Economy Matters

1
FOREWORD
JANUARY 2016
T
he recent decline in China’s currency, the Yuan, which has fuelled turmoil in Chinese stock
markets , highlights a major challenge facing the country: how to balance its domestic and in-
ternational economic obligations. The approach the authorities take will have a major impact
on the wellbeing of the global economy. The Yuan, which is set to be included in the IMF’s special
drawing rights (SDR) basket, has seen a close to 5 per cent drop in value in 2015. Much of the devalu-
ation of the Yuan is aimed at propping exports growth as China’s GDP growth rate slumped below
the crucial 7 per cent level in the third quarter of last year, signalling the end of two decades of
double-digit growth, which propelled the world’s most populous country to a superpower status in
the global economic order. In the aftermath of the financial crisis of 2008-09, China stood tall to carry
the world on its shoulders. With the global economic outlook muted this year, China’s slowdown is
an extremely worrying sign for the world economy. The Chinese authorities need to be careful of let-
ting the Yuan’s value drop significantly as the drop in China’s exports is mainly the result of sluggish
global demand, and the collapse of the Yuan would only increase the risk of competitive devaluations
in neighboring countries, creating a so-called currency war.
Business sentiment within industry has shown some improvement during the previous quarter of the
current fiscal, indicating higher confidence of industry in the economy. The prevailing mood of busi-
ness finds a reflection in the CII Business Confidence Index (BCI) for Oct-Dec 2015 (Q3FY16) quarter,
which rose marginally to 53.9 as against the level of 53.4 recorded in the quarter ending September,
2015. The BCI recovered this quarter after falling in the previous two quarters.Improvement in the
business sentiments, albeit mild, is welcome news at a time when global economic situation contin-
ues to remain under stress. In order to sustain the improvement, it would be crucial that we continue
to make necessary policy changes to invigorate domestic demand, boost investment and reverse the
decline in exports. Even as there is no sustainable sign of betterment in demand conditions, majority
of the respondents reported significant improvement in the ease of doing business since the forma-
tion of new government at the Centre.
Against a challenging macroeconomic backdrop, the Union Budget is scheduled to be unveiled by
finance minister Arun Jaitley on February 29. In the last budget the FM had rightly recognised that
investment activity remains sluggish and therefore had focussed on stepping up government capital
expenditure. This has yielded positive results. Nevertheless, demand conditions remain subdued and
the appetite for investments in the private sector is below par. Given that exports will remain on a
declining trend on account of global economic downturn, it is imperative that domestic demand is
stimulated. CII would recommend that capital expenditure on key projects in sectors such as roads,
railways, irrigation and power be increased substantially. At the same time, the fiscal deficit should
not be allowed to increase, as this would put pressure on interest rates, which have just started to
soften.
Chandrajit Banerjee
Director General, CII

5
EXECUTIVE SUMMARY
JANUARY 2016
Global Trends
The Yuan reached its lowest level against the dollar in
five years on January 7, 2016, following repeated devalu-
ations by the People’s Bank of China in the first week of
the current financial year. Chinese policy makers have
pushed the currency lower to try and help boost the
competitiveness of the country’s exporters. Addition-
ally, a weaker Yuan is feared to drive the global econo-
my closer to a recession as the purchasing power of the
world’s second largest economy deteriorates every time
the currency is devalued. Moving further, Japan narrowly
escaped a second recession under the current Abe ad-
ministration when the revised July-September GDP data
marked annualized 1.0 per cent growth from the previous
quarter. But the pickup in consumer spending and capital
investments by businesses remains sluggish, and exports
are dampened by decelerating growth in emerging eco-
nomic led by China. The demand in the economy has to
be stimulated by attacking the private sector’s chronic
savings surplus. The Japanese government forecasts that
GDP growth in the fiscal year beginning in April 2016 will
reach 1.7 per cent in real terms — up sharply from around
1 per cent estimated for fiscal 2015 and more optimistic
than what many private-sector economists predict.
Domestic Trends
IIP for the month of November 2015 declined sharply to
-3.2 per cent, the first contraction in a year. Although a
slowdown was expected on account of Diwali and a sharp
drop in factors such as auto sales but other factors such
as impact from the Chennai floods and steep falls in capi-
tal goods and manufacturing may have pushed the print
into negative territory. The base effect for the month was
also considerably adverse. The data print for this month
could be a blip; hence industrial output would recover in
the remaining months of this fiscal. In some more bad
news for the economy, rising prices for some food prod-
ucts and firm demand during the festival season pushed
up retail inflation (CPI) to high of 5.6 per cent in Decem-
ber 2015. However, the sequential momentum of head-
line CPI index edged down. It is however interesting to
note that though CPI inflation has shown a spike in the
last few months, it still remains more-or-less range bound
in RBI’s target range. On the external front, exports have
now contracted for the thirteenth consecutive month in
December 2015, worse than the steep decline witnessed
during the credit crisis of 2008-09, mainly due to tepid
global demand and a volatile global currency market.
Sector in Focus: Tax Reforms - Winds of
Change and India’s Response
India’s strong growth potential amid a difficult global en-
vironment makes it an attractive investment destination.
There are high expectations that the reforms envisioned
by the Government will provide new opportunities for
growth and investments. The tax reforms agenda is at a
prominent position in this context. Around the world, the
underlying trend is of countries moving towards a broad-
based, low-rate corporate tax environment. At the same
time, many countries are also gearing up to introduce BE-
PS-related tax reform to protect their tax turf and check
profit shifting. The final BEPS reports on all 15 focus areas
addressing Base Erosion and Profit Shifting have been
made public. These trends and forces are redrawing the
architecture of International Taxation. An inevitable cor-
ollary to these developments will be a rise in tax disputes.
So how is India responding to the changes? The Finance
Minister has announced a phased reduction in the corpo-
rate tax rate in keeping with the global trend. The corpo-
rate sector will also need to forego some of the current
incentives in lieu of the rate reduction. This will also be in
the interest of simplification of tax laws. On the indirect
taxes front, the most awaited tax reform in India is the
Goods and Services Tax (GST). While the Constitutional
amendment to enable the implementation of GST is still
pending, the Industry hopes for an early introduction of
a comprehensive and fair GST that will propel economic
growth.
Focus of the Month: Budget Expectations
Against a challenging macroeconomic backdrop, the Un-
ion Budget is scheduled to be unveiled by finance min-
ister Arun Jaitley on February 29. Expectations are high
that the government may announce increase in tax ex-
emption limit on savings. As private sector investment
growth has remained tepid this year, higher savings are
expected to make extra resources available to improve
investment activity in the economy. Regarding the fiscal
deficit target, government is confident of meeting the fis-
cal deficit target of 3.9 per cent of GDP for 2015-16, and 3.5
per cent next fiscal, despite pressure of additional outgo
on account of the 7th Pay Commission and OROP. In this
month’s Focus of the Month, experts provide their views
on the expectation from the forthcoming Union Budget.

ECONOMY MATTERS 6
GLOBAL TRENDS
China on Crossroads of Transition as Yuan
Depreciates
O
n January 7, 2016, the People’s Bank of China
cut its reference rate for the Yuan by 0.5 per
cent, the most since August 2015’s two per
cent devaluation and the eighth straight day that the
PBOC guided the Yuan lower. The move sent the Yuan
falling to 6.59 to the US dollar, its weakest since Febru-
ary 2011. This has resulted in global stocks, currencies
and commodities diving and sparking widespread fears
of a currency war.
move was believed to be a desperate attempt to boost
exports in support of an economy that is growing at
its slowest rate in a quarter century, though the PBOC
claimed that it was a part of its reforms to move to-
wards a more market-oriented economy. Since the rela-
tive size of the devaluation appeared to be in line with
In 2015, the People’s Bank of China had surprised mar-
kets with three consecutive devaluations of the Yuan,
knocking over 3 per cent off its value. Since 2005, Chi-
na’s currency had appreciated 33 per cent against the
US dollar and the first devaluation on August 11 marked
the largest single drop in 20 years. The unexpected

7
GLOBAL TRENDS
JANUARY 2016
The Yuan reached its lowest level against the dollar in
five years on January 7, 2016, following repeated deval-
uations by the People’s Bank of China in the first week
of the current financial year. Chinese policy makers
have pushed the currency lower to try and help boost
the competitiveness of the country’s exporters. But the
move unleashed turmoil in both local and international
stock markets by raising concerns that China’s economy
was weakening too quickly. Additionally, a weaker Yuan
is feared to drive the global economy closer to a reces-
sion as the purchasing power of the world’s second
largest economy deteriorates every time the currency
is devalued.
Fears have been elevated about how bad is the slow-
down in the world’s second-largest economy. While
markets anticipated that Beijing would allow the Yuan
to trade more in line with market forces after an entry
into the IMF’s reserve currency basket, they now fear
that Beijing, to help its exporters, is allowing the Yu-
an’s rapid depreciation to accelerate, hinting economy
is even weaker than imagined, or that official figures
show.Official economic growth in China is still running
at just below 7 per cent. But moves to devalue the Yuan
suggest attempts to shift the economy from an export-
led one to a consumer and services-led one are running
into problems. China is responsible for 17 per cent of
all the world’s economic activity, so any downturn in
spending there affects the rest of the world. Given the
panic in global markets in August 2015, another round
of Yuan weakening suggests Beijing thinks the economy
is struggling enough to warrant this drastic move. Ex-
ports in November dropped 6.8 per cent year-on-year,
the fifth straight month of decline, while witnessing a
nine-month decline in manufacturing indices,as China
struggles with weak global demand, rising labour costs
and a strong currency.
A weaker Yuan is also bad news for export-oriented
economies like Singapore, Hong Kong, South Korea and
Taiwan as their exports will be more expensive to Chi-
nese buyers. Their exports to other countries will also
have to compete against Chinese rivals who have the ad-
vantage of a weaker currency. The resulting capital out-
flows has hit Asian currencies and commodities. China
is the world’s biggest user of energy, metals and grains
and the Yuan’s sharp fall exacerbated the slump in the
currencies of big commodity suppliers like Australia,
New Zealand and Canada. Fears of a sharper slowdown
in China’s economy and market turmoil is also triggering
a sell-off in emerging-market assets by risk-averse inves-
tors.The currencies of South Korea, Taiwan and Singa-
market fundamentals, the PBOC’s claims could hold
water. After a decade of a steady appreciation against
the US dollar, investors had become accustomed to the
stability and growing strength of the Yuan and a drop
of more than 3 per cent had them rattled. China’s Presi-
dent Xi Jinping had pledged the government’s commit-
ment to reforming economy in a more market-oriented
direction ever since he first took office over two years
ago. That and the fact that China was determined to be
included in the IMF’s special drawing rights basket of re-
serve currencies made the POBC’s claim of devaluation
being a measure to allow the market to have a more
instrumental role in determining the Yuan’s value more
believable.

