UNION

2016-17

Budget 2016-17

INDEX
1.

Agriculture and farmers' welfare

2.

Rural Sector

3.

Social Sector Including Health Care

4.

Education, Skills and Job Creation

5.

Infrastructure and Investment

6.

Financial Sector Reforms

7.

Governance and Ease of Doing Business

8.

Fiscal Discipline

9.

Tax Reforms

Budget 2016-17

www.iasscore.in

AGRICULTURE And FARMERS' WELFARE

Agriculture growth in India has been stagnant since last 2 years. Last year the growth was -0.1% and this year
it is expected that growth would be 1.1%. Even today 48% of Indias population depends on Agriculture for
livelihood and stagnant Agriculture growth is leading to lack of demand for Industrial goods in rural areas
which is also putting a break on industrial growth. Thus no meaningful recovery in industrial sector is possible
until Agriculture sector takes off.
The incumbent Government understood this fact and therefore special emphasis have been given to agriculture
sector in this budget.
1)

Key Announcements related to Agriculture sector

The sector was allocated Rs. 47,912 crore in the budget for the year 2016-17, which is 84% more than
what; it had received during 2015-16.

(a) Irrigation
i)

Announcements

The Finance Minister announced creating a dedicated long term irrigation fund in the NABARD with an
initial corpus of about Rs. 20,000 crore and raising the agriculture credit target to Rs. 9 lakh crore for the
next fiscal as against the target of Rs. 8.5 lakh crore during 2015-16.

89 projects under the Accelerated Irrigation Benefits Programme (AIBP) that are languishing will be fasttracked.

2.85 million hectares will be brought under irrigation through the flagship Pradhan Mantri Krishi Sinchayi
Yojana (PMKSY) scheme in 2016-17.

To ensure irrigation equipment are made available at cheaper price, the government has reduced the excise
duty on on electric motor, shafts, sleeve, chamber, impeller, washer required for the manufacture of
centrifugal pump being reduced to 6% from 12.5%.

ii)

Likely impact

Currently, over 60 % of the total 142 million hectares of farm land in the country is not covered under
irrigation. Fast tracking of languished irrigation projects will help irrigate nearly 8 million hectare

Accelerated Irrigation Benefits Programme (AIBP), which was started in 1996 as a central financial
assistance programme to states for completing ongoing irrigation projects costing Rs. 1,000 crore or more
at that point in time. Since the beginning of AIBP, 297 major and medium irrigation projects and 16,769
minor projects have been approved for funding. Only 143 of the major ones have been completed, and
89 of them are in different stages of construction. It is these that the budget has now decided to put on
fast track.

iii) Challenges
Money is not the only constraint. Problems in land acquisition and technical difficulties like constructing
tunnels in some places have also hampered the execution of AIBP projects. Need work in that front also
to realize the target.

Notes

Budget

www.iasscore.in

(b) Agriculture Marketing

Since access to markets is quite critical for the income of farmers, the Finance Minister said, the government
was implementing the Unified Agriculture Marketing Scheme and an e-platform to this effect would be
launched on the birthday of Dr. Babasaheb Ambedkar on April 14.

This unified e-platform aims to connect up to 250Agri mandisby September 2016 and up to 585mandisby
March 2018. State governments will be urged to launch the e-market platform to unifymandisin the state,
thereby allowing farmers to sell their produce in anymandiof their choice. The Department of Agriculture
will also be providing free software to the state governments and help customize it as per their needs.

i)

Likely impact

Integration of Agri-markets across the country through the e-platform is seen as an important measure for
overcoming the challenges posed by the present agri-marketing system namely - Fragmentation of State
into multiple market areas, each administered by separate APMC, multiple levy of mandi fees, requirement
for multiple license for trading in different Agriculture Produce Market Committe (APMCs), licensing
barriers leading to conditions of monopoly, poor quality of infrastructure and low use of technology,
information asymmetry, opaque process for price discovery, high level of market charges, movement
controls, etc.The need to unify the markets both at State and National level is, therefore, clearly the
requirement of time, in order to provide better price to farmers, improve supply chain, reduce wastages
and create a Unified National Market.

(c) Agriculture Credit & Finance

In order to finance initiatives to improve the agriculture sector, the Minister proposed to impose Krishi
Kalyan Cess of 0.5% on all taxable services. This new cess will come into force from June 1.

Rural credit got a boost, too, from a target ofRs. 8.5 trillion in 2015-16 toRs. 9 trillion next year. To ease
the burden of loan repayment on drought-hit farmers, the budget allocatedRs. 15,000 crore towards
interest subvention.

i)

Likely impact

Interest subvention can help lower finance costs for farmers and Increase in rural credit will safeguard
farmers from the clutches of exploitative money-lenders and it will also increase the crop yield as farmer
will be able to use high quality seeds and equipments.

ii)

Challenges

To derive the intended benefits, the government has to ensure that the financial targets are achieved. At
present, both banks and farmers are reluctant to lend or borrow due to the weak financial profiles and farm
sentiments.

(d) Insurance
Funding for the recently launched crop insurance scheme, Pradhan Mantri Fasal Bima Yojana (PMFBY)
has been more than doubled fromRs. 2,589 crore in 2015-16 (Budget Estimate) toRs. 5,500 crore for
2016-17.

i)

Likely impact

Push to crop insurance will help lower the impact of crop and monsoon failures.

Notes

Budget

www.iasscore.in

(e) Soil Health Card & Organic Farming

Target to cover all 140 million farm holdings under the soil health card scheme by next year (March 2017).

To increase crop yields in rain-fed areas, government to promote organic farming aims to bring 500,000
acres under organic farming in 3 years. the budget allocatedRs.412 crore towards organic farming

i)

Impact

A greater thrust of Soil Health Card Scheme will educate farmers about the nutrient level of the soil. This
can drive farmers towards the judicious usage of fertilizers.

Also, the schemes for organic farming will improve soil health and productivity.

(f) Fertilizers

Government also announced to introduce Direct Benefit Transfer of fertilizer subsidy to farmers on pilot
basis in few districts of the country.

On fertilizer products, the government has reduced the excise duty on micro nutrients, which are covered
under the Fertilizer Control Order, 1985 and manufactured by registered entities, to 6% from the existing
12.5%.Also, the excise duty has been exempted on physical mixture of fertilisers made out of chemical
fertilisers on which duty of excise has been paid by co-operative societies and those holding certificate of
manufacture for mixture of fertilisers under the Fertiliser Control Order 1985 for supply to the members
of such co-operative societies.

i)

Likely impact

Impact of DBT is discussed separately in detail later in this chapter.

Reduction of excise duty on micro-nutrients would reduce the prices of these fertilizers which would
incentivize the farmers to use it and this would correct the imbalance in the fertilizer use where Urea is
used more than other fertilizers.

