Prefilling of IT returns

Pre-filled income tax returns expected to be a reality from 2020. The Central Board of Direct Taxes (‘CBDT’) is working on creating the necessary infrastructure. This facility is aimed at providing ease of tax filing and compliance process to the Taxpayers.

1Faceless Income Tax scrutiny Most income tax scrutiny proceedings under Income Tax to be faceless. Scope of ‘e-proceedings’ as currently existent are expected to be increased to cover various other proceedings under the Income Tax laws.
2Unique Document Identification Number Any communication (including notices, summons, orders etc.) to be issued by the income tax authorities on or after 1 October 2019 shall be mandatorily issued through a centralized computer system and would contain a computer generated unique Document Identification Number (‘DIN’). Any communication issued without the DIN shall be invalid.
3Time limit for disposal of notices All notices issued prior to 1 October 2019 to which responses/ compliances are pending, to be issued through the centralized system by generating DIN.

All notices issued from 1 October 2019 to be mandatorily disposed off within three months from the date of reply by taxpayer.
4Relief from enhanced surcharge on Long Term/ Short Term Capital Gains The levy of additional surcharge on non-corporate taxpayers vide Finance (No. 2) Act, 2019 presented in July 2019 had raised panic among the Foreign Institutional Investors (‘FII’) on account of higher tax burden on Indian capital market investments. 

This led to a steep fall in the capital markets and wiped out investor wealth. Accepting representations from various stakeholders and in order to encourage participation in capital markets, the Government has decided to exempt surcharge on the Long Term/ Short Term Capital Gains arising from transfer of equity shares/ units of equity oriented mutual funds referred to in Section 111A and Section 112 A.
5Withdrawal of Angel Tax provisions for Startups and their investors As per the Income Tax law, any investment received in excess of the fair value is subject to tax in the hands of recipient. This had created a lot of difficulties for the entire Startup community and their investors. In order to mitigate genuine difficulties faced by Startups and their investors, the Government has decided that the provisions of Section 56(2)(x) dealing with taxation of excess valuation over book value shall not be applicable to a Startup registered with DPIIT.

The Government has also decided to set up a dedicated cell under a Member of the CBDT for addressing the problems of Startups and who could directly approach the cell for quick resolution of any Income Tax issues.
6Higher depreciation for vehicles purchased till March 2020 In order to boost the automobile sector, the Government has provided an additional depreciation allowance of 15% in addition to the existing 15%, thereby aggregating to 30% depreciation for all vehicles acquired during FY 2019-20 till 31 March 2020.

2. Corporate Law

1Quick incorporation of Companies The incorporation process for Companies has been made simple and faster. It is now possible to incorporate a company within one day as a norm rather than an exception, provided all requisite documents are available.  A Central Registration Centre for name reservation and incorporation has been set up.  An Integrated Incorporation Form also consisting of automatic registrations under other laws has been introduced.
2Corporate Social Responsibility (CSR) violations Any violation of CSR obligations shall not be treated as a criminal offence and would instead be considered as a civil liability. The Ministry of Corporate Affairs would review the sections under Companies law and make necessary amendments. The Government has provided extensions to companies for completing ongoing projects towards fulfil their CSR obligations.
3Shifting of 16 offence sections to monetary penalty only Various offences under the Company law have been reviewed and rationalised for the reasons of being too harsh.  Some of these offences have been moved to a monetary penalty and some offences have been made compoundable. Compounding of offenses is a priority over prosecution
4Faster and easier approvals for mergers and acquisitions The procedural approvals and compliances involved in case of mergers and acquisitions has been rationalised and simplified.
5Modifications in provisions for Differential Voting Rights In order to enable promoters of Indian companies to retain control of their companies in their pursuit for growth and creation of long-term value for shareholders, whilst raising equity capital from global investors, various amendments have been brought in the context of issue of shares with Differential Voting Rights (DVRs).
6Withdrawal of over 14,000 prosecutions under Companies Act In order to facilitate ease of doing business in India, several cases of prosecution proceedings have been withdrawn and offences have been compounded. The FM has reiterated to move from the prosecution route to a rationalised route.
7Robust IBC framework with amendments supporting MSMEs and home buyers The Insolvency and Bankruptcy Code has been amended from time to time in order to provide clarity and reverse the varied interpretations from various Tribunals/ Courts.