ECONOMY MATTERS 8
GLOBAL TRENDS
pore are the most vulnerable to a decline in the Yuan
as their exporters have the highest exposure to China
in Asia. To some extent, weaker currencies might help
Asian exporters recoup some of the competitiveness
they are losing to China, but at the cost of hurting the
buying power of consumers and companies and likely
raising the cost of their debt.
The devaluation could also reignite an Asian currency
war. It will put pressure on Asian emerging economies
like Vietnam, Malaysia and Indonesia to push down
their own currencies to help their exporters and to
prevent destabilizing capital flows. As it did in the 1997
Asian financial crisis, a competitive spiral of currency de-
valuations could result. Such competitive devaluations
serve only to crimp trade and economic growth, reduc-
ing imports without any benefit to export, according
to a research based on more than 100 countries by the
Financial Times.
Some say that China’s recent actions are indicative of a
deeper crisis. One important barometer relates to Chi-
nese labour strike data. Newly released figure from the
China Labour Bulletin reveal that the number of strikes
and workers’ protest dramatically increased at the end
of 2015 particularly in manufacturing, construction and
mining. As a result the labor costs for big firms tripled -
encroaching upon and often flattening profit margins.
In the beginning of 2016, manufacturing continued at
a nine month low and China’s trade share of GDP was a
third of that less than a decade ago. As a result, China
is in the throes of a major shift in the balance of power
between labour and capital, and is attempting to trans-
form its producers into consumers – a grand transition
from world’s supply side workshop to its next great
marketplace.China’s working population has shrunk
by 3.5 million. Many economists in the IMF state that
China is reaching a point of labor scarcity, the so-called
“Lewis turning point”, an inevitable developmental
phase when wages surge sharply, industrial profits are
squeezed, with a steep fall in investment. Indicatively,
real wages in China since 2001 have increased at a rate
of 12 per cent per annum and observers speculate the
recent devaluation of the Yuan reveals complications
in China’s attempt to shift from an export-led to a con-
sumer and services-led economy.
The current process in China is similar to the crisis in the
West in the 1960s and 70s. Changing labour-capital rela-
tions coupled with strikes and increased workers’ bar-
gaining power lead to higher wages and broader social
reforms, resulting in diminished labour output and high-
er costs of maintaining workers in production as well as
an increased “social wage”, squeezing profits further.
In the final phase: capital innovates by automating and/
or leaving for a more profitable terrain – however in
this case there are few if any options as an alternative
to China. Thus, the transition may deepen the crisis of
accumulation in the “real economy” for transnational
capital.
The devaluation of the Chinese currency is a worrying
development for India and will make Indian exports ex-
pensive while widening the trade deficit with the neigh-
boring nation, even though the depreciation of the
Yuan is definitely going to make imported goods from
China cheaper. In 2014-15, the bilateral trade between
the countries stood at US$72.3 billion with the trade
gap at US$49 billion. The government and the Indian
industry have time and again raised concerns about the
widening deficit. India has been pushing China to give
greater market access to Indian products such as agri-
cultural products, IT and pharmaceuticals. China wants
to push goods into different countries, particularly In-
dia, and that would become even cheaper with the cur-
rency devaluation.

9
GLOBAL TRENDS
JANUARY 2016
The growth in private final consumption expenditure
improved to 0.4 per cent in the third quarter of 2015
as compared to a flat growth witnessed in the similar
quarter in 2014. Major companies continue to enjoy
improved profits, and say they are ready again to offer
wage hikes. It remains unclear whether pay raises will be
broad enough across the economy to shore up personal
consumption, which has remained weak since the first
consumption tax hike in 17 years in April 2014. Growth in
government final consumption expenditure saw a very
slight improvement to 0.3 per cent as compared to 0.2
per cent in the third quarter of 2014. Growth in gross
fixed capital formation expanded to 0.3 per cent in the
third quarter of 2015 as compared to a contraction of
0.9 per cent in the third quarter of 2014.
Japan narrowly escaped a second recession under
the current Abe administration when the revised July-
September GDP data marked annualized 1.0 per cent
growth from the previous quarter. But the pickup in
consumer spending and capital investments by busi-
nesses remains sluggish, and exports are dampened
by decelerating growth in emerging economic led by
China. The combination of fiscal stimulus and mon-
etary easing known as Abenomics has spurred corpo-
rate profits, increased tax revenue and fueled about 70
per cent gain in the benchmark Topix stock index since
Prime Minister Shinzo Abe’s election in December 2012.
The Japanese economy has been showing rhythmic
Insufficient private demand remains the core problem.
The savings of households in Japan are no longer ex-
ceptional. In 2013, Japan’s household savings were 3.8
per cent of Japan’s GDP, against 4.8 per cent in the UK,
5.1 per cent in the US, 6.1 per cent in Italy and 6.3 per
cent in Germany. Despite Japan’s corporate savings be-
ing exceptional, increasingly, Japan’s corporations do
not invest, to match their savings, because of dearth
of good investment opportunities in Japan. Consump-
tion is a very low share of GDP, because the income of
households, that is the workers’ compensation, is a low
share of GDP. The demand in the economy has to be
stimulated by attacking the private sector’s chronic sav-
ings surplus.
fluctuations in the GDP growth for the past nine quar-
ters. Growth in GDP in the third quarter of 2015 stood
at 0.3 per cent, as compared to a contraction of 0.7 per
cent witnessed in the comparable quarter of 2014. This
was driven mainly by acceleration in gross fixed capital
formation, and also in part by rise in growth in private
final consumption expenditure and exports. Over the
past nine quarters, the Japanese economy has been
coming above and going under the water periodically.
Pulsing peaks and troughs, as high as 1.2 per cent in the
first quarter of 2014 and as low as -1.9 per cent in the
second quarter of 2014 respectively, have marked the
growth scenario.
Japanese Economy Narrowly Misses Recession
in 3Q15

ECONOMY MATTERS 10
GLOBAL TRENDS
Exports’ growth in the economy has mirrored the fluc-
tuations in the GDP growth in Japan. Growth in exports
rose to 2.7 per cent in the third quarter of 2015 as com-
pared to 1.6 per cent in the third quarter of 2014. Im-
ports, which are a subtraction from the GDP, also saw
a minor increase in growth to 1.7 per cent in the third
quarter of 2015 as compared to 1.1 per cent in the similar
quarter in the previous year.
Prices in the country have been on a downward trend
for quite some time now. While inflation in the econo-
my stood at mere 0.2 per cent in the third quarter of
2015, steep downfall from 3.4 per cent in the compara-
ble quarter in 2014. This was driven by all components –
food, energy, services. Food inflation fell to 2.9 per cent
in the third quarter of 2015 as compared to 5.5 per cent
in the third quarter of 2014. Energy prices continued to
contract and witnessed a de-growth of as high as 10.4
per cent in the third quarter of 2015 as compared to an
inflation in energy prices to the tune of 6.9 per cent a
year ago. Prices of services, except housing, too saw a
fall in growth to 0.9 per cent in the third quarter of 2015
as compared to an inflation in prices of services of 2.9
per cent in the similar quarter in the 2014.
Japan’s declining working population and increasing
number of pensioners are keeping demand down and
inflation rates low. Abe has been trying to raise wages to
also reverse deflation. For the same, corporate income
could be redistributed in two ways. One way would be
via higher taxes that are then remitted to households,
via lower taxation of income and consumption. But in
Japan, uniquely, it might be possible to persuade com-
panies to act in concert, to raise wages.

11
GLOBAL TRENDS
JANUARY 2016
The BOJ scrapped interest rates as its main policy tool
in 2013 and instead set a target for the size of the mon-
etary base. It has kept its deposit rate at 0.1 per cent.
Governor Haruhiko Kuroda has said he is confident that
he can attain the 2 percent inflation target around the
six months through March 2017, but that timing could
change because of the slump in oil prices. Kuroda ini-
tially said the bank aimed to reach the goal by March
2015. While the majority view of economists is that the
BOJ is far from reaching its inflation target, most say it
will stick to its pace of quantitative easing rather than
expand or reduce it. The pressure is now on Abe to take
up the mantle of stimulus as liquidity in the bond mar-
ket evaporates, they argue.
The Japanese government forecasts that GDP growth
in the fiscal year beginning in April 2016 will reach 1.7 per
cent in real terms — up sharply from around 1 per cent
estimated for fiscal 2015 and more optimistic than what
many private-sector economists predict. Meanwhile,
the consumption tax is scheduled to be raised again
in April 2017, from 8 to 10 per cent. It’s expected that
the rush to buy before the tax hike will boost consumer
spending into the latter half of fiscal 2016 and shore up
growth to a certain extent. But it’s widely believed that
the impact will not be as strong as before the April 2014
hike, when the GDP grew an annualized 5 per cent in
the January-March period — before declining by 7.2
percent in the subsequent quarter.
The policies known as Abenomics, after Shinzo Abe,
Japan’s prime minister since December 2012, were a
bold attempt to revitalize the Japanese economy. The
quiver of Abenomics contains three “arrows”: fiscal
policy, monetary policy and structural reforms. Of the
three, monetary policy has been shot most aggres-
sively. Under the policy of quantitative and qualitative
easing adopted in April 2013, the Bank of Japan has in-
creased its balance sheet from 34 per cent of gross do-
mestic product at the end of the first quarter of 2013 to
73 per cent two and a half years later. Relative to GDP,
the BoJ’s balance sheet dwarfs those of the Federal Re-
serve, the European Central Bank and the Bank of Eng-
land. The arrow of fiscal policy has, however, not been
shot. According to the International Monetary Fund, Ja-
pan had a cyclically adjusted fiscal easing of only 0.4 per
cent of gross domestic product in 2013. The cyclically
adjusted fiscal deficit tightened by 1.3 per cent of GDP in
2014, largely because of a misconceived jump in the rate
of consumption tax, from 5 to 8 per cent, in the spring
of 2014. A comparable tightening is forecast for 2015.
Finally, structural reforms have been quite modest. The
government has reformed agricultural co-operatives.
It has also agreed to liberalization in the Trans-Pacific
Partnership (TPP), the US-led trade pact. It has made
modest progress on energy and tax reform. Improve-
ment in opportunities for women is moving at a glacial
pace. Increasing immigration remains largely taboo.
The labour market has entrenched differences between
permanent and temporary workers.