(g) Pulses
To increase crop yields in rain-fed for enhancement in pulses production, the budget allocatedRs. 500
crore under the National Food Security Mission. The programme will cover 622 districts in the country.

The budget has also proposed to increase the provision for thePrice stabilization fundto Rs 900 crore,
which will go for creating buffer stock of pulses.

i)

Criticism

If the government wants to procure 50,000 tonne pulses as it had announced, the provision of Rs. 900
crore under the Price Stabilisation Fund seems to be inadequate.

Amount under National Food Security Mission (NFSM) is also inadequate to make any significant
transformation in the production of pulses.

However, the announcement of theFinance Ministerto increase the scope and efficiency of Minimum
Support Price (MSP) operations may be helpful for pulses in the long term. The budget proposed to
increase scope of decentralised procurement and to take up online procurement through Food Corporation
of India. If farmers are assured that pulses will be procured at MSP without any hassle, they will not
reduce area under the crop.

Notes

Budget

www.iasscore.in

(h) Livestock

The budget has provided for Rs. 850 crore in next few years for spending on the Pashudhan Sanjivani,
an animal wellness programme and provision of Animal Health Cards (Nakul Swasthya Patra); 2nd an
Advanced breeding technology; 3rd, Creation of E-Pashudhan Haat, an e-market portal for connecting
breeders and farmers; and 4th, a National Genomic Centre for indigenous breeds.

i)

Impact

India lacks in animal records, high quality breed and has been neglecting local breeds. The budget
provision of Rs. 850 crore is in right direction. The improved breeding will deliver increased productivity
and hence improve farmer profitability.

E-commerce will help us improve transparency and eliminate middle men. The proposed e-commerce
platform will help connect those who are looking for good breeds with the breeders.

The National Genomic Centre will help unleash potential we have in our indigenous breeds and take it
to thefarmersto translate into their dairy operations. The focus on advanced breeding is also good as the
sexed semen technology, patented by 2 global companies, is not locally available in India.

Finance Minister also proposed to amend section 35 (AD) of the Income-tax Act so as to reduce the
deduction from 150% to 100% in the case of a cold chain facility, warehousing facility for storage of
agricultural produce, production of fertiliser among others effective from April 1st 2016.

To encourage cold storage facilities in the farm sector, Finance Minister Arun Jaitley, exempted service
tax on all facilities provided by the state-run National Centre for Cold Chain Development effective from
April 1st 2016 At present, the service tax rate is 14%.

To facilitate import of some cold chain equipment, thegovernment also extended concessional 5 per cent basic
customs duty for pre-cooling units, pack houses, sorting and grading lines and ripening chambers also.
2)

Analysis of some new Announcements

(a) Krishi Kalyan cess

Union Budget for 2016-17 (April-March) introduced a new cess on services named Krishi Kalyan Cess at
the rate of 0.5%. The effective rate of the Krishi Kalyan Cess, however, will be lower than 0.5% as the
government will provide input tax credit for the cess, as against no input tax credit for Swachh Bharat
Cess.

Proceeds of cess would be exclusively used for financing initiatives relating to improvement of agriculture
and welfare of farmers.

(b) Direct Benefit Transfer For Fertilizer Sector

Government also announced to introduce Direct Benefit Transfer of fertilizer subsidy to farmers on pilot basis
in few districts of the country.
Why DBT is needed in Fertlizer sector?

Currently The government has fixed the Maximum Retail Price (MRP) of Urea at Rs. 5,360 per tonnes.
The difference between the Urea MRP and the cost of production is being reimbursed to the Urea
manufacturers. That constitutes subsidy for Urea.

The government had allocated Rs.72,968.56 crore forfertiliser subsidy, out of which Rs. 38,200 crore was
earmarked fordomestic Urea.

Notes

i)

Budget

www.iasscore.in

At present there is excess focus and usage of Urea, delayed subsidy payments, Non-availability of
domestic natural gas and inconsistent goverment policy. The current selling price of Urea which is highly
subsidised is almost 1/4th the world price. This not only leads to excess usage of Urea but also leads to
leakage of subsidized Urea at a open market and even are exported illegally to neighboring countries.

Urea is highly subsidized which makes the prices of decontrolled Nitrogen Phosphorus and Potossium
(NPK) fertilizers 3-4 times higher, thereby,decreasing their consumption.

Though the government allowed gas pooling recently, but the entire benefit goes to Urea industry and not
to NPK manufacturers.

DBT has shown positive results in LPG sector where it has reduced subsidy burden for government by
eliminating ghost beneficiaries.

If the farmers are given subsidy directly, this will not only stop leakage but will also avoid unnecessary
payments.

Filling leakages: DBT will help in reducing mal-practices like leakages, ultimately giving the beneficiary
what he/she is entitled per work and red-tapism.

ii)

Challenges of introducing DBT in Fertilizers

Replicating the DBT model in fertilizers requires more than just a robust system of identification for
eliminating fictitious/duplicate beneficiaries. This would mean, firstly, capping the number of bags on
which the subsidy is payable, based on a reasonable assessment of requirement. That, in turn, would
depend on the specific fertilizer as well as the crop and location where it is grown Making it more
complicated than the straight one product-12 cylinders formula in DBT for LPG.

Implementing the PAHAL-DBT model in fertiliser will also require arriving at indicative non-subsidised
market rates, linked to international prices.

The issue of upfront payment not all farmers can pay market prices for say, fertilisers and wait for the
subsidy to be credited to their bank accounts is far more serious than in LPG cylinders. Not all farmers
can pay Rs. 20,000 now and wait for the subsidy to be credited to their bank accounts. In the event of
prices hardening, the problem of upfront payment becomes even more critial.

The main issue in DBT is over the practicability of making direct payments to crores of farmers, as
opposed to the current system where the government pays subsidy to just 100 or so manufacturers and
importers of fertilisers.

3)

Way Forward

The 1st requirement for DBT is a system to track the movement of every bag of fertilizer, right from the
manufacturing plant or port of import till the last-mile point of sale to the farmer.

A uniform fertilizer subsidy policy is must for DBT.

To solve the issue of upfront payment, provision of issuing Kisan Subsidy Cards to be used solely for
making upfront payments on subsidised inputs like fertiliser and seed could be made. Such payments
would be allowed only through custom-made swipe machines at fertiliser/seed stores, with the card getting
recharged when the subsidy from the government is transferred into the farmers bank account.

Notes

Budget

Budget 2016-17

www.iasscore.in

RURAL SECTOR
Rural India consists of about 650,000 villages which contribute near 69% of the population. Directly &
indirectly this population contributes near 50% of the GDP. This years budget is painted as pro farmer, pro
rural & pro Infrastructure.
Major announcements for Rural Sector:

Allocation for Rural Sector - Rs.87,765 crore.