3. Labour Law

1Fixed term employment for flexibility in hiring Fixed term employment contracts have been permitted in order to provide flexibility in hiring.  This would provide a transparency and encourage direct hiring by businesses rather than taking the contractor route for hiring temporary resources.
2Contribution of ESIC reduced from 6.5% to 4% The statutory contribution by Employer and Employee had been reduced from 6.5% to 4%, resulting in a higher take home for employees covered under the Employee State Insurance Scheme.
3Web-based Inspections The concept of web based inspections have been introduced thereby eliminating the scope of a physical inspection.  The inspections have also been made jurisdiction-free in order to avoid any harassment by officials. In case of physical inspections, all Inspection reports are mandatorily required to be uploaded within 48 hours.
4Compounding of offences Similar to other laws, compounding of offences has been introduced even in case of labour laws in order to facilitate ease of doing business and reduce litigation.
5Self-certification under labour laws for Start-ups In order to ease compliance burden, Startups have been allowed to self-certify compliance with labour and environment laws. In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation after due enquiries and approvals.

4. Goods and Services Tax (‘GST’) Law

1Reduction in GST returns and simplification of forms The GST Council has already prescribed revised return formats under GST which have been launched on a trial basis for the acquaintance of taxpayers. The return format and contents have been simplified. The new GST return filing system is applicable from November 2019 onwards.
2Simplification of refund process under GST Various procedural issues involved in processing refund applications under GST have been simplified. Most processes have been automated and the timelines for refund approvals have been streamlined.
3Risk based approach in dealing with taxpayers The Central Board of Indirect Taxes and Customs (‘CBIC’) has been working on framing a risk-based policy approach in dealing with any assessment or enquiries under GST law.

The risk-based methodology is expected to be process and time efficient for the CBIC in collection and administration of GST.
4GST Refunds to MSMEs The Government has resolved to issue all pending refund claims to MSMEs 30 days.  In future, all GST refunds shall be paid within 60 days from the date of application

5. Measures in the Banking and NBFC Sectors

1Additional Credit expansion through Public Sector Banks (‘PSBs’) The Government would release the aggregate of INR 70,000 crores as announced earlier during the Budget 2019 in order to boost credit and steer growth in the economy. Additional lending and liquidity to the tune of ~ INR 5 Lakh crores is also being provided as upfront Capital to PSBs.

This will benefit Corporates, Retail borrowers, MSMEs, small traders, etc
2Banks to effect timely rate cuts As per the consultations held between the Government and Bankers, all Banks have decided to pass on any rate cuts by way of reduction in the Marginal Cost of Funds based Lending Rate (MCLR) to all borrowers.  MCLR is the minimum lending rate below which a bank is not permitted to lend.
3Banks to launch Repo rate/ external benchmark linked loan products As per the industry consultations and streamlining the manner of linking key bank rates to existing loans, banks have agreed to launch loan products based on floating rates.  The rates may be linked to the Repo rates or any external benchmarks. 

This structural change would translate into reduced EMI for housing loans, vehicle and other retail loans.  Working capital loans for industry would also become cheaper.
4 Customer Ease – Return of documents provided as security To reduce harassment and bring in greater efficiency, all PSBs would ensure mandated return of loan documents within 15 days of loan closure.  This would benefit all borrowers who have mortgaged assets including borrowers under the MUDRA scheme, Self Help Groups, Micro Finance Institutions etc.
5 Support to NBFCs/ HFCs More credit support for purchase of houses, vehicles, consumption goods by way of providing additional liquidity support of INR 20,000 crores by National Housing Bank (‘NHB’) to HFCs. This would aggregate to INR 30,000 crores of support by NHB.