ECONOMY MATTERS 12
DOMESTIC TRENDS
Industrial Production Contracts in
November 2015
I
IP for the month of November 2015 declined sharply
to -3.2 per cent, the first contraction in a year. Al-
though a slowdown was expected on account of Di-
wali and a sharp drop in factors such as auto sales but
other factors such as impact from the Chennai floods
and steep falls in capital goods and manufacturing may
have pushed the print into negative territory. The base
effect for the month was also considerably adverse. The
data print for this month could be a blip; hence indus-
trial output would recover in the remaining months of
this fiscal. On a cumulative basis, industrial production
growth has improved at higher pace of 3.9 per cent
in April-November 2015 compared with 2.5 per cent in
the corresponding period last year. In FY16, we expect
industrial production to grow at a higher rate as com-
pared to the previous fiscal on the back of improving
global conditions and policy aided domestic upturn.

13
DOMESTIC TRENDS
JANUARY 2016
Mirroring the poor performance of the overall indus-
trial sector, output of the eight core industries also con-
tracted to the tune of 1.3 per cent in November 2015 as
compared to 3.2 per cent growth posted in the previous
month. The core sector index comprises 38 per cent of
the total weightage of items included in the Index of In-
dustrial Production (IIP). The index’s cumulative growth
On the sectoral front, growth of manufacturing sector,
which constitutes over 75 per cent of the index, declined
to 4.4 per cent in November 2015 as compared with
healthy 10.6 per cent growth in the previous month. In
terms of industries, seventeen (17) out of the twenty
two (22) industry groups (as per 2-digit NIC-2004) in the
manufacturing sector showed negative growth during
the month of November 2015 as compared to the corre-
sponding month of the previous year. Electricity output
decelerated sharply to 0.7 per cent in November 2015
as compared to 9.0 per cent growth in the previous
month. Mining output growth also slowed down to 2.3
per cent from 5.2 per cent in the previous month. The
recent auction of coal mines by the government could
provide some impetus to coal production in the months
to come.
The details in the use-based segment are fairly encour-
aging. Capital goods output is usually a volatile compo-
nent but it had shown steady growth for four months
before contracting steeply in November 2015. Private
capex continues to remain weak in the economy and
hence the Government’s role in capital expenditure
from April to November 2015-16 stood at 2.0 per cent,
as compared to 6.0 per cent during the corresponding
period of 2014-15. Out of the eight core industries only
fertilisers and coal reported healthy output numbers.
However, production of refinery products, crude oil,
natural gas and steel dwindled in the period under re-
view.
becomes crucial to support growth recovery. Capital
goods output contracted by a hefty 24.4 per cent in the
month under review as compared to healthy growth to
the tune of 16.3 per cent in the previous month. Con-
sumer durables have been on a strong footing for quite
a few months now and the November 2015 print stood
at 12.5 per cent, albeit lower than the robust 42.3 per
cent posted in the previous month. This component has
remained positive for six months in a row now and has
been aided by continuous improvement in sectors such
as passenger cars. The strength in consumer durables
helped overall consumer goods to post positive growth
to the tune of 1.3 per cent in November 2015. Consumer
goods have been positive for a while now but perfor-
mance has mostly been tepid on account of weakness
in consumer non-durables. For the month of Novem-
ber 2015, the non-durables sector registered negative
growth to the tune of -4.7 per cent after posting posi-
tive growth in the previous month. The weak growth of
consumer non-durables is also reflective of the cumula-
tive impact of two consecutive years of drought and the
growing distress in the rural economy.

ECONOMY MATTERS 14
DOMESTIC TRENDS
Wholesale Price Index (WPI)-based inflation moved up
to a 12-month high of -0.7 per cent in December 2015,
recording a rise for the fourth straight month from -2.0
per cent in November 2015. As per the revised data, the
inflation figure for October 2015 was slightly scaled up
to -3.7 per cent from -3.8 per cent reported provision-
ally. An increase in WPI inflation in December 2015 was
mainly driven by primary articles and fuel products. Fur-
ther, the WPI inflation continued to be in the negative
zone for the fourteenth straight month in December
2015. WPI has been experiencing deflation on annual
basis from November 2014. Sustained decline in WPI is
good news for corporate as WPI is input price for manu-
facturing process.
Mirroring the rise in WPI based inflation, rising prices for
some food products and firm demand during the fes-
tival season pushed up retail inflation (CPI) to high of
5.6 per cent in December 2015. However, the sequential
momentum of headline CPI index edged down to -0.4
per cent on a month-on-month basis in December 2015
from 0.4 per cent on month-on-month basis previously.
Food inflation came in at multi-month highs of 6.3 per
cent as compared to 6.1 per cent in the previous month.
Cereals inflation continued to remain muted. Going
ahead, this number is likely to see correction as prices
cool and the unfavourable base effect wears off. A sig-
nificant development seen was an uptick in vegetables
CPI as compared to the sharp cooling in on-the-ground
prices. Vegetables inflation came in at 14.2 per cent as
compared to 3.9 per cent posted in the previous month.
Vegetables CPI is likely to correct in the coming months.
Outlook
Industrial production, which has drifted into the negative terrain in November 2015 on account of the steep slide in
the growth of manufacturing and electricity sectors, is much below expectations and could be the impact of sub-
dued activity experienced in the aftermath of the festive season. However, going forward, we hope that growth
would pick up in the coming months as pro-active reform initiatives taken by the government in recent months
would make a positive impact on investment decisions and spur a turnaround in demand. In FY16, we expect in-
dustrial production to grow at a higher rate as compared to the previous fiscal on the back of improving global
conditions and policy aided domestic upturn.
Both Indices of Inflation Rise in December 2015

15
DOMESTIC TRENDS
JANUARY 2016
Core inflation showed a marginal uptick to 4.7 per cent
in December 2015 as against 4.6 per cent in the previous
month. However, the subdued domestic demand cou-
Rising food prices, pushed primary products prices
higher to 5.5 per cent in December 2015 as compared
to 2.3 per cent in the previous month driven by higher
food prices. Inflation in the prices of food articles rose
to 8.2 per cent in December 2015 from 5.2 per cent in
the preceding month. This was the highest rate of food
inflation since July 2014. This was mainly due to rise in
prices of condiments & spices (to 21.7 per cent from 18.9
per cent), vegetables (to 20.6 per cent from 14.1 per
cent; despite the easing in inflation for onions to +26.0
per cent from 52.7 per cent and tomatoes to 60.2 per
cent from 137.6 per cent), eggs, meat & fish (to +5.0 per
cent from -2.2 per cent), cereals (to 1.6 per cent from 0.5
per cent) and fruits (to +0.8 per cent from -2.3 per cent).
While inflation for pulses eased mildly, it remained at an
alarming 55.6 per cent in December 2015 as compared
to 58.2 per cent in November 2015. Prices of pulses have
risen due to shortage in production. Normally, food
prices moderate with the onset of rabi harvesting sea-
son. But, due to intermittent unseasonal rainfalls and af-
fect of El Nino resulting into drought in some areas and
flood in some major agri commodities growing regions,
pled with weak international crude prices are likely to
support muted core inflation, which we expect to stay
below 5 per cent in the coming months.
the food prices remain elevated. Inflation for primary
non-food articles firmed up to 7.7 per cent in December
2015 from 6.3 per cent in November 2015, while inflation
for other non-food articles decelerated mildly to 7.9 per
cent in December 2015 from 8.0 per cent recorded in
the previous month.
Deflation in fuel sector increased to 9.1 per cent in De-
cember 2015, as compared to deflation to the tune of
11.1 per cent in the month before, reflecting the hike in
prices of petrol and diesel announced on 15 November
by 36 paisa per litre and 87 paisa per litre respectively.
Manufacturing products recorded a deflation to the
tune of 1.4 per cent in December 2015, remaining flat as
compared to last year. The fall was on account of defla-
tion in the prices of textiles, chemicals & chemical prod-
ucts and basic metals, alloys & metal products. Non-
food manufacturing or core inflation, which is widely
regarded as the proxy for demand-side pressures in
the economy remained flat at -2.0 per cent during the
month as compared to -1.9 per cent during the previous
month.

ECONOMY MATTERS 16
DOMESTIC TRENDS
India’s merchandise exports contracted for the thir-
teenth consecutive month in December 2015, worse
than the steep decline witnessed during the credit cri-
sis of 2008-09, mainly due to tepid global demand and
a volatile global currency market. Exports contracted
by 14.7 per cent in December 2015, lower than 24.5 per
cent decline witnessed during the previous month. A
stronger rupee compared with its peers has also hurt
exports. The rupee has been the top performing emerg-
ing market currency in 2015, with the real effective ex-
change rate rising 3.7 per cent in the April-December pe-
riod. Further, net earnings from services trade touched
US$6.3 billion in November 2015, up just 0.2 per cent,
while cumulatively in April-November 2015, net earnings
from services fell 3.8 per cent compared with a year
ago, according to data released by the Reserve Bank of
India.
Exports of drugs and pharmaceuticals (8.2 per cent),
chemicals (1.1 per cent), readymade garments (5 per
cent) increased in December 2015, while exports of
gems and jewellery (7.8 per cent), engineering goods
(-15.7 per cent) and petroleum products (-47.7 per cent)
contracted. The eight items of export which turned pos-
itive during the month are coffee, tobacco, spices, ce-
real preparations and miscellaneous processed items,
chemicals, electronic goods, handicrafts (excluding
handmade carpets), plastics and linoleum. Given the
recent trend, exports are likely to fall below US$300 bil-
lion mark, for the first time since FY11. This is certainly
not good news as India aims to take exports of goods
Outlook
WPI index has shown deflationary trends since the last fourteenth consecutive month in December 2015 indicat-
ing slackness in economic activity across sectors. Retail inflation measured by the consumer price index (CPI) in-
creased for the fifth successive month in December 2015, pushed up by a surge in the monthly momentum. Food
inflation rose sharply in December 2015, driven especially by pulses and vegetables. It is however interesting to
note that though CPI inflation has shown a spike in the last few months, it still remains more-or-less range bound in
RBI’s target range. Going forward, we expect subdued demand conditions to keep CPI inflation capped with only
transient episodes of rise due to surge in food prices.
EXIM Scenario Continues to Remain Grim