Rs.2.87 lakh crore will be given as Grant in Aid to Gram Panchayats and Municipalities as per the
recommendations of the 14th Finance Commission.

Every block under drought and rural distress will be taken up as an intensive Block under the Deen Dayal
Antyodaya Mission.

A sum of Rs.38,500 crore allocated for MGNREGA.

300 Rurban Clusters will be developed under the Shyama Prasad Mukherjee Rurban Mission

100% village electrification by 1st May, 2018.

District Level Committees under Chairmanship of senior most Lok Sabha MP from the district for
monitoring and implementation of designated Central Sector and Centrally Sponsored Schemes.

Priority allocation from Centrally Sponsored Schemes to be made to reward villages that have become free
from open defecation.

A new Digital Literacy Mission Scheme for rural India to cover around Rs. 6 crore additional household
within the next 3 years.

National Land Record Modernisation Programme has been revampedand Rs. 150 crore has been provided
for this purpose.

New scheme Rashtriya Gram Swaraj Abhiyan proposed with allocation of Rs. 655 crore.

2)

How New Proposals will support Rural India?

Enhanced allocation to Gram Panchayats as per recommendations of the 14th Finance Commission will
resolve the issue of fund crunch for major rural development programmes. It will translate to an average
assistance of over Rs.80 lakh per Gram Panchayat.

Poor Monsoon for last 2 years has created much distress in rural area & even reduced the growth rate of
production in agriculture.

Under Deen Dayal Antyodaya Mission Formation of Self Help Groups (SHGs) will be speeded up to
promote multiple livelihoods. Cluster Facilitation Teams (CFT) will be set up under MGNREGA to
ensure water conservation and natural resource management. These districts would also be taken up on
priority under Pradhan Mantri Krishi Sinchaii Yojna.

Notes

1)

Budget

www.iasscore.in

Development of 300 new Rurban clusters will incubate growth centres in rural areas by providing
infrastructure amenities and market access for the farmers. They will also expand employment opportunities
for the youth.

With 100% electrification of rural areas, every section of India will have access to electricity.

To make the India open deification free which is a major challenge in rural areas, Under Swachh Bharat
Mission is Indias biggest drive to improve sanitation and cleanliness, especially in rural India, priority
allocation from Centrally Sponsored Schemes will be made to reward villages that have become free from
open defecation. It will reduce the incidences of diseases & improve health parameters.

Digital literacy mission which includes National Digital Literacy Mission; and Digital Saksharta Abhiyan
(DISHA) will support the realization of Digital India. it will speed up digital delivery of services in rural
areas and also create the new job opportunities for rural youth.

Modernization of land records is critical for dispute free titles. The National Land Record Modernisation
Programme has been revamped under the Digital India Initiative and will be implemented as a Central
sector scheme with effect from 1st April, 2016. The revamped Programme will build an integrated land
information management system.

Rashtriya Gram Swaraj Abhiyan will develop governance capabilities in Panchayat Raj Institutions to
deliver on the Sustainable Development.

Apart from these rural road development get Rs.19000 crore. This will help to integrate the remaining
villages with economic development of India & provide ease of transportation & boost economic activities
in these areas.

Increased allocation under MNREGA will eanable to cope the landless laboureres & even small farmers
to overcome the distress created by droughts in last 2 year, increase the rural income & support the poor
to come out of poverty. It is expected that 215 crore persons days of employment to be created under
MGNREGA this year. At least 5 lakh farm ponds & dug wells in rain fed areas and 10 lakh manure pits
for production of organic manure will created by making productive use of allocations under MGNREA.

National Rural Drinking Water Programme for supplementing the States in their effort to provide safe
drinking water to all rural habitations. Rs.5000 crore has been provided for this purpose.

3)

Criticism:

Huge allocations made to Panchayats raise question on the utility of this fund as Pachayats have still
lacking in resource management the capacity & are poor in book keeping, Fund Management.

As MGNREGA is demand driver, increased allocation would not help if, funds are not released on time
thus a reduction in number of man days is observed.

There are question on the success of Shyama Prasad Mukherjee Rurban Mission, as same model was
followed in Providing Urban Amenties to Rural Areas (PURA), previous cluster based scheme for rural
development which was not a success!

Digital literacy will be challenging in rural areas as basic literacy is at low & infrastructure for digital
platform is lagging.

Rationalization of farm subsidy has not done which require political will.

Even after electrification in many villages, the number of hours electricity is provided is very low. Thus
without providing electricity for adequate Number of hours, electrification alone would not help.

Notes

Budget

www.iasscore.in

There is a huge cut in the Industrial and Commenrcial Developmnent Corporation (ICDS) which is
mainly benefiting the children in rural areas & supporting them to stay out of malnutrition.

The condition of roads built earlier through Pradhan Mantri Gram Sadak Yojana is poor! Some of them
are even worse than Kutchha roads. Regular maintenance of these roads itself is a challenge.

Notes

Budget

Budget 2016-17

www.iasscore.in

SOCIAL SECTOR INCLUDING HEALTH CARE

Allocation for social sector including Education and Health Care Rs.1,51,581 crore.
1)

LPG Connections:

Rs. 2,000 crore have been allocated for initial cost of providing LPG connections to BPL families.

The Scheme to be continued for at least 2 more years to cover a total of 5 crore BPL households. This
will ensure universal coverage of cooking gas.

This measure will empower women and protect their health. It will reduce drudgery and the time spent
on cooking.

It will also provide employment for rural youth in the supply chain of cooking gas.

It will also help in reducing carbon footprint as soot from burning of cow dung or firewood would be
reduced.

2)

Health:

a.

New Health Protection Scheme

New Health Protection Scheme will provide health cover up to Rs. 1 lakh per family will be launched.
For senior citizens an additional top-up package up to Rs. 30,000 will be provided.

This will help reduce out-of-pocket expenditure of poor and economically weak families and they will be
relieved from financial stress.

This is a positive move and an improvement over the Rashtriya Swasthya Bima Yojana (RSBY) scheme. RSBY
was successful, but the cover was onlyRs.30,000 for a family of 5 persons. The premiums were shared by
the Centre and the state, individuals had to payRs.30 only. The policy did not include outpatient care.
Prime Ministers Jan Aushadhi Yojana

3,000 Stores under Prime Ministers Jan Aushadhi Yojana will opened during 2016-17. This will help
provide quality generic medicines at affordable price.

c.

National Dialysis Services Programme

About 2.2 lakh new patients of End Stage Renal Disease (Kidney Failure) get added in India every year
resulting in additional demand for 3.4 crore dialysis sessions.

Dialysis centres in India, largely in the private sector and concentrated in the major towns, the demand
is only half met.

National Dialysis Services Programme to be started under National Health Mission through PPP mode.

Exemption of certain parts of dialysis equipment from basic customs duty, excise Countervailing Duty
(CVD) and Speical Additional Duty (SAD).