In addition, Partial Credit Guarantee scheme has been framed for purchase of pooled assets of NBFCs/ HFCs upto INR 1 Lakh crores would be monitored at the highest level in each bank

Further, it has been decided that all prepayment notices issued to NBFCs would be closely monitored by Banks.
6 Transparent One Time Settlement (OTS) Policy In case of loans which have been considered as Stresses Assets or Non-Performing Assets (‘NPAs’), Banks have been advised to issue an improved and transparent OTS policy for settling overdues with the borrowers. The revised Policy would be based on a check box approach, i.e., OTS would be applicable if certain prescribed conditions are fulfilled.  This would lead to increased transparency in the entire process, revive credit growth, contribute to recoveries for Banks and benefit MSME and retail borrowers in settling their overdues.
7 Protecting honest decision making by bankers in commercial decisions In order to provide a support to aid in the decision making process by Bankers and to prevent any kind of harassment pursuant to any genuine commercial decisions taken by bankers, the Central Vigilance Commission (‘CVC’) has issued directions to the Internal Advisory Committee (IAC) in respective banks to classify cases as vigilance and non-vigilance. The decision of the IAC and the Bank’s Chief Vigilance Officer (‘CVO’) would be treated as final.
8Use of Bank KYCs by NBFCs NBFCs would now be permitted to use the Aadhaar authenticated bank KYC to avoid repeated processes.  Necessary changes to this effect would be made in the Prevention of Money Laundering Act, 2002 (‘PMLA’), the PMLA Rules and the Aadhaar Regulations

This would facilitate easier and fast-tracked onboarding of customers.
9Co-origination of loans by PSBs jointly with NBFCs In order to take advantage of the liquidity with PSBs and ensure last mile customer connect of NBFCs, all PSBs have been advised to fast track collaboration for granting loans to various segments like – MSMEs, Small traders, Self Help Groups, MFIs etc. in co- origination mode with NBFCs.

6. MSME Sector

1MSME Bill discounting through GSTN The Trade Receivable Discounting System (‘TreDS’) is an online bill discounting platform that helps cash-starved micro, small and medium enterprises (MSMEs) raise funds by selling their trade receivables to buyers.

In order to enhance market for bill discounting for MSMEs the TReDS would be facilitated to use the Goods and Services Tax Network (‘GSTN’) system in the medium term.
2Definition of MSME The Government is actively considering necessary amendments to the MSME Act by moving to towards a single definition of MSME.
3Recommendations of the UK Sinha Committee The UK Sinha Committee constituted by the Government has provided various recommendations on the ease of credit, marketing, technology, delayed payments etc.

The Government would study the recommendations and take necessary measures within the next 30 days.

7. Financial Markets

1 Deepening of bond markets in India In order to improve access to long term finance, the Government has proposed to establish an organisation to provide Credit Enhancement for infrastructure and housing projects in order to enhance debt flow towards such projects.

The government would soon take further action on development of Credit Default Swap markets, in consultation with the Reserve Bank of India (‘RBI’) and Securities and Exchange Board of India (‘SEBI’).

In order to improve domestic market in bonds, the Ministry of Finance would work with the RBI to make it more conducive for investors and bond issuers, as well as facilitate increased trading for price discovery