17
DOMESTIC TRENDS
JANUARY 2016
and services to US$900 billion by 2020 and raise the
country’s share in world exports to 3.5 per cent from 2
per cent now. Exports in the past four fiscal years have
been hovering at around US$300 billion.
Worried by the continuous decline in exports, the gov-
ernment has raised duty drawback rates for exporters
and implemented the interest stabilization scheme in
November 2015. While the increase in duty drawback
rates will help exporters recover higher input tax outgo
that they pay during the process of making the final
product, the interest stabilization scheme will allow ex-
porters to receive bank loans at a lower rate of interest.
Imports too contracted by 3.7 per cent in December
2015 as against contraction of 30.2 per cent posted in
India’s trade deficit widened to US$11.7 billion in Decem-
ber 2015 as against a deficit of US$9.8 billion in Novem-
ber 2015. On a cumulative basis, trade deficit for April-
December FY2016 was US$99.2 billion, lower than the
deficit of US$111.7 billion during the same period previ-
Rupee has depreciated to its two-year low of 67.6 per
US$, losing close to 9 per cent till January 19th 2016
from the start of FY16. Much of this is based on short-
term trends possibly fuelled by capital exit in the con-
text of the collapse in both oil prices and the Chinese
stock market. FIIs have been in the sell-off mode in eq-
uity segment for last 3 months. From Jan 1 to Jan 20,
November 2015. During April-December 2015, India’s
cumulative imports were US$261 billion. This is a 17 per
cent drop from US$316 billion, the cumulative figure
for the same period last year. Non-oil imports picked
up 7.63 per cent in December 2015, while oil imports
contracted 33.2 per cent due to falling crude oil prices.
Amongst non-oil imports, gold imports remained strong
at US$3.8 billion in December 2015 as against US$3.5 bil-
lion in November. Non gold non crude imports, a broad
gauge of domestic demand and industrial recovery, fell
by 1.9 per cent in December 2015 as against contraction
to the tune of 22 per cent in November 2015. The con-
traction was driven by- coal (-35 per cent), mineral ores
(-22 per cent), fertilizers (-20 per cent), and chemicals
(-5 per cent).
ous year. Though improving domestic competitiveness
through structural reforms is crucial to improve exports
performance, we believe that can only materialize in
the medium-term. In the near-term, a weaker Rupee
can act as a catalyst to revive competitiveness.
2016, foreign institutional investors (FIIs) sold shares
worth Rs 7,146 crore in the domestic equity markets. US
is the biggest importer of crude oil. So when the crude
prices go down, it means US will be saving more dollars
to buy it, as a result dollar as a currency strengthens,
leading to fall of Indian rupee and other currencies at
the forex market.
Rupee Depreciates Sharply

ECONOMY MATTERS 18
DOMESTIC TRENDS
Business sentiment within industry has shown some
improvement during the previous quarter of the cur-
rent fiscal, indicating higher confidence of industry in
the economy. The prevailing mood of business finds
a reflection in the CII Business Confidence Index (BCI)
for Oct-Dec 2015 (Q3FY16) quarter, which rose margin-
ally to 53.9 as against the level of 53.4 recorded in the
quarter ending September, 2015. The BCI recovered this
quarter after falling in the previous two quarters.
Even more significantly, the improvement has been led
by the rise in the Current Situation Index rather than
the Expectation Index, implying that the rigorous policy
efforts being undertaken by the government in recent
months have positively influenced the business senti-
ments. CII-BCI is calculated as a weighted average of
the Current Situation Index (CSI) and the Expectation
The fall of Rupee has been also led by a strengthening
dollar as positive US economic data have raised expec-
tations over further hike in interest rates by the US
Federal Reserve. The rupee is also pressured by worries
over yuan devaluation by the Chinese authorities. De-
There are positive impacts of Rupee depreciation like
boosting export of industries like IT, handicrafts, and
pharmaceuticals textiles. However, there are negative
impacts like increase in import bill, inflation, burden for
Index (EI), with greater weight given to EI as compared
to CSI. These indices are based on questions pertain-
ing to performance of the economy and respondent’s
firm. Respondents are asked to rate the current and
expected performance on a scale of 0 to 100. A score
above 50 indicates positive confidence while a score
above 75 would indicate strong positive confidence. On
the contrary, a score of less than 50 indicates a weak
confidence index.
The CII 93rd
edition of quarterly Business Outlook Sur-
vey is based on over 200 responses from large, medium,
small and micro firms, covering all broad sectors and re-
gions of the country. The survey was conducted from
October-December 2015, covering more than 100 firms
of varying sizes.
preciation in the Chinese yuan earlier this month had led
to sharp sell-off in the Indian stock markets, affecting
the rupee movement. Chinese yuan has dropped nearly
1.5 per cent against the dollar since the beginning of
2016.
government and industrial foreign borrowings hurting
import based industries. Going forward, we expect Ru-
pee to remain range-bound against the US dollar.
CII Business Confidence Index Improves, Marginally

19
DOMESTIC TRENDS
JANUARY 2016
(i). Credit Growth
A major proportion of the respondents (34 per cent)
seemed unsure about the adequacy of the 125 basis
points cut in policy rates, by the RBI, in driving the re-
(ii). Ease of Doing Business
The government has spear-headed several initiatives
to improve ease of doing business (EODB) over the last
year ranging from the Make in India initiative to eas-
ing the FDI limits across various sectors, single window
clearances, E-biz portal etc. All these initiatives have re-
sulted in the improvement in India’s EODB ranking by
the World Bank as India jumped up 4 places to stand at
GENERAL ECONOMIC PROSPECTS
covery in credit growth. Closely enough, an equal pro-
portion of respondents (33 per cent each) felt that the
RBI’s policy actions may or may not support the recov-
ery in credit growth.
130 in 2016 from 134 in 2015. On the ground as well, the
governments initiatives seem to have had an impact on
the business environment as close to two thirds of the
respondents (64 per cent) felt that there has been a 10-
30 per cent improvement in ease of doing business, of
which 35 per cent felt there has been a 10-20 per cent
improvement while 29 per cent felt that there has been
a 20-30 per cent improvement.

ECONOMY MATTERS 20
DOMESTIC TRENDS
GENERAL BUSINESS PROSPECTS
(iii). Exchange Rate
A major share of the respondents (55 per cent) expect
the exchange rate to range between Rs 63 and Rs 67
(i). Capacity Utilisation
Close to half of the respondents (48 per cent) anticipate
capacity utilization to lie between 50-75 per cent in the
Oct-Dec quarter, marginally up from 47 per cent who
witnessed the same in Jul-Sep quarter. Additionally,
greater proportion of respondents (35 per cent) expect
per US dollar in 2015-16. This is mainly attributable to the
recent strengthening of the US dollar against all major
currencies of the world and the persistent weakness in
emerging market economies.
capacity utilization to lie above the 75 per cent level in
Oct-Dec 2015, up from 25 per cent who witnessed the
same in Jul-Sep 2015. Though the capacity utilization
has improved over the years, it still stands far below the
pre-crisis peak. To bridge this gap, the government has
undertaken reforms and initiatives that would help im-
prove business environment and overall demand condi-
tions in the economy.

21
DOMESTIC TRENDS
JANUARY 2016
(ii). Investment Plans
Major share of the respondents (59.8 per cent) felt that
their plans about investing in the domestic economy are
likely to remain unchanged in Oct-Dec 2015. Similarly, on
an international front, firms do not anticipate a change
in their international investment plans, with a majority
(iii). Overall Sales and New Orders
Firms continue to anticipate further improvement in
demand conditions, as 44 per cent of the respondents
expect new orders to improve in the Oct-Dec 2015,
up from 31 per cent who witnessed the same in Jul-
Sep 2015 quarter. Further, sales are also expected to
of respondents (70.5 per cent) of the expecting status-
quo in Oct-Dec quarter. The prevailing excess capac-
ity in the economy is holding back firms from making
new investments even though these firms anticipate
improvement in sales and new order in the said period.
improve as 44 per cent of respondents anticipate an
increase in sales as compared to 32 per cent who wit-
nessed the same in the Jul-Sep quarter. It is important
to note that firms are upbeat about the demand con-
ditions in the coming months even though half of the
firms registered no change in sales and new orders in
the Jul-Sep 2015 quarter.

ECONOMY MATTERS 22
DOMESTIC TRENDS
(v). Export and Import Trends
More than half the respondents expect no change in
the trade situation in the Oct-Dec 2015 quarter. On the
exports front, though a majority of the respondents
(54.8 per cent) expect status-quo on their export or-
ders, there has been an increase in the percentage of
respondents expecting their export orders to improve
Asked to rank the topmost concerns facing industry, 87
per cent respondents to the survey cited low domestic
demand, lack of consensus on economic reforms and
(20.5 per cent), as against 17.3 per cent who witnessed
the same in the previous quarter. On the other hand,
more than two thirds of the respondents (71.6 per
cent) anticipate import orders to remain unchanged in
the Oct-Dec quarter, as compared to 64.5 per cent of
respondents who witnessed the same in the previous
quarter.
fragile global economic recovery as among the top-3
constraints impacting investment.
(iv). Profits after Tax
Profit expectation has largely remained unchanged
from the previous quarter with majority of the respond-
ents (44.8 per cent) anticipating status-quo in after tax
profits as compared to 45.2 per cent of the respondents
who witnessed the same in the Jul-Sep 2015 quarter.
Further it is important to highlight that there has been
an increase in the proportion of respondents expecting
a decline in after tax profits in Oct-Dec 2015 quarter and
a corresponding decline in the share of respondents an-
ticipating an increase in after tax profits.