This will also reduce the frequent trips made by families, often over long distances, to access dialysis
services, incurring heavy travel costs and loss of wages.

Notes

b.

Budget

www.iasscore.in

3)

Enterprenuership

a.

Stand Up India Scheme

Stand Up India Scheme to facilitate promote entrepreneurship among SC/ST and women.

The Scheme will facilitate at least 2 projects per bank branch. This will benefit at least 2.5 lakh entrepreneurs.

National Scheduled Caste and Scheduled Tribe Hub to be set up in partnership with industry associations.

This Hub will provide professional support to Scheduled Caste and Scheduled Tribe entrepreneurs to fulfil
the obligations under the Central Government procurement policy 2012, adopt global best practices and
leverage the Stand Up India initiative.

The schemes for welfare and skill development for Minorities such as Multi-sectoral Development
Programme and Upgrading the Skills and Training in Traditional Arts/Crafts for Development
(USTAAD) shall be implemented effectively.

Earlier government has launched SC Venture Capital Fund for economic empowerment of the person from
the marginalized section.
4)

Measures for moving towards a pensioned society

Withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension
Scheme.

The annuity fund which goes to the legal heir after the death of pensioner will not be taxable in all 3
cases. Also, we are proposing a monetary limit for contribution of employer in recognized Provident and
Superannuation Fund of Rs. 1.5 lakh per annum for taking tax benefit.

Exemption from service tax for the Annuity services provided by the National Pension System (NPS)
and Services provided by Employees Provident Fund Organisation (EPFO) to employees.

Reduction service tax on Single premium Annuity (Insurance) Policies from 3.5% to 1.4% of the premium
paid in certain cases.

Government to contribute 8.33% in Employees Pension Scheme (EPS) of new employees for 3 years.

All these steps will bring a kind of parity among pension schemes like EPF and NPS. The exemption of 40%
corpus of NPS at the time of withdrawal will boost the enrollment in the scheme.
Promise of FDI in pensions and a social security platform linked to Aadhaar is also a good move.

Notes

But the decision of funneling of money into EPS is a regressive decision but it will boost formal employment.

10

Budget

Budget 2016-17

www.iasscore.in

EDUCATION, SKILLS And JOB CREATION

Education is fundamental to economic growth and social transformation of any country. It makes a person
employable for semi-skilled jobs and provides skilled workforce and higher-order knowledge creation for future.
India with her large demographic dividend needs to focus on education and skill development in order to reap
the benefits.
The current state of education in many states in the country is deplorable due to inadequate infrastructure,
inappropriate quality of teachers and weak governance system. Many states do not have necessary will or
resources to revamp education system. Higher priority needs to be given to strengthen primary and secondary
education system.
The budget 2016-17 made significant announcements for this sector which can be highlighted as:

The government has announced a marginal increase of 4.8% in the overall budget for education with a
bigger thrust on improving higher learning. The fund has been increased to Rs. 72,394 crore against Rs.
69,074 provided last year.

The government will set up a Higher Education Financing Agency (HEFA) with an initial capital base
ofRs.1,000 crore. HEFA will be a not-for-profit organization that will leverage funds from the market and
supplement them with donations and Corporate Social Responsibility (CSR) funds. The funding agency
will finance infrastructure expansion and renovation of government institutions such as IITs, IIITs, NITs
and different central universities. These funds will be used to finance improvement in infrastructure in our
top institutions and will be serviced through internal accruals.

Setting up of a National Board for Skill Development Certification in partnership with the industry and
academia. The government also proposed to further scale up the Pradhan Mantri Kaushal Vikas Yojna to
impart skill training to 10 million young people over the next 3 years, from the current 2.4 million. It will
enable to bring skill education to those who do not have the financial capacity to pay for their training.

Scheme to get Rs.500 crore for promoting entrepreneurship among SC/ST. This is expected to benefit as
many as 2.5 lakh entrepreneurs. A large number of entrepreneurs and the creation of an entrepreneurial
environment will not only benefit the individual but also create a job ecosystem, which will contribute
to better livelihoods.

10 public and 10 private educational institutions to be made world-class.

Digital repository for all school leaving certificates and diplomas. Rs. 1,000 crore for higher education
financing.

Rs. 1,700 crore for setting up 1500 multi-skill development centres across the country. India is in need
of such institutions from long as we are still not able to tap the large potential of the country.

62 new Navodaya Vidyalayas to provide quality education. It would aid rural students get quality education.

Digital Literacy Scheme to be launched to cover 6 crore additional rural households

Entrepreneurship training to be provided across schools, colleges and massive online courses.

The government proposes to focus on higher education. In the same direction, IITs witnessed a hike of
almost Rs.700 crore in their allocation. The Rashtriya Uchchtar Shiksha Abhiyan (RUSA), a scheme

Notes

1)

Budget

11

www.iasscore.in

focused on funding higher education in states, saw an increase of 18% from Rs.1,000 crore in 2015-16
to Rs.1,300 crore this year.

The government has raised allocation by Rs1.335 crore, for Sarva Shiksha Abhiyan and the Mid Day
Meal Scheme.

2)

The budgetary allocation as compared to last budget can be stated as:

3)

BE 2015-16 (in cr)

BE 2016-17 (in cr)

Higher education

69,074 72,394

School education

28,840 43,554

Likely impact:
Criticisms:

The 2016-17 Union Budget has allocated Rs.72,394 crore compared to Rs.68,963 crore for last year,
which is about 4.9% increase in education sector of the budget. About 4% of the total budget and 0.5%
of the GDP is allocated for education. This is a far cry from the 6% of GDP that had been recommended
by the Education Commission set up in 1966 under the chairmanship of D.S. Kothari.

The government has again missed the boat on secondary education. Focused attention needs to be paid
to this part of school education to ensure that students are well-equipped to tackle higher education.

Instead of regulating fees in private institutes (and for that matter government institutes), the government
needs to provide for easy and low interest (or interest-free) student loans and a large number of scholarships
for meritorious students. This would ensure that higher educational institutes are financially viable while
ensuring there is equity.

b)

Positive Outcomes:

The last budget did not focus much on education sector. But the Union Budget 2016-17 looks promising
for Indias youth, as there are measures towards improving the quality of education, focus on skill
development, improving teaching and research outcomes, emphasis on job creation, and creating an ease
of business environment to promote entrepreneurship. It will boost the confidence of bridging the skills
gap and place India in a relatively much better position on the global skills landscape.

The Budget clearly aims towards creating parity across all sections to ensure overall economic growth of
the individual as well as the country. There is a clear effort to strengthen the economy through substantial
investment in infrastructural development, healthcare, job creation, skill development, and micro, small
and medium enterprises. It is expected to bring good changes in the level of skills which will enhance
employability.

