Government has been responsive to requests of PEs and VCs
The adherence to fiscal prudence under very trying global economic circumstances is widely appreciated. The efforts to encourage investments in Indian infrastructure are laudable.
The Union Budget 2016 has attempted to balance the imperatives of encouraging domestic demand and stimulating growth, whilst keeping the fiscal deficit and inflation firmly under control.
The adherence to fiscal prudence under very trying global economic circumstances is widely appreciated. The efforts to encourage investments in Indian infrastructure are laudable. This includes significant outlays for roads, railways and rural development. Improved infrastructure would lower the cost of doing business in India, and provide multiplier benefits for the economy.
The government has also been responsive to some of the long pending requests of the private equity and venture capital (PE/VC) industry. This is important as PE/VC has now become so essential for spurring growth in the Indian corporate sector.
These include the reduction in the applicable period of capital gains for unlisted companies from three year to two years, making this one of the major positives of this budget. Also start-ups have been given a three-year tax exemption and a respite on capital gains taxes, thus making this an entrepreneur friendly budget.
The improved tax efficiency with regard to FDI investments in Alternate Investment Funds, along with the removal of dividend distribution tax on REIT's, are steps in the right direction.
The clear messaging of a more stable and simplified tax environment is also welcome, although this has to translate on the ground. Even the hint of retrospective taxation sends wrong signals to investors and increases the uncertainty related to investing in India.
A prerequisite for domestic growth is to focus on prioritizing areas that will facilitate doing business in India - much more needs to be done here. Also the increases in dividend distribution tax, income tax surcharge and tax on PPF withdrawals could be a negative - historically in India, higher taxes have not lead to growth or investment.
Finally, it will be critical for the Government to push through key reforms like the GST and the new Bankruptcy code at the earliest.