23
SECTOR IN FOCUS
Tax Reforms: Winds of Change and India’s Response
JANUARY 2016
I
ndia’s strong growth potential amid a difficult global
environment makes it an attractive investment des-
tination. There are high expectations that the re-
forms envisioned by the Government will provide new
opportunities for growth and investments. The tax re-
forms agenda is at a prominent position in this context.
Around the world, the underlying trend is of countries
moving toward a broad-based, low-rate corporate tax
environment. At the same time, many countries are
also gearing up to introduce BEPS-related tax reform to
protect their tax turf and check profit shifting. The final
BEPS reports on all 15 focus areas addressing Base Ero-
sion and Profit Shifting have been made public.
These trends and forces are redrawing the architecture
of international taxation. The years to come will see a
greater focus on multilateralism, more transparency
and reporting requirements, stricter tax enforcement,
and a new set of rules defining the way domestic/over-
seas profits are taxed. An inevitable corollary to these
developments will be a rise in tax disputes.
So how is India responding to the changes? The Finance
Minister has announced a phased reduction in the cor-
porate tax rate in keeping with the global trend. The
corporate sector will also need to forego some of the
current incentives in lieu of the rate reduction. This will
also be in the interest of simplification of tax laws.
On the indirect taxes front, the most awaited tax re-
form in India is the Goods and Services Tax (GST). While
the Constitutional amendment to enable the implemen-
tation of GST is still pending, the industry hopes for an
early introduction of a comprehensive and fair GST that
will propel economic growth. Indeed, India is taking the
right steps toward tax reforms. What is needed now is
a focus on effective and time-bound implementation of
the positive reforms already announced. To minimize
uncertainty, the industry looks to a structured consulta-
tive process as the Indian Government amends tax laws
in response to global developments. Equally important
will be the tax administrative reform. The alternate dis-
pute resolution mechanisms, in particular, need to be
improved to take on the challenge of newer controver-
sies that the transition will bring.
In this month’s Sector in Focus, we present excerpts
from a white paper on “Tax Reforms – Winds of change
and India’s response” which was released in the CII 3rd
Global Tax Summit held on 8th
October 2015 in Delhi. The
paper explores the changing tax landscape across the
globe. It also discusses the policy and administrative re-
forms needed in India for a facilitative tax environment
that will provide stability, and encourage investments
and growth.

ECONOMY MATTERS 24
SECTOR IN FOCUS
In the current global environment, the advanced econo-
mies are experiencing slow growth and many emerging
economies are facing difficulties in maintaining decent
growth. In this uncertain scenario, India stands out for
its resilience, growth potential and attractiveness as
an investment destination. As quoted by Reserve Bank
of India Governor, “India is an island of relative calm
in an ocean of turmoil.” The country has been able to
withstand the external shocks and can boast of robust
economic growth at 7.0-7.5 per cent. Other macroindi-
cators support the sound economic picture. However,
India needs the right reforms to sustain this growth. Tax
policy and administration is one of the key areas that
industry looks to as an enabler for growth and invest-
ment.
In the last two years, the thrust of the tax policy has
been on promoting investments in the manufacturing
sector, bringing certainty in taxation for foreign inves-
tors, and providing a stable and non-adversarial tax
environment. Several forward-looking and positive
measures have been taken by the Government in this
direction. These include:
• The Constitutional (Amendment) Bill for the intro-
duction of GST was tabled in the Parliament and
passed by the Lok Sabha.
• The Government announced the lowering of the
corporate tax rate from the current 30 per cent to
25 per cent in the next four years, accompanied by
a gradual phase-out of incentives.
• The Government accepted the recommendations
of the AP Shah Committee to the effect that Mini-
mum Alternate Tax (MAT) provisions will not be
applicable to Foreign Portfolio Investors (FPIs) not
having a place of business/permanent establish-
ment in India, for the period prior to 1 April 2015.
• The Finance Ministry decided not to file an appeal
against the Bombay High Court’s ruling in favor of
Vodafone in the transfer pricing dispute.
• A High Level Committee has been constituted to
regularly interact with industry and help provide
clarity and certainty in taxation.
• Greater clarity has been brought in on issues such
as taxation of indirect transfer of Indian assets and
Place of Effective Management (POEM).
• More enabling tax provisions have been introduced
for Real Estate Investment Trusts and offshore
funds with fund managers based in India.
• Positive steps have been taken toward tax admin-
istration and improving dispute resolution mecha-
nisms, e.g., notification of Advance Pricing Agree-
ment (APA) rollback rules for four prior years,
expansion of scope of the Authority for Advance
Rulings (AAR) to resident taxpayers and announce-
ment of additional AAR benches, and restructuring
the composition, jurisdiction and control of Dispute
Resolution Panels (DRPs) across the country.
• A High Level Committee has been constituted to
scrutinize fresh cases of indirect transfers arising
from retrospective amendments of 2012. The Gov-
ernment also announced that there will be no ret-
rospective changes that lead to fresh tax liability.
• Internal circulars have been issued by the Central
Board of Direct Taxes (CBDT) to its field officers to
follow a non-adversarial tax regime.
All these developments are indicative of the Govern-
ment’s firm commitment to provide a more enabling
tax environment. However, the industry feels that
while many welcome announcements have been made
by the Government for a stable and taxpayer-friendly
tax environment, the on-the-ground experience does
not match up to the good intent. The passage of the
Constitutional amendment for GST is still pending due
to a disrupted Parliament session. There are still many
instances of inconsistencies between intent and inter-
pretation of the law: field officials not following the de-
partment circulars in spirit; high pitched assessments
that do not stand the test of judicial scrutiny in appeals;
and the levy of unjustified penalties and holding back of
refunds. Clearly, more needs to be done to give shape
to the intent and take it to the implementation level.
Tax administration and ease of doing business
Recognizing the need to overhaul the tax administra-
tion, the Government has announced a number of posi-
tive steps toward a non-adversarial tax regime. How-
ever, despite the good intent, the measures have not
translated into a visible difference in the on the-ground
experience or ease of doing business for taxpayers.
The Tax Administration Reforms Commission (TARC)
had made some path breaking recommendations to
I.Tax Reforms for Stability, Growth and Investments

25
SECTOR IN FOCUS
JANUARY 2016
reengineer the current tax administration. The Gov-
ernment must revisit these suggestions and prepare
a strategy for their implementation. In particular, the
following recommendations should be implemented at
the earliest:
Structure and governance
• A common Tax Policy and Analysis (TPA) unit —
separate from the directorates responsible for
operations in the field — should be established to
focus on policy development, technical analysis and
statutory drafting.
• An Independent Evaluation Office should be set up
to monitor the performance of tax administration,
promote accountability, evaluate the impact of tax
policies and assess all factors that affect tax admin-
istration.
• There should be selective convergence of the two
boards to achieve better tax governance.
Key internal processes
• PAN should be developed as Common Business
Identification Number, which can be used by other
government departments.
• There should be a common return for excise and
service tax.
• Refunds sanctioned should be paid on time along
with the applicable interest automatically and not
on demand by taxpayers.
• The rate of interest on refunds should be the same
as the interest charged by the tax department.
• Single detailed documentation requirements
should be framed for transfer pricing as well as cus-
tom valuation by both the boards.
• Tax avoidance instruments should not be used for
revenue generation.
Customer focus
• For each of the boards, a dedicated organization
should be constituted for delivery of taxpayer ser-
vices with customer focus.
• Taxpayer service delivery should be located under
one umbrella for large taxpayers.
• Officers and staff at all levels of tax administration
should be trained for customer orientation.
• There should be regular stakeholder consultations
on issues of tax disagreements and tax law chang-
es.
Dispute resolution
• A dedicated task force should be constituted for re-
view and liquidation of cases currently clogging the
system.
• Clear interpretative statements should be formu-
lated on contentious issues that are binding on the
tax department.
• The practice of pre-dispute consultation before is-
suing a tax demand notice should be established.
• The consequences of not adhering to timelines in
resolving disputes should be prescribed.
• Introduce statutory Alternate Dispute Resolution
(ADR) process, arbitration and conciliation.
• Settlement Commission should act as part of tax-
payer services, and be made available to the tax-
payer to settle disputes at any stage.
• Appeals to high courts and the Supreme Court
should only be on a substantial question of law.
• On disposal of cases by the Supreme Court/High
Court, and if the judgment is accepted by the de-
partment, an instruction should be issued to all au-
thorities to withdraw appeal in any pending case
involving the same issue.
Conclusion
The Finance Minister has stated that India is on the cusp
of modernizing and rationalizing its tax policies, and
that while fashioning the tax policies for the 21st
cen-
tury, the tax administration cannot afford to lag behind.
The new era of reforms has already begun. It is time to
focus on the delivery of the vision. A thorough impact
analysis of the proposed reforms, a transparent and
consultative approach, backed by a fair administration
is the need of the hour. The pace of implementation of
reforms will be equally important to make the reforms
process perceptible.

ECONOMY MATTERS 26
SECTOR IN FOCUS
The implementation of the Goods and Services Tax
(GST) is the top priority from an indirect tax reforms
agenda perspective. If implemented in the right man-
ner, GST can improve India’s competitiveness, be a cata-
lyst to the “Make in India” initiative of the Government
and spur investments. While the GST’s proposed design
is far from ideal, with its flaws of sector exclusions and
the proposed 1 per cent origin tax, there is scope to cor-
rect some of these anomalies.
While the Government’s intent and associated actions
to implement GST are evident, a political impasse con-
tinues to cloud the implementation date, with the delay
in the passage of the Constitutional Amendment Bill.
However, the Government has been working on vari-
ous aspects of GST, namely laws, rules, business pro-
cesses, etc. The recent award of a contract to build the
GST Network (GSTN) affirms the Government’s commit-
ment to implement GST. The Constitution Amendment
Bill is anticipated to be passed by the Parliament in the
winter session, so that the process of GST implemen-
tation gains pace. The implementation date of April
2016 looks challenging and even the Finance Minister’s
recent comments — that GST, being a transaction tax,
can be implemented in any month of the fiscal — allude
to this. It appears that implementation could occur any-
time in 2016, possibly around September/October 2016,
if not earlier.
The main cause of concern for the industry is the almost
complete lack of visibility on what is being drafted by
policy-makers with respect to the GST law and rules. It
is, therefore, important that the Government bring out
these documents in the public domain at the earliest
and seek feedback from the industry. It is also impor-
tant for the Government to create a proper, structured
forum for industry consultations to ensure effective
representation and a collaborative approach to the en-
tire process. Internationally, such as in the recent Ma-
laysian GST implementation, laws and rules were made
public more than a year in advance, though changes did
happen along the way.
Clarity on rates is another area of concern for the indus-
try. Though the mandate for GST design, structure and
rates is with the GST Council, the Chief Economic Advi-
sor (CEA) to the Government of India is mandated to
present a report on GST rates. This report is likely to be
submitted in October 2016 and is expected to provide
some insights into the rate structure. The National Insti-
tute of Public Finance and Policy is also reexamining the
rates in continuation to its previous study. A single rate,
though ideal, may not fructify and we are likely to arrive
at a multiple rate structure considering the ground real-
ity. The industry’s hope is that the rates are moderate
and the standard rate is well below 20 per cent for ef-
fective compliance.
The recent awarding of the contract for the design, de-
velopment and implementation of GSTN is another im-
portant milestone. It is critical that the industry is made
aware of the compliance requirement under GST, con-
sidering that India is looking at transaction-level report-
ing with electronic credit matching. While this would
lead to automation and a fair degree of transformation
— which would be welcome — the industry needs to
understand what they need to provide as inputs for
compliance so that IT systems are suitably modified.
GST readiness: implications for the industry
GST is much more than a tax reform and will have a
wide impact on industry operations, including govern-
ment tax administrations. GST readiness will require
significant time and proactive planning to leverage its
benefits. All aspects of business, namely ERP systems,
financial accounting/reporting, controls and processes,
tax compliance, supply chain models and operating
structure, will undergo changes. GST will impact mar-
gins, pricing, working capital and cash flows, which fun-
damentally means an opportunity to re-engineer and
transform business to leverage this tax reform. Every
company would need to commit significant resources
to focus and manage this change as a program, while
continuing to run existing businesses. This process will
be disruptive in the interim, and will require careful and
intelligent planning of resource allocation.
Advance and timely knowledge of business process
changes, laws and rules, therefore, becomes critical for
the industry. Companies also need to understand the
importance of advocacy, which could straddle across
II. Indirect Tax Reforms Agenda: Goods and Services Tax