Notes

a)

12

Budget

Budget 2016-17

www.iasscore.in

INFRASTRUCTURE And INVESTMENT

Infrastructure is one of the strong pillars of economy and "exemplary" and "proactive" steps by government
to remove hurdles resulted in India awarding highest ever road contracts in 2015 as well as highest ever sales
of motor vehicles which are clearly "signs of growth". However, the progress in Indian infrastructure has been
painstakingly slow in recent years. The infrastructure sector suffers from lack of funds, clearance and regulatory
hurdles. This leads to stalling of a large number of projects.
The budget 2016-17 made significant advances in this sector and increased allocation for some projects which
are aimed at boosting the growth of the sector. Several measures are under way in various line ministries, such
as projects under the Sagarmala Port Development Program, financing of Smart Cities and Atal Mission for
Rejuvenation and Urban Transformation (AMRUT) and the Hybrid Annuity Model for National Highways.
It has focussed on the Roads sector, alongside Railways and Ports, as a key vehicle for catalysing public
investments. Thrust areas include the construction and award of 10,000 kms roads each over the next fiscal,
upgradation of 50,000 km. of state highways into national highways and rolling out of 85% of the stuck
projects.
Some of the announcements are as:

Rs.27,000 crore to be spent on Roadways

65 eligible habitats to be connected via 2.23 lakh km. of road. This will provide connectivity to far off
places in the country.

The fund for the sector has been raised to Rs.55,000 crore for Roads and Highways. Total allocation for
road construction, including Pradhan Mantri Gram Sadak Yojna (PMGSY), would amount to Rs.97,000
crore. Total outlay for infrastructure in Budget 2016 now stands at Rs.2,21,246 crore.

National Highways Authority of India (NHAI) will raise funds through bond sales. Rs.31,300 crore of
Bond issuance by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority are expected to be
raised during 2016-17.

To bolster ports sector, Rs. 8,000 crore has been provided for Sagarmala Project. Further, new greenfield
ports will be developed on east and west coasts. This will boost the port sector. Ports in the public sector
will be encouraged to corporatize and become companies under the Companies act2013.

Plans for revival of underserved Airports. Under this, 160 airports will be revived with an allocation of
Rs 50-100 crore each. Also, 10 out of 25 non-functional air-strips will be developed. The Centre is to
partner with States to revive small airports for regional connectivity. This move is aimed at boosting the
civil aviation sector and improving regional connectivity. This development will be a part of the governments
low-cost airport plan and will help reduce the cost of domestic flights.

Department of Disinvestment to be renamed as Department of Investment and Public Asset Management.

Minimum Alternate Tax (MAT) will be applicable for startups that qualify for 100% tax exemption. This
may however, reduce the interest of the investors.

10,000 km. of National Highways in 2016-17 and 50,000 km. State Highways to be converted to National
Highways (NH) roads.

Notes

1)

Budget

13

www.iasscore.in

Service tax exemption for affordable housing schemes even within the realm of public-private partnership
(PPP).

2)

The Government Has Announced Plans To Re-vitalise PPPs. Some Of Them Are:

Public Utility (Resolution of Disputes) Bill will be introduced during 2016-17

Guidelines for renegotiation of PPP Concession Agreements will be issued

New credit rating system for infrastructure projects to be introduced

Reforms in FDI policy in the areas of Insurance and Pension, Asset Reconstruction Companies, Stock
Exchanges.

100% FDI to be allowed through Foreign Investment Promotion Board (FIPB) route in marketing of food
products produced and manufactured in India.

A new policy for management of Government investment in Public Sector Enterprises, including
disinvestment and strategic sale approved.

For railways sector also which is suffering from lack of investments, the government aims to generate 1020% of Revenues from non-tariff sources over next 5 years by monetising assets. Apart from this, Rs.
50 crore has been earmarked for innovation grants to start ups.

3)

Likely impact:

Enhanced allocation in road and highways sector by around 22% is definitely a positive for this sector.
However, role of private sector investment would be key to achieve the target of 10,000 km of National
Highways construction during Financial Year (FY) 2016-17. Therefore, 2 initiatives such as Public Dispute
Resolution Body and Guidelines for renegotiation of PPP contract are important to provide necessary
impetus to the PPP model of procurement in roads and highways sector which has suffered due to
disputes and litigations.

Development of roads would help the road segment gain market share in the countrys overall freight
movement thereby driving growth in commercial vehicles in the long run.

Focus on public capital expenditure might help crowd in private investment demand as well. Roads are
known to have huge multiplier effects. Road construction companies will gain from order inflows and
government support to see projects completion soon. Some scepticism on ordering out remains as clarity
on manner of outlay of funds for roads is awaited.

Tax incentives may spur demand for homes. The profit exemption for developers, however, will not
benefit bigger listed realty firms. Clarity on dividend distribution tax of Real Estate Investment Trusts
might lead to more funding of realty projects.

The infrastructure boost will, in the long term, improve demand for cement. However, the higher cess
on Coal may hurt profit margins of cement companies, as oversupply may hinder them from passing on
the cost increase to buyers.

Better credit rating system for infrastructural projects will bring in funding on reasonable terms to aid
firms in execution.

The focus on improved infrastructure through network of roads, rail, ports and airports will provide
impetus for enhanced growth and in turn, generate employment.

Equal emphasis has been laid on railways, ports and aviation sector. With the announcements made, the
infrastructure sector is likely to witness growth in the coming years.

Notes

14

Budget

Budget 2016-17

www.iasscore.in

FINANCIAL SECTOR REFORMS

Financial Sector reforms are mentioned as 1 of the 9 key areas which receive special attention in this Budget.
Financial sector include Banks, NBFC, ARC etc.
1)

Key provisions in the Budget

(a) ARC,S

The major proposal in the budget to tackle the problem of stressed assets in the banking sector concerns
the Asset Reconstruction Companies (ARCs).

The budget proposed to make necessary amendments in the SARFAESI Act 2002, to enable the sponsor
of an ARC to hold up to 10% stake in the ARC and permit Non-instituional investors to invest in
Securitsation Receipts.

The Budget permits 100% FDI and Sponsor ownership on Asset Reconstruction companies.

Likely Impact

This is likely to boost the effectiveness of ARCs in resolution of distressed assets.

(B) Bankruptcy code

At present, a systemic vacuum exists with regard to bankruptcy situations in financial firms. Finance
Minister announced thatcomprehensivecode will be enacted and legislation will be brought in to deal
with illicit deposit taking schemes.

This Code will provide a specialized resolution mechanism to deal with bankruptcy situations in banks,
insurance companies and financial sector entities. This Code, together with the Insolvency and Bankruptcy
Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy.

The proposed law aims to reduce delays in resolution of insolvency cases and improve recoveries of
amount lent to companies. The draft bill has proposed a timeline of 180 days, extendable by another 90
days, to resolve cases of bankruptcy.