The Government has further amended the relevant Company law regulations to remove the requirement for creation of a Debenture Redemption Reserve (DRR) of outstanding debentures in respect of listed companies, NBFCs and HFCs, which would make more funds available at disposal for operational and business purposes.
2Access of Indian Companies to the Global Markets The Depository Receipt Scheme issued in 2014 is expected to be operationalised soon by the SEBI. This would give Indian companies increased access to foreign funds through American Depository Receipts (‘ADR’) and Global Depository Receipts (‘GDR’).
3 Use of Aadhaar based KYCs for domestic retail investors In order to improve market access for the domestic retail investors, Aadhaar-based KYC has been permitted for opening of Demat account and making investments in mutual funds. The necessary notification for amendments in PMLA Rules would be issued.  This is expected to increase the scope of garnering investments from retail investors.
4 Simplified KYC for foreign and investors and FPIs The KYC procedure for foreign investors including FPIs would be simplified further in order to improve market access.
5 Offshore Rupee market In order to bring the offshore Rupee market to Domestic stock exchanges and permit trading of USD – INR derivatives in the International Financial Services Centre (‘IFSC’) of Gujarat International Finance Tec-City (‘GIFT’), the Ministry of Finance is working with the RBI to introduce various measure for facilitating increased participation.

8. Infrastructure

1 Delayed Payments All delayed payments from Government/ CPSEs would be monitored by the Department of Expenditure and performance reviewed by the Cabinet Secretariat from time to time.  This would provide cash flows into the system and facilitate investments into infrastructure development.
2 Payment of arbitration awards In case of any contractual disputes by Government/ CPSEs which are pending to be implemented pursuant to the receipt of Arbitral Awards, the Government has decided to make payment aggregating to 75% of the Arbitral awards, while parallelly pursuing any legal remedies available and pending any scrutiny.

These payments would be implemented and monitored by the Cabinet Secretariat
3Investments for developing modern infrastructure over 5 years The Department of Economic Affairs has constituted an Inter-Ministerial Task force to finalise the pipeline of infrastructure projects and making investments of INR 100 lakh crores over the next 5 years.

This initiative is expected to boost growth and creation of jobs. These projects would be monitored actively to accelerate capital expenditure and investments in the economy

9. Automotive Sector

  1. All BS IV vehicles purchased till 31 March 2020 would remain operational for the entire period of registration.
  2. The revision of one-time registration fees for vehicles is being deferred till June 2020.
  3. Both Electric Vehicles (‘EVs’) and Intermediate commercial vehicle (‘ICVs’) would continue to be registered even after April 2020
  4. The Government’s focus would be on setting up of infrastructure for development of automobile ancillaries/ components including batteries for export.
  5. The Government has lifted the ban on purchase of new vehicles for replacing all old vehicles by its Departments in order to boost demand. The Government expects other stakeholders in the economy to follow suit
  6. The Government is actively considering various other measures including the introduction of a scrappage policy for old vehicles.

10. Housing Sector

1Relaxation
of ECB guidelines for Affordable Housing
ECB guidelines would be relaxed to facilitate financing of eligible home buyers under the PMAY, in consultation with RBI.
 
These benefits are in addition to the existing ECB norms for the affordable housing segment.
2House Building AdvanceThe interest rate on House Building Advance shall be lowered
and linked with the 10 Year Government Securities (G-Sec) Yields.
 
Government servants contribute to a major component of demand for houses. This will encourage more government servants to buy new houses.
3Special Window for affordable and middle-income HousingA Special Window to provide last mile funding for housing projects of the following categories in order to focus on construction of unfinished units:
· Projects which are not considered as Non-Performing Assets (NPAs)
· Projects which are not the subject matter of proceedings before the National Company Law Tribunal (NCLT)
· Projects which are Net-worth positive
· Projects in the affordable and middle-income category segments
· The objective is to focus on construction of unfinished units.
 
The Government on the lines of National Investment and Infrastructure Fund (NIIF), would also contribute to the fund along with the rest of the investors like LIC, other institutions and Private capital from banks / sovereign funds / DFIs etc.
 
The Fund shall be set up as a Category – II Alternative Investment Fund Trust (AIF) and would be professionally run with experts from Housing and Banking sectors.
 
The fund size is expected to be INR 10,000 crores and would receive contributions from the Government and similar amounts from outside investors.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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Measures to Boost Economy – Part 1 | Announcements by Finance Ministry

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