27
SECTOR IN FOCUS
JANUARY 2016
areas of law, place of supply rules, compliance and reg-
istration requirements, treatment of existing Central
and State incentives, and the rate structure. While there
is a lack of an identified forum — especially at the State
level — for such interactions/advocacy, identifying po-
tential issues and possible solutions could be a good
starting point to commence engagement with law mak-
ers.
Depending on the complexity and the sector, compa-
nies will need a minimum of 8-12 months to manage this
change. The lack of clarity on the implementation date
poses a challenge for companies to commit to this criti-
cal change. While many companies have recognized this
and started the process in a phased manner, several are
still on the fence and could be caught off guard in case
implementation happens in 2016. Our Malaysia experi-
ence showed us that, even with the construct of laws
being known more than a year in advance, companies
struggled to be ready and comply on the implementa-
tion date. It is pertinent to mention that the Malaysian
GST was fairly simple with a single rate, whereas the
Indian GST appears complex to begin with. It involves
a dual GST (Center and State), integrated GST for inter-
state transactions, and a potential non-creditable origin
tax.
GST readiness: recommendations for the
industry
In our view, it is already time for companies to start the
change process, though in a phased manner with an
indirect tax impact analysis at the outset. This can be
done by mapping existing transactional tax costs and
examining how they pan out in potential GST scenarios,
based on the known GST structure and possible rates.
Such an analysis would provide insights on how pricing,
margins, working capital and cash flows can be poten-
tially affected, and the areas that require attention in
the operating structure and supply chain. This would
also help identify potential areas of advocacy.
Another important area is ERP system reconfiguration
requirements. In our understanding, several ERP tax
modules will require fundamental changes depending
on their versions, which will require time-consuming
up-gradation of these ERP versions. The time for these
upgrades is over and above the time that would be re-
quired for GST impact changes and customization. Thus,
early proactive planning in these areas would allow suf-
ficient time for change and testing. Further phases of
GST readiness, such as changes in operating structure,
supply chain changes (if any), changes in processes and
controls, tax accounting changes, training, etc. can then
be more effectively rolled out at a later stage as more
clarity on the law, rules, compliance and rates emerges.
Since the impact of GST would be across business, com-
panies would require a cross-functional steering team
to address and manage this change at the senior leader-
ship level.
Other interim changes in indirect taxes
While the Government continues its efforts to imple-
ment GST in 2016, there are some critical actions that
it can take in the interim as part of the Union Budget
exercise or otherwise.
(i). Dispute resolution efficacy
It is critical to strengthen the dispute resolution mecha-
nism, as indirect tax litigation continues to be concern
for the industry. The long pendency of disputes and the
several stages of appellate proceedings at the levels of
departments, tribunals and courts are significantly time-
consuming for the industry and the revenue authorities.
The Tax and Administrative Reform Commission (TARC)
report’s recommendations have examined these in
granular detail and merit immediate implementation.
While actions such as appointment of members and
establishment of Authority for Advance Rulings have
been taken, the pendency and efficacy of disposal of
cases requires a sense of urgency with early creation of
additional benches as announced.
(ii). Service tax refunds
Service tax refunds in the service exports industry
continue to be a huge pain point. While there are juris-
dictions that function fairly well, the quantum of pen-
dency and rejections leading to litigation are still very
high. This affects the fundamental tenet of “ease and
cost of doing business.” An efficient, transparent, auto-
mated, consistent and time-bound refund mechanism is
required for the immediate release of such service tax
refunds, with a post-audit mechanism. In order to en-

ECONOMY MATTERS 28
SECTOR IN FOCUS
sure equity and accountability, interest rate on refunds
should be the same as the rate applicable for delayed
payment of taxes and duties.
(iii). Customs valuation – SVB process
The process of customs valuation scrutiny by the ports
and Special Valuation Branch (SVB) needs immediate at-
tention. The pendency levels of such assessments and
attendant 1-5 per cent extra duty deposits/provisional
bonds are a cause of concern for the industry. The TARC
report alludes to this glaring fact and recommends elim-
inating the SVB process, replacing it with post-clearance
customs audit.
(iv). Cenvat Credit Rules liberalization
As a pre-requisite for a good GST, it is important to re-
visit the Cenvat Credit Rules restrictions to avail input
credit. The rules should allow credit of all taxes across
inputs, capital goods and input services incurred by
businesses, without any restriction, to ensure no cas-
cading of input taxes and a clean Cenvat.
Conclusion
It is our considered view that the fuzziness surrounding
the implementation date of GST should not, in any way,
result in complacency. As discussed earlier, the fact that
the Government is moving ahead with the drafting of
the law and implementing GSTN indicate that GST may
be implemented at short notice. Managing compliance
itself may be a difficult task, let alone optimization of
the supply chain. The industry will benefit from pro-
ceeding with impact analysis and getting compliance
systems ready. Given the constraints, this would be the
most optimal way of keeping the date with GST.

29
FOCUS OF THE MONTH
Budget Expectations
JANUARY 2016
D
omestic GDP data grew at higher rate of 7.4
per cent in the second quarter of FY2016, indi-
cating that the recovery has gained strength,
as we had anticipated. GDP growth is likely to exceed
7.5 per cent for the full year. In a year when external
demand remains a drag on the economy, this would be
considered a strong performance. The acceleration in
the manufacturing sector shows that the government’s
policy direction is bearing fruit. The Make in India cam-
paign with its objective of raising the growth rate in the
manufacturing sector has begun to make an impact.
Policy measures need to focus on a revival in project
execution in manufacturing, real estate and infrastruc-
ture.
Though WPI inflation has continued to remain sub-
dued, CPI inflation has posted mild spikes in the last few
months on the back of rising food prices. However, go-
ing forward, CPI inflation is expected to rein in around
RBI’s target of 6 per cent for January 2016. On the ex-
ternal front, while, US economy is slowly but steadily
inching towards a recovery, growth in emerging market
economies (EMEs) continues to remain tepid, thus put-
ting our exports in shaky territory. Evidently, exports
have now contracted for twelve consecutive months. In
November 2015, the contraction was to the tune of 24.5
per cent. Imports too fell for the twelfth consecutive
month, declining by a sharp 30 per cent in November
2015. The consistent fall in exports has been exerting
upward pressure on the trade deficit.
Against a challenging macroeconomic backdrop, the
Union Budget is scheduled to be unveiled by finance
minister ArunJaitley on February 29. Expectations are
high that the government may announce increase in
tax exemption limit on savings. As private sector in-
vestment growth has remained tepid this year, higher
savings are expected to make extra resources available
to improve investment activity in the economy. Regard-
ing the fiscal deficit target, government is confident of
meeting the fiscal deficit target of 3.9 per cent of GDP
for 2015-16, and 3.5 per cent next fiscal, despite pres-
sure of additional outgo on account of the 7th
Pay Com-
mission and OROP. In this month’s Focus of the Month,
experts provide their views on the expectation from
the forthcoming Union Budget.

ECONOMY MATTERS 30
FOCUS OF THE MONTHCII VIEWPOINT
Select CII’s Budget Expectations
I
n the last budget the FM had rightly recognised that
investment activity remains sluggish and therefore
had focussed on stepping up government capital ex-
penditure. This has yielded positive results. Neverthe-
less, demand conditions remain subdued and the appe-
tite for investments in the private sector is below par.
Given that exports will remain on a declining trend on
account of global economic downturn, it is imperative
that domestic demand is stimulated.
CII would recommend that capital expenditure on key
projects in sectors such as roads, railways, irrigation and
power be increased substantially. Particular attention
should be paid to rural demand, which can be support-
ed through spending on rural roads and irrigation. At
the same time, the fiscal deficit should not be allowed
to increase, as this would put pressure on interest rates,
which have just started to soften. The following meas-
ures can be taken to ensure this:
(i). Step up PSU disinvestment – This will reduce the
borrowing need of the government. With better
planning, funds can be raised through the year.
(ii). Reduce subsidy outgo – With greater implementa-
tion of direct benefits transfer, the fuel subsidy bill
can be steadily reduced. Fertiliser subsidy should be
paid directly to farmers as cash transfers.
(iii). Stagger Pay commission pay outs – (entire pay-
ment in one year will put pressure on states to also
implement higher pay scales. The stimulus from
such an increase will be temporary and limited to
consumer goods. )
(iv). Raise tax revenue through expansion of base –
(both direct and indirect tax revenue have been
strong this year and helped in meeting the revenue
targets. Efforts to increase the tax base should be
ramped up.)
Reduction in Corporate Tax Rate and Ration-
alisation of Incentives
CII welcomes the Minister’s proposal to lower the tax
rate from the current 30 per cent. CII has been asking
for the lowering of the corporate tax burden. A lower
tax rate will enable more development and growth of
the corporate sector. The phase out of incentives is im-
portant for broadening the tax base and for simplifica-
tion of tax law.
Incentives have played an important role in attracting
investments for manufacturing as well as infrastructure
sectors. Keeping this in mind, CII suggests the follow-
ing:
i. The corporate tax rate to be reduced to 22 per cent
(and it should be inclusive of surcharge and no
other additional levies should be imposed over and
above this rate).
ii. The government should announce a year-wise road-
map for reduction of corporate tax rate from 30 per
cent to 22 per cent.
iii. The withdrawal of incentives should be done in a
calibrated manner, in line with the reduction in tax
rate and keeping in mind the competitiveness of
the sector.
iv. The minimum alternate tax (MAT) should also be
withdrawn in a calibrated manner. (While removing
MAT, it should be clarified that MAT credit can be
carried forward and set-off against their normal tax
liability in future).
v. It should be clarified that the sunset date of
01.04.2017 for phase out of incentives means finan-
cial year commencing on 01.04.2017.
vi. Phase out of incentives should be prospective. (Any
current incentives applicable to qualifying invest-
ments made /activities before financial year com-
mencing on 01.04.2017 should be grandfathered. It
would be a wrong signal to the industry if the cur-
rent entitlements are compromised and thus have
‘retroactive taxation effect’).
vii. It may be appreciated that the current effective tax
rate (after incentives) as estimated by the govern-
ment is 23 per cent. However, this is only an aver-
age of the tax burden on various industry sectors.
Many industries enjoy an effective tax rate of much
less than 23 per cent. The Government should be
sensitive to this aspect and the withdrawal of incen-
tives should be done in a way that the tax burden
on these industries increases in a gradual manner.