(C) Banking sector

To support the Banks in dealing with the problem of Non Performing Assets (NPAs)25000 crore rupees
will be infusedtowards recapitalization of Public Sector Banksin 2016-17.

The Bank Board Bureau (BBB)will be operationalized during 2016-17 and a roadmap for consolidation
of Public Sector Banks will be spelt out. The BBB was formed under chairmanship offormer CAG Vinod
Raion 28th February 2016.

The process of transformation ofIDBI Bankhas already started. Government will take it forward and also
consider the option of reducing its stake to below 50%.

Budget also proposed Code on Resolution of Financial Firms. The Code, announced in the Budget last
week, envisages a Resolution corporation.

Notes

Budget

15

www.iasscore.in

i)

Where there is need for Resolution Corporation?

Unlike in the West, there is no shuttering of banks in India. Rather, the regulator and government work
together to nudge or force a tottering bank to merge with another lender.

A powerful resolution corporation would step in much before the lender or financial firms net worth
(capital plus reserves minus liabilities) erodes by selling assets, changing the management, even winding
up in an orderly way ensuring there is little impact on the financial system or the economy in the event
of its failure. This would strengthen our Financial system.

ii)

Challenges

A resolution corporation will succeed only if it is empowered to take swift action overnight in many cases
without its order on winding up or dissolving of a firm facing legal challenges. That would mean drafting
a law to give it the requisite powers, and incorporating changes in other laws such as the Bank Nationalisation
Act, SBI Act and LIC Act. That wont be easy, especially considering hurdles in getting laws approved
in Parliament.

2)

Criticisms of Budget Provisions

The budget have been criticized on following grounds by many experts

People were expecting a reform to foreign investment in stock exchanges, which has increased from 5%
cap per investor to a 15% cap. From a control perspective, foreign investors would not be interested in
such an increase, which raises their capital investment but restricts their ability to control the domestic
exchange any further. A 5% control is quite similar to a 15% control in terms of ability to change
management. So increasing investment will not look inviting.

The concept of taking away the double taxation for dividend for high net worth investors and promoters
means that there is now triple taxation. (i) When the company pays corporate tax, (ii) When the
company pays dividend distribution tax (iii) When the investor pays tax. This may be sound rich bashing,
but is poor policy for capital formation and investment.

Public banks are to be capitalized by only Rs. 25,000 crore. The NPAs, the real quantum of which is
a matter of conjecture, but by all estimates well in excess of that figure will restrict the ability of banks
to lend purposefully. Particularly to the infrastructure sector and to the corporate sector in general.

Many recommendations of the Justice Srikrishna financial sector committee, with 2 exceptions, have
not been announced for implementation.

No decision was made on the long-awaited reform in the taxation of alternative investment funds that
invest in listed securities. Currently, they neither get the benefit of a pass-through nor do they get the
benefit of long-term capital gains available to an investor who invests directly in listed securities. The
illogical lack of such benefit means that a person investing inINFOSYSor other listed stock will pay 0%
capital gains tax if held for a year, but if the same investor were to invest through the SEBI-registered
AIF, he would pay upwards of 35% tax and harassment for paying even more. This could have been a
major source of investment from domestic savers who under invest.

Notes

16

Budget

Budget 2016-17

www.iasscore.in

GOVERNANCE And EASE OF DOING BUSINESS

DefinitionEase of doing business is an index published by the World Bank. It is an aggregate figure that, includes
different parameters which define the Ease of Doing Business in a country.

1)

Description:

It is computed by aggregating the distance to frontier scores of different economies. The distance to
frontier score uses the Regulatory Best Practices for doing business as the parameter and benchmark
economies according to that parameter.

For each of the indicators that form a part of the statistic Ease of doing business, a distance to frontier
score is computed and all the scores are aggregated. The aggregated score becomes the Ease of doing
business index.

Indicators for which distance to frontier is computed include construction permits, registration, getting
credit, tax payment mechanism etc. Countries are ranked as per the index.

India ranks dismal in the ease of doing business index. Though Indias Rank improved 12 places since
the incumbent government came to power India still ranks 130 out of 186 countries.

2)

Budget 2016 on Ease of Doing Business:

The governments focus in terms of Ease of Doing Business has been not just for corporate entities but
also for ordinary people, with attempts being made to remove irritants in their dealings with the government.

The overarching theme in terms of Ease of Doing Business has been to minimize government and
maximize governance. With that focus, the government has constituted a task force for rationalizing
human resources in the government and in autonomous bodies.

Complicated and vague tax provisions in India leads to lots of litigation Which prevents Ease of Doing
Business in INDIA. This budget introduced several steps across direct and indirect taxes to reduce
disputes, clarify existing laws and free up money locked in litigation. The budget offered a way out to end
tax disputes arising from retrospective taxation of capital gains, presented the road map for phasing out
corporate tax exemptions, announced a slew of measures to reduce tax disputes (especially in areas such
as transfer pricing and indirect taxes), and deferred implementation of POEM (Place of Effective
Management) rules by another year.

The government offered a one-time settlement of pending tax disputes relating to retrospective amendments
to tax laws. Companies embroiled in tax disputes will be able to pay tax arrears and get a waiver of
interest and penalty provided. They withdraw all appeals against the government in all judicial forums,
including international arbitration under bilateral investment protection agreements. This means companies
like Vodafone Group Plc. and Cairn Energy Plc. will have the option of pursuing their disputes or go for
a settlement.

The budget announced introduction of 11 new tax tribunal benches for indirect taxes and steps to reduce
transfer pricing litigation. It also moved to implement the recommendations of the R.V. Easwar committee
to simplify income-tax laws including rationalization of tax deducted at source provisions.

Notes

Budget

17

www.iasscore.in

A bill to amend the Companies Act 2013 will be introduced in the current session of Parliament for
greater ease of doing business, including for facilitating registration of a new company in just one day.
The Bill would also improve the enabling environment for start-ups.

Other steps included moderation of the penal interest to 30%, clarifications on the scope of intermediary
services, etc. and measures to align the current tax regime closer to Goods and Service Tax (GST) by
pruning exemptions and rationalization of tax rates.

Recognising high penalty as the main reason for income tax litigation, the government announced a series
of measures in the Budget 2016-17 to reduce the penalty percentage and encourage taxpayers to settle
disputes expeditiously

There are currently over 3 lakh cases involving amount of over Rs 5.5 lakh crore pending in direct taxes.
To reduce litigation from the assessees side, the government has reduced the maximum penalty rate from
100-300% to 50-200%. The penalty for misreporting income stands doubled to 200%.

To ease the process of exit of loss making firms government is planning to bring bankruptcy code in
Parliament.

3)

Issues:

Even as penalty rates are being lowered, tax experts said significant discretion will still be available to
the tax officers under the new dispensation, which needs to be reduced for litigation to come down.

