With the last throes of the demonetization saga closely nipping at the government's heels, much theatre and fanfare accompanied the introduction of its 2017-18 budget. Tension was heightened as the union budget was merged with the railway budget, reportedly for the first time in 92 years.

Expectations were wide ranging. While banks expected a proposal to establish a "bad bank" to alleviate the non-performing asset (NPA) crisis, the manufacturing and industrial sector expected a significant reduction in corporate income tax rates. Similarly, capital markets' investors expected an end to the securities transaction tax. Also predicted were various sops to give a fillip to the government's aim of moving towards a cashless economy.

Although the budget didn't introduce any radical reforms or measures, neither did it leave the economy disheartened or dejected. For starters, while banks didn't get the "bad bank" they had been hoping for, the budget proposed that interest for NPAs would be taxed on an actual receipt basis rather than an accrual basis, thereby removing the burden of paying tax on unrealized income for some banks. The proposal to increase allowable (i.e. tax deductible) provision on NPAs from 7.5% to 8.5% was also well received.

Another well received proposal would allow listing of security receipts issued by trusts established by asset reconstruction companies for resolving NPAs. By way of brief background, the lack of a secondary market in such security receipts has reduced investor interest in this asset class. By allowing security receipts to be listed and traded, the budget hopes to improve capital flows into this sector. Tellingly, in its meeting on 11 February, the board of the Securities and Exchange Board of India approved the listing and trading of security receipts as part of its action plan for 2017-18.

While a press release dated 29 October 2015 of the Central Board of Direct Taxes had mentioned that the concessional withholding tax rate of 5% would be applicable on rupee denominated bonds, this had not been included in the 2016 Finance Act. While likely an inadvertent oversight, in a corrective move, the budget rectified this by announcing that the time period for the withholding tax rate of 5% applicable on interest earned by foreign investors on Indian bonds would be extended from 30 June 2017 to 30 June 2020, and that this concession would also be applicable to rupee denominated bonds.

Foreign portfolio investors (FPIs) have also welcomed an unexpected reform in the budget, exempting category I and category II FPIs from indirect transfer provisions introduced in the Income Tax Act in 2012. The budget also proposed inserting a provision in the Income Tax Act clarifying that indirect transfer provisions would not apply in the case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India.

Both the industry and foreign investors have welcomed the budget proposals to phase out the Foreign Investment Promotion Board and to further liberalize the foreign direct investment (FDI) policy, thereby streamlining FDI flows into India. Notably, the budget also announced the government's intent to introduce a bill for the resolution of insolvent financial entities. Together with the Insolvency and Bankruptcy Code, this is expected to provide a consolidated and comprehensive insolvency resolution process.

Other financial sector reforms proposed in the budget include: implementing a completely online registration process for financial market intermediaries; providing a common application form for FPIs for registration, the issue of a permanent account number, and opening of bank and dematerialized accounts; and categorizing non-banking financial companies fulfilling prescribed net worth criteria as "qualified institutional buyers".

A little deliberated proposal is to amend the Arbitration and Conciliation Act to "streamline institutional arrangements for resolution of disputes in infrastructure related construction contracts, PPP and public utility contracts". This is expected to positively impact India's currently abysmal global rating for contract enforcement. While lacking in bold moves, the budget was nevertheless favourably received by nearly all segments in the economy. While there are the usual naysayers, long-time observers have commended the sensible proposals in the budget, and in particular, the proposal to adhere to a fiscal deficit target of 3.2%. While the government is clear about its bold plans for transforming the Indian economy, it is noteworthy that the government is also committed to do so in a sustained and incremental manner.

This article was first published in the MARCH 2017 issue of the India Business Law Journal

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