31
FOCUS OF THE MONTH
JANUARY 2016
A Tax Blueprint for Growth and Investments
A
mong the World Bank predictions that the year
2016 could be a year of “perfect storm” for the
world economy and a simultaneous slowdown
in the BRICS countries, hope floats that India will contin-
ue to expand at a robust pace and boast of an economic
growth of more than 7 per cent.
The global economic conditions remain vulnerable, giv-
en the prospects of rising interest rates in the US and
a slowdown in China. India too is facing the challenge
of falling exports, a clear indication that it will have to
rely on stimulating domestic demand for pushing up the
economic growth to its potential level. The government
has stepped up its capital spending to stimulate do-
mestic economic activity, but the private sector invest-
ments have remained subdued. Given these conditions,
adhering to the fiscal consolidation path announced
in the last budget would be a serious policy challenge.
Therefore, India would need the right reforms to sus-
tain its current growth.
The government has taken positive steps to remove
some of the bottlenecks that have slowed the econom-
ic activity. For instance, allowing greater participation
of private companies in coal mining for commercial sale
will help increase coal production to meet domestic
demand and reduce imports. Similarly, the proposal to
legalize land leasing should help liberalise the use of ag-
ricultural land for non-agricultural / industrial purposes.
The initiative to set up new factories for increasing the
freight pulling locomotives, the package to the propos-
al for highway expansion in the coming fiscal year with
construction of highways accelerated to 30 km per day
from the current pace of around 13 km are all positive
measures that will help rejuvenate the economy.
Tax policy and administration is one of the key areas that
industry looks to as an enabler for growth and invest-
ment. Recognising this, the thrust of India’s tax policy
in the last two years has been on promoting invest-
ments in the manufacturing sector, bringing certainty
in taxation and providing a stable and non-adversarial
tax environment. Several forward-looking and positive
measures have been taken by the Government in this
direction. It is now time to give shape to the good intent
and take it to the implementation level.
A significant reform eagerly awaited by the industry is
the Goods and Services Tax. With a good design, the GST
will remove the current fiscal barriers to manufacturing
in India and help create a single market. Industry hopes
that the days to come will see the political consensus
needed to push this reform through. It is also hoped
that the proposals such as additional 1 per cent tax on
inter-State supplies and exclusion of significant sectors
from the GST base will be done away with. These pro-
posals are contrary to the spirit of ‘Make in India’.The
industry also looks forward to a moderate revenue neu-
tral rate (RNR) that will not create undue burden on the
manufacturing and services sectors.
Pending the implementation of GST, the government
must address the persistent issues plaguing the indus-
try. Correction of the inverted duty structure, ration-
alisation of the Cenvat credit scheme to enable avail-
ability of credit for all inputs and input services with no
restrictions and undue delays in refunds that block the
working capital of the companies are some significant
concerns that need urgent attention.
An important policy announcement made by the Fi-
nance Minister in last year’s Budget was the corporate
tax rate reduction from 30 per cent to 25 per cent over
the next four years. This is indeed a transformative
measure that will spur investments and growth and
make the Indian corporate sector more competitive.

ECONOMY MATTERS 32
FOCUS OF THE MONTH
With the current tax rate of 34.61 per cent (inclusive of
surcharge and cesses), the applicability of MAT and divi-
dend distribution tax (17.3 per cent) makes the overall
tax burden on the corporate sector very high. Around
the world, the corporate tax trend is to move towards
a broad-based, low-rate corporate tax environment,
with countries such as the UK announcing a roadmap to
lower the tax rate to 18 per cent by 2020.
The corporate tax rate of 25 per cent announced by
the government should be inclusive of surcharge and
no other additional levies should be imposed over and
above this rate. The government should announce a
year-wise roadmap for reduction of the tax rate from 30
per cent to 25 per cent. The withdrawal of incentives as
announced by the government should be done in a cali-
brated manner, in line with the reduction in tax rate. To
reduce the tax burden in the real sense, the minimum
alternate tax (MAT) should also be withdrawn in a cali-
brated manner.
In the context of lowering the overall tax burden on the
corporate sector, the taxation of dividends also merits a
review. Currently, no other BRICS country imposes a tax
on distribution of dividends. Further, there is ambiguity
on whether dividend distribution tax (DDT) levied on an
Indian company is creditable in the hands of the foreign
shareholder as DDT is not a withholding tax. It should
be clarified that DDT is a deemed withholding tax to en-
able its credit in the hands of the foreign shareholder.
The government has taken many positive steps towards
improving tax administration. However, the adminis-
trative framework needs a complete overhaul and calls
for bold and swift measures. The Tax Administration Re-
forms Commission (TARC) had made path-breaking rec-
ommendations to re-engineer the current tax adminis-
tration. The government must revisit these suggestions
and prepare a strategy for their implementation. Con-
stitution of a separate Common Tax Policy and Analysis
(TPA) unit to focus on policy development, technical
analysis and statutory drafting; the need for revenue
forecasting based on tax gap analysis; and performing
impact assessment analysis for major policy proposals
are some of the excellent proposals that merit immedi-
ate attention by the government.
There are still many instances of inconsistencies be-
tween intent and interpretation of the law; the de-
partment circulars not followed in spirit; high-pitched
assessments that do not stand the test of judicial scru-
tiny in appeals; and the levy of unjustified penalties and
holding back of refunds. Such instances are an outcome
of setting unreasonable revenue targets and poor rev-
enue management and can be minimised by use of rev-
enue analytics and forecasting techniques.
Improving the dispute minimisation and resolution
mechanisms is another front that needs urgent atten-
tion. It is evident from the global tax developments
that many countries are gearing up to introduce BEPS-
related tax reform to protect their tax turf and check
profit shifting. The next few months will see a greater
focus on multilateralism, more transparency and re-
porting requirements, stricter tax enforcement and a
new set of rules defining the way the domestic / over-
seas profits are taxed. An inevitable corollary to these
developments will be rise in the tax disputes.
The alternative dispute resolution mechanisms must be
improved at the earliest to be equipped to deal with the
potential disputes. For instance, Advance Pricing Agree-
ments (APAs) have received an enthusiastic response
from the taxpayers, with more than 580 APA applica-
tions received by the Department. 31 APAs have been
signed so far. While this progress is commendable to
expedite the signing of APAs, the APA team should be
suitably expanded on an urgent basis. Similarly, More
than 400 matters are pending before the Authority for
Advance Rulings (AAR). Additional benches at Delhi and
Mumbai should start functioning as soon as possible.
In line with the TARC’s recommendations, the govern-
ment should formulate clear interpretative statements
on contentious issues. Appeals to high courts and the
Supreme Court should only be on a substantial question
of law. On disposal of cases by the Supreme Court/High
Court, and if the judgment is accepted by the depart-
ment, an instruction should be issued to all authorities
to withdraw appeal in any pending case involving the
same issue.
The Prime Minister’s vision of ‘Make in India’ provides
a tremendous opportunity to the Indian manufacturing
to grow and become competitive in the medium to long
term. The need of the hour is to provide the right physi-
cal and fiscal eco-system to help transform the vision to
reality. The government must resolutely keep pushing
the ground level reforms, including tax reforms, to build
a pro-investments and pro-growth India.

33
FOCUS OF THE MONTH
JANUARY 2016
Expectations from Union Budget, 2016-17
T
he Union Budget, 2016-17 would be a mid-term
budget of the Government since the tenure of
the present Parliament would expire only in
2019. Since the year 2019 would be the election year,
the budget for the year 2018-19 cannot be expected
to be bold and there is likelihood of many pre-election
sops to the voters. That leaves one with the remaining
two years i.e. 2016-17 and 2017-18 as the years when
one can expect Budget proposals in accordance with
the demands of the economy. That’s how the Budget
2016-17 becomes significant for the National Democrat-
ic Alliance (NDA) Government to be used as a major in-
strument for steering the economy through higher and
higher growth.
The major challenge before the Union Finance Minister
would be to reach the target of maintaining the fiscal
deficit of 3.9 percent of the Gross Domestic Product
(GDP), while simultaneously increasing public invest-
ment to maintain a steady growth. One view is that for
maintaining growth, there is no harm in having a small
break in the fiscal consolidation by way of public invest-
ment through planned capital expenditure, particularly
in infrastructure like road, highways, buildings and in
power sector. Expenditure in these sectors will boost
demand of goods like cement, steel etc. and thus in-
crease the manufacturing activity resulting in growth.
Even with increased public expenditure, the target of
fiscal consolidation can be reached or nearly reached if
the current revenue buoyancy in Indirect Taxes is fur-
ther enhanced through strategic increase in rates of tax
and better tax compliance. There does not seem to be
anymore scope to increase the Direct Taxes. That makes
the strategic handling of Indirect Taxes more critical.
Another way of continuing with the fiscal consolidation
for the Government would be to find ‘expenditure sav-
ings’ and minimize additional expenditure demands.
Yet another way would be to undertake bold subsidy
reforms by way of minimizing and streamlining the food
and fertilizer subsidies. Indeed, 2016 is the year when
the Finance Minister can take unpopular steps as the
economy demands; the election is still around three
years away. Reduction of subsidy would be one. Post-
ponement of implementation of the Recommendations
of the Seventh Central Pay Commission by one year can
be the other one. This will give Government a cushion
of over Rupees one lakh crore for the Budget year. With
this expenditure savings for one year- a critical and cru-
cial year, the Government can afford to continue its
public expenditure that would boost growth.
With this background, let us have a look at the Budget
Expectations in the universe of Indirect Taxation. First,
the Central Excise and Service Tax. The Goods and Ser-
vices Tax (GST) Constitution Amendment Bill having
missed the bus in the winter session of 2014, it is now
certain that GST cannot be implemented from April,
2016. Therefore, the Budget 2016-17 will have to have
taxation proposals on Central Excise and Service Tax,
the two central taxes that were to be subsumed in GST.
That said, it is also true that the GST is unputdownable
and its introduction is just a matter of time. Therefore,
the Budget 2016-17 would provide an opportunity to
prepare the taxmen and taxpayers to be ready for GST
by aligning the tax structures of Central Excise and Ser-
vice Tax, to start with. Given the need for a smooth tran-
sition to the GST regime, one can expect the following
from the budget proposals of 2016-17.
The Expert Panel led by MrArvind Subramanian, the
Chief Economic Advisor has suggested four GST rates
– a standard rate of 18 per cent for most of the goods,
a merit rate of 12 per cent for goods of consumption

