Relations between India and the UK are growing stronger as the first month of 2022 draws to a close. The New Year has begun with the announcement that the much anticipated between India and the UK Free Trade Agreement (FTA) negotiations have begun in earnest. As the negotiating teams sit down together, the Union Budget 2022-23 will shortly be announced setting the tone of India’s domestic policy for the forthcoming financial year and beyond. UK businesses, with one eye on the FTA negotiations, will also be watching the Budget closely.
The Ministry of Finance is justifiably positive of the strong economic recovery and growth India has posted as it recovers from the pandemic. The latest figures show that the growth in real GDP is estimated to have averaged more than 9 percent in 2021-22 buoyed by robust activity from all sectors and particularly in the manufacturing sector which has grown at an impressive 12.5 percent over the same period. A significant result of this positive performance has been the uptrend in inward investment in India.
India’s growth projected to be highest among major nations
The FDI equity inflows during the first half of 2021-22 registered a 4 percent increase year on year with computer and IT, automobile, and the services sectors attracting the largest FDI. Indeed, looking forward, India’s growth in 2022 is projected to be amongst the highest growth of major nations, further endorsing the success story of pandemic recovery. As such, this year’s Union Budget is a significant opportunity to build on that success and further generate long-term investment and growth.
Last November, the UKIBC made recommendations, on behalf of UK businesses, to the officials within the Ministry of Finance on reforms to be included within the forthcoming Union Budget aimed at promoting greater investment across sectors to the benefit of India.
While the previous Budget brought a considerable reduction in the corporate tax rate to 22 percent for domestic firms, foreign businesses were largely ruled out. A clear and staggering reduction in the rates for international businesses too would help to attract and scale fresh as well as existing financial capital enhancing the funding of important domestic programs.
Rationalise rates in telecom
We support the Indian government’s ambitions to place India at the centre of Industrial Revolution 4.0. and facilitating flows of data sets would substantially enhance India’s position as an attractive operating environment. At the same time, telecom service providers have struggled in recent times, owing to higher regulatory charges, capex cost, and import dependence on telecom equipment. Businesses would like to see a rationalisation of rates that covers exemption on spectrum payment, license fees, and usage charge; reduction in basic customs duty on import of equipment, and refund on input tax credit up to Rs 35,000 crore. This would alleviate the existing financial stress and support technology transfer across borders.
Seek a phased reduction in BCD on bulk spirits
Another area where reform could see a win-win for Indian businesses and consumers alike is the basic customs duty in the alcohol beverages sector. Many Indian companies utilise British imported bulk spirits for their end-use products. Yet, some are constrained by the high basic customs duty (150 percent) applied. The effective tariff is considerably high compared to global standards, including few major emerging economies such as China (5 percent) and Brazil (20 percent).
A phased reduction in the BCD on bulk spirits would enhance access to high-quality products at reduced costs for domestic consumers and for those companies using the products in their own production process. In addition, it promises positive results to develop the domestic market via manufacturing, farming and hospitality channels as well as technology transfer in areas such as packaging and process technology.
Define scope of ‘e-commerce operator’
The Equalisation Levy (EL) provisions introduced in 2016 and expanded in scope in 2020 as a substitution for the digital tax on e-commerce operators has been a fruitful step. The implications of this levy are far and wide when it comes to digital-only businesses as well as businesses going digital particularly for non-residents. Even the higher education sector, which seeks higher levels of internationalisation, faces this uncertainty to a certain degree. Therefore, as the growing needs of digitisation and commercialisation expand, it is important to appropriately define the scope of an ‘ecommerce operator’ as well as validate the applicability of EL provisions in alignment with the OECD BEPS tax commitments.
Tax incentives needed to attract incentives in ESG
To achieve the 2070 target of net-zero and the pledge to increase renewable energy capacity to 500 GW by 2030, India, like all nations, must prioritise measures towards sustainable financing mechanisms, which could include developing a suitable taxonomy for sustainable activities, popularising financial products, and providing tax incentives to draw stronger investments in the Environment, Social and Governance (ESG) space.
With the improving fiscal position and resilience shown by India, the focus of this year’s Budget should become more outward-oriented by streamlining various tax-based measures, one that showcases India as a global hub to foreign businesses and investors. Combining these elements with a big investment push would secure India’s position as a forward-looking economy.
For the UK, such a Budget with positive reforms – combined with the achievement of a comprehensive Free Trade Agreement in the coming year would further to deepen the ties between Indian and UK businesses in the near and long term.
The author is Executive Chair, UKIBC.
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