The discretion to levy penalty has been provided to the assessing officer for malafide intent only, not for
the bonafide. However, what constitutes malafide or bonafide intent is not clearly defined which means
that still tax official has lots of discretion.

As explained in the Budget documents, under-reported income is basically the difference between the
income assessed and returned, while misreporting is defined to include situations of misrepresentation,
suppression of facts, claims of expenditure not substantiated by evidence, false entries in the books and
so on. It is in the case of misreported income, which will attract 200% penalty, where the tax assessing
officer can exercise discretion.

4)

Other Steps Taken By The Incumbent Government To Improve Ease Of Doing Business:

Reducing disputes with taxpayers, providing clarifications by way of circulars (non-applicability of MAT
to foreign companies in certain cases).

Abolishing wealth tax.

Reducing corporate tax to 25%

Introducing e-Business portal which merges 14 regulatory permission at 1 place.

Proposal to bring Bankruptcy law for easier exit of investors

Deferring General Anti-Avoidance Rule (GAAR) by 2 more years.

Establishment of dedicated branches in court for early resolution of commercial disputes

Getting rid of distinction between FDI & FII.

Merging Forward Market Commission (FMC) With Security and Exchange Board of India (SEBI).

Reduction in the number of documents required to export & import to 3 from 10.

Notes

18

Budget

www.iasscore.in

Security clearance by Foreign Investment Promotion Board (FIPB) investment proposal will now be cleared
by 30 days down from 90 days.

Proposed 5 pronged labor code to replace the 44 laws.

Introduction of Labor Identification Number and putting inspection on unified portal.

Fast track approval agreement with Japan & Germany.

FIPB permission now only for FDI investment above Rs.5000 crore. Previously that the limit was Rs.3000
crore.

Notes

Budget

19

Budget 2016-17

www.iasscore.in

FISCAL DISCIPLINE
Definition:
The difference between total revenue and total expenditure of the government is termed asfiscal deficit. It
is an indication of the total borrowings needed by the government. While calculating the total revenue,
borrowings are not included.
Ill-effects of Fiscal Deficit

According to the neo-classical economists, a high government deficit leaves little for the private sector for
investment and puts upward pressure on interest rates also referred as crowding out.

Reduction in fiscal deficit leads to macroeconomic stability, attracts more private investment and helps
raise the growth rate

High Fiscal Deficit can be financed through domestic borrowing, foreign borrowing or by printing money.
While excessive domestic borrowing can lead to a hardening of interest rates, too much of foreign
borrowings can culminate in an external debt crisis. Printing money stokes inflationary pressures.

High fiscal defcit It also reduces the capacity of the state to lend any support to the economy in case
growth slips.

Sustained high fiscal deficits not only lead to a rise in the debt-GDP ratio but also to an increase in interest
payments as a proportion of revenues, leaving less for productive expenditure.

Hampers the future growth: Borrowings increase the financial burden for future generations. It adversely
affects the future growth and development prospects of the country.

2)

Is it always Harmful?

Fiscal deficit could be harmful or beneficial based on the purpose for which debt is raised for. For example
Investment in highways which will leads to lower cost of transport as well as generates demand for steel
and cement. This will ultimately leads to higher growth rate. It is necessary to raise revenues for meeting
these expenditures. It is best to raise these revenues via taxation. But it is justifiable to borrow and spend
this money even though this leads to an increase in Fiscal Deficit. If the government incurs Fiscal Deficit
to invest in roads it may attract more private investment. On the other hand, if the government incurs
fiscal deficit to pay higher salaries to its employees; or to look the other way while money is being leaked
from the coffers, then it may lead to reduction in investment and growth rate. Thus, Fiscal Deficit is good
or bad is based on how the loan or debt is spend.

3)

Budget 2016 & Fiscal Defcit:

Finance Minister Arun Jaitley, stuck to the Fiscal Deficit target of 3.5% of Gross Domestic Product
(GDP) for 2016-17, after achieving the 3.9% of GDP target in 2015.

Despite maintaining the fiscal consolidation roadmap, the government has stepped up expenditure for the
next year, especially for the infrastructure and rural sectors. To stimulate the economy in the backdrop
of global slowdown, the Budget proposes a 15.3% higher expenditure at Rs.19.78 lakh crore in 2016-17,
comprising Rs.5.50 lakh crore under Plan and Rs.14.28 lakh crore under non-Plan.

Notes

1)

20

Budget

www.iasscore.in

The Finance Minister announced that he will set up a committee to review the Fiscal Responsibility and
Budget Management (FRBM) Act and determine whether there should be a range for fiscal deficit targets,
rather than set numbers, to provide the necessary policy space to governments.

4)

Implications of Sticking to Fiscal defict Target?

The decision to stick to the path of fiscal consolidation is a wise one. It will send out the right signals
to the investors.

It would provide freedom to the government to increase Public investment in order to revive growth.

RBI said that, Structural reforms in the forthcoming Union Budgetthat boost growth while controlling
spending will create more space for monetary policy to support growth, In simple terms, this would mean
that the RBI will mostly likely go for a quarter basis points rate cut, as early as in March.

5)

Why Fiscal Responsibility and Budget Management (FRBM) Act Needs Amendment?

In the budget, it was announced that the government will form a committee within next one month to
look into the merits of a range for fiscal deficit target as against the current practice of a fixed number.

There is now a school of thought which believes that instead of fixed numbers as Fiscal Deficit Targets,
it may be better to have a fiscal deficit range as the target, which would give necessary policy space to
the government to deal with dynamic situations that India currently faces i.e. global economic and
financial market uncertainty, and tepid private investment demand domestically. The suggestion that,
fiscal expansion or contraction should be aligned with credit contraction or expansion is worth exploring.
FRBM act has been criticized because of its rigidness of target.

There is no denying that, the Act has helped focus attention on the issues relating to fiscal consolidation
thanks to the Mandatory Medium-Term and Strategy Statements that, the government of the day is
required to present annually before Parliament. But with regard to the larger objective of ensuring macroeconomic stability, the record has been less than ideal.

Both headline Consumer Price Inflation (CPI) and the Debt-Servicing Costs (DSC) for the Central
government were, at different points in the post-FRBM era, at divergence with the performance of fiscal
deficit, raising questions about the over-emphasis on a cast-in-stone target number.

Notes

Budget

21

Budget 2016-17

www.iasscore.in

TAX REFORMS

The Tax Rules and Regulations in India are known for its complexity and confusion which not only gives
discretion to Tax officials to harass the common man and corporate but also disincentives the foreign
investors to invest in India.

1)

Key Highlights in the budget 2016 related to taxes

No changes have been made to existing income tax slabs.

