Capex-led Growth Strategy from Industry Chambers’ Recommendations

Capex-led Growth Strategy from Industry Chambers’ Recommendations

Subject: Economy

Section: Fiscal policy/Public finance

Capex-led Growth Strategy:

• Suggested maintaining a capex-led growth strategy in the upcoming Vote on Account to sustain the ongoing economic growth momentum.
• Urged an increase of at least 20% in the Centre’s capital expenditure to ₹12 lakh crore.

Central Support to State Capex:

• Proposed expanding Central support to State capex through interest-free 50-year loans, recommending an increase by about ₹30,000 crore to ₹1.6 lakh crore.

Corporate Tax Rate:

• Advocated for retaining the corporate tax rate at the current level for tax certainty.
• Appreciated the government’s efforts to maintain stability in tax rates despite economic and political challenges.

Buyback Tax (BBT):

• Recommended exempting buyback tax (BBT) for listed shares using the open market through the stock exchange method.
• Proposed that the exemption under section 10(34A) should not be applicable, and transactions should continue to be subject to capital gains tax.

Extension of Sunset Date for Concessional Tax Rate:

• Advocated for extending the sunset clause for the concessional tax rate of 15% under Section 115BAB by one year, from March 31, 2024, to March 31, 2025.
• Suggested that this extension would encourage more investment in the manufacturing sector and exports.

Recommendations by FICCI:

Focus on Public Capex:

• Emphasized the importance of public capex (on physical, social, and digital infrastructure) in the upcoming Budget.
• Urged the government to lay a major thrust on public capex considering the current global developments and associated challenges.

Buyback Tax (BBT):

• Recommended exempting BBT for listed shares involved in buybacks using the open market through the stock exchange method.
• Stated that the justification for BBT levy does not exist in such cases where the promoter group cannot participate in the buyback.

Extension of Sunset Date for Concessional Tax Rate:

• Proposed extending the concessional tax regime for manufacturing operations for at least five years.
• Argued that extending the tax regime would provide stability and certainty, boosting the confidence of investors considering investments in India.

Sunset clause

A “sunset clause” refers to a provision in a law or regulation that specifies a termination date or conditions under which the law or regulation will expire or no longer be in effect. Essentially, it sets a deadline for the validity or applicability of certain provisions.

In the context of taxation or economic policies, a sunset clause may be included to provide a temporary benefit, concession, or special treatment. After the specified period or under certain conditions, the benefits or provisions automatically come to an end unless the government decides to extend or renew them.

For example, in the case of tax incentives for a specific industry introduced to encourage investment, the sunset clause might determine that these incentives will expire after a certain number of years unless the government decides to extend them.

This approach allows for periodic reviews and adjustments to policies based on evolving economic conditions or policy priorities.

“Buyback Tax” (BBT)

The term “Buyback Tax” (BBT) generally refers to the tax implications related to share buybacks undertaken by companies. A share buyback, also known as a stock repurchase, occurs when a company repurchases its own outstanding shares from the open market or directly from shareholders.

Tax on Distributed Income: In the Indian context, the Buyback Tax is essentially a tax on distributed income by the company undertaking the buyback. It is applicable under Section 115QA of the Income Tax Act.

Introduced to Curb Tax Avoidance: The Buyback Tax was introduced to prevent tax avoidance by companies through the buyback route. It ensures that companies cannot use buybacks as a tax-efficient means of returning money to shareholders, especially in comparison to dividends.

Applicability: The tax is levied on the distributed income arising from the buyback of unlisted shares by a company. It is not applicable to buybacks through stock exchanges for listed shares.

Tax Rate: The distributed income through buyback is taxed at a specified rate, and the tax is paid by the company. The tax rate and other details are subject to the provisions of the Income Tax Act prevailing at the time.

Interim Budget, and Vote on Account:

Constitutional Mandate (Article 266):

• Article 266 of the Constitution of India mandates that parliamentary approval is necessary to withdraw money from the Consolidated Fund of India.

Legal Requirement (Article 114 (3)):

• Article 114 (3) of the Constitution specifies that no amount can be withdrawn from the Consolidated Fund without the enactment of a law, i.e., an appropriation bill.

Vote on Account:

• A vote on account is a parliamentary approval sought by the government to meet expenditure, such as salaries and ongoing programs, without altering the taxation structure. This is done until a new government presents a revised full Budget for the entire fiscal year. It allows the new government to signal its policy direction through the subsequent full Budget presentation.

Difference with Full Budget:

• While a full Budget addresses both expenditure and revenue, a vote on account deals exclusively with the expenditure side of the government’s budget. The vote on account is typically valid for two months, while a full budget covers the entire fiscal year.
• As a convention, a vote-on-account is treated as a formal matter and passed by the Lok Sabha without extensive discussion. Conversely, passing a full budget involves detailed discussions and voting on demands for grants.

Interim Budget Distinction:

Scope of an Interim Budget:

• An Interim Budget is not equivalent to a ‘Vote on Account.’ While a vote on account addresses only the expenditure side, an Interim Budget encompasses a complete set of accounts, covering both expenditure and receipts.

Financial Statement Similarity:

• An Interim Budget provides a comprehensive financial statement, much like a full budget, offering details on both expenditure and revenue.
• Unlike a vote on account, an Interim Budget considers both the spending and revenue aspects, providing a broader financial overview.