ECONOMY MATTERS 34
FOCUS OF THE MONTH
by common man, a demerit rate of 40 per cent for To-
bacco & Cigarette, luxury cars and some other luxury
items and a special rate of 2 per cent for precious met-
als. With these recommendations in mind, the Budget
may provide for four rates of duty- of course not with
the rates recommended for GST.
At present the Central Excise exemptions are more than
300 in number, whereas the state VAT has only around
100 exemptions. Since in the GST regime there will be
same set of exemptions for Central GST and State GST,
the Budget 2016 may propose for a drastic reduction in
the number of Central Excise exemptions. In choosing
the exemptions that would continue, it is expected that
the need for retaining those relating to Power and In-
frastructure sectors would be kept in mind. In the GST
regime, the tax rate would be same for goods and ser-
vices. Given that the standard rate of goods is expected
to be 18 per cent minimum, the Service Tax rate may
be increased to 16 per cent incrementally in the Budget
2016.
The threshold limit would remain the same for both
Centre and State GST in the GST regime. Currently, the
thresholds for Central Excise, Service Tax and State VAT
are Rs 1.50 crores, Rs 10 lakhs and Rs 3 to 5 lakhs re-
spectively. The Central and States are negotiating for a
threshold between Rs 10 lakhs and Rs 25 lakhs. Mean-
while, the CEA led panel has recommended for a higher
threshold of Rs 40 lakhs. The Budget 2016 will provide
an opportunity to bring down the threshold for Central
Excise Duty to Rs 75 lakhs and raise that for Service Tax
to Rs 20 lakhs.
Now the duty rates on goods that are not related to
GST. Considering that there is a public outcry against
pollution in metros and big cities and the Judiciary is
also intervening by way of discouraging the use of
heavy duty diesel vehicles, the Budget may propose
further increase in the Excise Duty on Diesel SUVs and
other Diesel vehicles and reduction in duty on small ve-
hicles that run on CNG or petrol.
The continuous fall in oil prices in the international mar-
ket may not continue given the volatile international
situation particularly in Middle East. The Finance Min-
ister is expected to use the low oil price to tighten up
subsidies and cut the fiscal deficit by increasing excise
duty rate of oil and oil products.
As a measure of revenue mobilization to offset the in-
creased public expenditure, the Finance Minister may
also take cue from the CEA panel’s report and identify
a few luxury items and increase Central Excise duty on
them, as a prelude to GST.
As for the Customs Duty, the scope for mobilsation of
revenue would be less. India has signed a number of
Free Trade Agreements, committing herself to either
full exemption or preferential rate for Customs Duty.
Then, there are certain items with WTO bound rates, be-
yond which Customs Duty cannot be enhanced. There-
fore, notwithstanding the demand for increased Cus-
toms Duty on imported goods so as to give a fillip to the
‘Make in India’ programme, the scope for doing that is
limited. Nevertheless, the Finance Minister is expected
to increase Customs Duty on goods on which there is no
such aforesaid limitations. The finished consumer prod-
ucts – particularly the luxury ones may be targeted in
this regard.
On the export front, there has been the beginning of a
crisis in the ‘emerging markets’ due to prevailing low oil
prices – thus resulting in reduced demand in those mar-
kets for Indian exporters to explore. In order to help
the Indian exporters in making their goods and services
competitive, it is expected that the Finance Minister
would extend some major tax benefits to the exporters.
Thus, we can expect the Finance Minister to moderately
increase the public investment in identified sectors, find
some expenditure savings and streamline and minimize
food and fertilizer subsidies. He will also have to mobi-
lize the extra revenue needed for maintaining the fiscal
deficit target of 3.9 per cent of GDP through moderate
increase in Indirect Taxes in certain identified items.
We can also expect him to give a clear signal about his
resolve to introduce the GST by proposing certain pre-
paratory measures explained above.
[Mr. Sumit Dutt Majumdar is also the author of a book titled “Customs Valuation – Law and Practice” and “GST in
India-its travails, tribulations and challenges ahead”]
(The views are personal and not necessarily of CII)

35
FOCUS OF THE MONTH
JANUARY 2016
Expectations from Budget 2016
I
t is no secret that India witnessed rapid slowdown in
investments made in the past few years. One of the
key reasons attributed to such a slowdown was the
investor’s perception that India had an aggressive tax
regime. The fact that the Government had resorted to
“retrospective tax amendments” to overturn some of
the Supreme Court judgments is an illustrative example.
This lent to lack of certainty and predictability of the tax
system—something that is a very significant pre-requi-
site for potential investor confidence.
With its emphasis on improving sentiments, bringing
back investor confidence and creating a stable and
transparent tax regime, the new Government took cer-
tain unprecedented steps such as the decision on not
to go in for appeal against an adverse transfer pricing
ruling pronounced by the H’ble Bombay High Court in
the case of Vodafone (decision in relation to which was
taken at the highest echelon, the Union Cabinet), ac-
cepting the A. P. Shah Committee report on non-appli-
cability of MAT on FIIs / FPIs, and also coming up with a
clarification on the position with regard to applicability
of MAT on foreign companies.
There was no better way to welcome 2016, but with
quite a few tax-payer friendly announcements by the
Central Board of Direct Taxes (CBDT), indicating a new
approach to tax litigation, i.e.
- Raising the monetary limits or thresholds for filing
appeals. With the most interesting aspect of this
announcement being—such an increase in thresh-
old limit is with a ‘retrospective effect’ albeit in a
positive way.
- Extending the mandate of collegiums of Chief Com-
missioners of Income Tax (CCIT), which was formed
last year to approve the filing of appeals before
High Courts, to even consider withdrawal of ap-
peals that are no longer prosecutable.
It is worth mentioning here that never in the past, the
Government had done anything similar to reduce the
pending tax litigation in India.
In order to further demonstrate its commitment and
to provide a simplified and non-adversarial tax regime,
the Government had set up a 10-member Income Tax
Simplification Committee headed by Retd. Justice R.V.
Easwar, with the following broad objectives:
- To check curb litigation and facilitate speedier dis-
pute resolution;
- To facilitate the ease of doing business in India;
- To simplify the existing tax laws;
- To suggest any modifications required to ensure
certainty and predictability in tax laws without sub-
stantially impacting the tax base
The Committee has recently released its draft report,
with the first batch of recommendations focusing on
bringing simplicity and clarity in tax laws. Many of those
recommendations may find their way in the Union
Budget 2016-17.
Now, with the Union Budget 2016-17 scheduled to be
unveiled by the Finance Minister on 29 February 2016,
expectations of the tax payers and the industry run
high, that the Government may come out with some
major reforms. This second full-year Budget of the cur-
rent Government should focus on steps to accelerate
economic growth that seems to have stagnated in the

ECONOMY MATTERS 36
FOCUS OF THE MONTH
7.0–7.5 per cent range amid global slowdown.
An interesting fact—India, a country with more than 125
crorepeople,hasonly3.3percenttaxpayingpopulation
as compared to 39 per cent in Singapore, 46 per cent in
the US, and 7 per cent in New Zealand! Accordingly, in-
stead of tinkering with the income tax exemption limit
every year, it’s the right time for the Government to go
ahead with an aggressive long-term approach which ex-
pands its income tax payer base. The same would also
provide headroom to focus on economic reforms to
achieve higher growth.
The Tax Administration Reform Commission (TARC) has
also echoed the said concern in its report and calculated
that the number of people paying taxes should be at
least 6 crores. The Parliamentary Standing Committee
on Finance in its report has also said that, “time has
come to reinvent the tax collection approach, i.e., to
move towards the untapped or lesser tapped brackets
of income which mostly comprise the un-organized sec-
tor and the cash economy.”
Second, with a view to increase export competitive-
ness and promote the ‘Make in India’ initiative, it’s the
right time that developers of Special Economic Zones
(SEZs) and units in these enclaves be given exemption
from Minimum Alternate Tax (MAT) and Dividend Dis-
tribution Tax (DDT). Here, it would be worthwhile to
note that before MAT and DDT were imposed on SEZ
in 2011-12, growth in exports from SEZs was far exceed-
ing the increase in the country’s overall goods exports,
and such high growth rates dropped consistently since
these taxes were imposed.
Third, in his budget speech of 2015-16, the Finance Min-
ister promised a 5 per cent cut in corporate taxes over
four years. He categorically said, “I, therefore, propose
to reduce the rate of corporate tax from 30 percent to
25 percent over the next four years. This will lead to
higher level of investment, higher growth and more
jobs. This process of reduction has to be necessarily ac-
companied by rationalization and removal of various
kinds of tax exemptions and incentives for corporate
taxpayers, which incidentally account for a large num-
ber of tax disputes.”
Following this, in November 2015, CBDT released a road-
map to introduce sunset clause for open-ended corpo-
rate tax exemptions and concurrently pruning the list
of sectors that are entitled to such benefits on research
and development, and capital expenditure. The exemp-
tions have been categorized as the ones having a sunset
clause, those that are open-ended, and the ones that
have outlived their utility but still continue to be a part
of the Income-tax Act, 1961.
The difficulty with the above Finance Ministers’ state-
ment of reducing corporate tax from 30 per cent to 25
per cent is that the current Government has only three
regular budgets to go (i.e., 2016-17, 2017-18 and 2018-19).
The 2019 budget to be presented by this Government
will be an interim one. Therefore, the 5 per cent reduc-
tion in corporate tax rates should be fast-forwarded to
the next three budgets (including 2016-17 budget).
Consequent to above measures, the Government may
be able to accumulate substantial funds to give a re-
ally hard push to investment under its flagship ‘Make
in India’ program and various other social/economic re-
forms. It’s the right time for the Government to move
forward and enable the Indian economy to leapfrog and
bring the acche din for aamadmi.
(The views are personal and not necessarily of CII)

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