People with income less than Rs. 5 lakh to get deduction of Rs. 5,000, up from Rs. 2,000 last year

Deduction for rent paid under Sec. 80 (GG) to be increased to Rs.60,000 from Rs.24,000

Presumptive income tax scheme for all professionals with gross income of Rs. 50 lakhs

100% tax exemption to start ups on profits for 3 years and also capital gains tax relief.

National Pension Scheme gets partial tax exemption for withdrawal - 40% of withdrawal to be exempt

The proposal aimed attaxing withdrawals beyond 40% of the Employment Provident Fund (EPF) corpus
was introduced in the Union Budget for 2016-17. Finance Minister initiallyargued that, this would discourage
full withdrawals and help create a pension society in India.Taking salaried tax payers by surprise, the
government was almost immediately inundated with heavy criticism from all political quarters. Assessing
this overwhelmingly negative feedback, and with the fear it would hold up key legislation stated for the
Budget session, the Prime Ministers Office (PMO) recommended the complete withdrawal of the proposal.
The Labor Ministry also stated its opposition to any kind of taxation on the (EPF) after coming under
fire from trade unions and opposition parties.

First home buyers to get additional deduction of Rs.50,000 for interest on loans upto Rs.35 lakhs and
value of house to not exceed Rs.50 lacs

Higher taxes on all cars.

Taxes on tobacco products, barring beedi, to go up by 10-15%.

No Service Tax for houses built under 60 sq. metres.

4% high capacity tax for States SUVs

2)

Budget 2016 & Tax reforms

Positives
(a) AUTOMATION OF ASSESSMENT

Notes

According to the Budget proposals, notices and documents can be issued in both paper and electronic form,
and the term hearing will include ecommunication of data. The scope of e-Assessments will be introduced
in 7 Mega Cities. The scrutiny will be done in an e-Environment, where there will be no face-to-face interface
between the Income Tax Department and the assessee, unless either of the 2 parties wants to hear the other.
This would also reduce opportunities for corruption.

22

Budget

www.iasscore.in

(b) INCOME DECLARATION

Immunity will be granted to those who declare their undisclosed income and pay 45% there of - 30% tax,
7.5% surcharge and 7.5% penalty - Between the June 1st and 30th September, 2016 window.
(c)

Tax Dispute Resolution

Complicated and vague tax provisions in India leads to lots of litigation which prevents Ease of Doing
business in India. This budget introduced several steps across direct and indirect taxes to reduce disputes
clarify existing laws and free up money locked in litigation. The budget offered a way out to end tax
disputes arising from retrospective taxation of capital gains, presented the road map for phasing out
corporate tax exemptions, announced a slew of measures to reduce tax disputes (especially in areas such
as transfer pricing and indirect taxes) and deferred implementation of POEM (Place Of Effective
Management) rules by another year.

The government offered a one-time settlement of pending tax disputes relating to retrospective amendments
to tax laws. Companies embroiled in tax disputes will be able to pay tax arrears and get a waiver of
interest and penalty provided they withdraw all appeals against the government in all judicial forums,
including International Arbitration under Bilateral Investment Protection Agreements. This means companies
like Vodafone Group Plc. and Cairn Energy Plc. will have the option of pursuing their disputes or go for
a settlement.

The budget announced introduction of 11 new tax tribunal benches for indirect taxes and steps to reduce
transfer pricing litigation. It also moved to implement the recommendations of the R.V. Easwar committee
to simplify income-tax laws including rationalization of tax deducted at source provisions.

Recognizing high penalty as the main reason for income tax litigation, the government announced a series
of measures in the Budget 2016-17 to reduce the penalty percentage and encourage taxpayers to settle
disputes expeditiously

There are currently over 3 lakh cases involving amount of over Rs 5.5 lakh crore pending in direct taxes.
To reduce litigation from the assessees side, the government has reduced the maximum penalty rate from
100-300% to 50-200%. The penalty for misreporting income stands doubled to 200%.

(d) Income limit For Presumptive tax scheme raised

In order to significantly ease tax rules, Budget 2016-17 said, small businesses with gross income up to
Rs. 2 crore can now use the presumptive taxation scheme, doubling it from the existing ceiling of Rs 1
crore. So far available only to small businesses, the presumptive taxation scheme has been extended to
professionals with gross income up to Rs. 50 lakh.

The presumptive taxation scheme is currently available, under Section 44 (AD) of the Income Tax Act,
for small and medium enterprises with turnover or gross receipts not exceeding Rs. 1 crore. Under this
scheme, In case of businesses, a sum equal to 8% of the total turnover or gross receipts, is deemed to
be profits and gains of such business chargeable to tax .

Raising this limit will ease tax compliance burden on small businesses and professionals.

At present, about 33 lakh small business people avail of this benefit, which frees them from the burden
of maintaining detailed books of account and getting audit done.

Increase in the turnover limit would reduce the compliance burden of the small taxpayers and facilitate
the ease of doing business, the Finance Ministry said in the Budget documents.

Notes

Budget

23

www.iasscore.in

Separately, for small enterprises with a turnover up to Rs. 5 crore, Finance Minister Mr. Arun Jaitley
proposed to lower the corporate income tax rate to 29% plus surcharge and cess for the next financial year
from the current 30%.

3)

Criticisms of the Budget

Though the Budget takes some steps forward on administrative simplification, but then doesnt go far
enough by amending the provision on retrospective taxation.

It does provide some tax relief to Small and Medium Enterprises (SMEs) under direct taxes, but doesnt
extend it to cover indirect taxes. There are several incremental measures, but no intention to undertake
deep, structural reforms in tax policy or administration.

The idea of providing yet another tax amnesty, after last years rather unsuccessful attempt to garner
undisclosed foreign assets, is a terrible one. It clearly gives a signal to tax evaders that there will be ample
opportunities to convert their unaccounted, untaxed incomes and assets into white incomes and assets,
with zero risk of prosecution. On the one hand there is tough talk of dealing firmly with tax evasion,
and on the other hand there are amnesties.

In last years budget speech, Finance Minister Arun Jaitley had promised a sweeping reform of corporate
taxation: That over the next 3 years he would cut rates from the headline rate of 30% to 25%. Unfortunately,
these promises have not been kept in this budget. The Finance Minister has tinkered with the rate,
providing some relief to small companies and to those that will come into being after April 1, 2016, but
not touching the vast majority of companies and businesses.

Reform of the indirect tax system is on hold with the Goods and Services Tax (GST) bill stalled in the
Rajya Sabha. The code intended to simplify and reform direct taxes has now completely gone off the
radar screen.

Meanwhile, ad hoc rate adjustments and new cesses have been added that make the tax system more
complex.

India was expecting repealing of Minimum Alternate Tax (MAT) at least from Speical Economic Zone
(SEZ) where introduction of MAT in 2011 have significantly reduced new investment, However no
decision is taken in this respect.,

Notes

24

Budget