Economic Survey 2019: Rs 2-trn Smart City Mission projects underway

The Survey noted that about 1,290 projects worth Rs 22,569 crores have been completed and are operational.

The government's Smart City mission seems to be moving smoothly with the Economic Survey on Friday suggesting that under the initiative, more than 5,000 projects worth more than Rs 2-trillion were under different stages of implementation in 100 cities across the country.

The Survey noted that in all the target cities, Special Purpose Vehicles (SPVs) have already been incorporated while City Level Advisory Forums (CLAFs) and Project Management Consultants (PMCs) have been set up.

"Since the launch of the mission, 5,151 projects worth more than Rs 2-trillion are at various stages of implementation in the 100 cities," the Survey said.

As on November 14, 2019, 4,154 SCM projects worth Rs 1.49-trillion (72 per cent of the total proposals) have been tendered, out of which 3,359 projects worth Rs 1.05-trillion (51 per cent of total proposals) have been issued work orders.

Additionally, about 1,290 projects worth Rs 22,569 crores have been completed and are operational.

Breaking down the developments in creating smart cities across the length and breadth of the country, the Survey said that smart command and control centres worth Rs 4,135 crore have been completed in 26 cities.

As many as 51 smart water works worth Rs 2,136 crore have been completed, 127 smart road projects worth Rs 1,784 crore have been completed and 39 smart solar projects worth Rs 204 crore have been completed under the Mission, it said.

The Smart Cities Mission was launched on June 25, 2015. The first list of 20 cities announced on January 28, 2016. The fast tracklist of 13 cities was announced on May 24, 2016. The second list of 27 cities was announced on September 20, 2016. The third list of 30 cities announced on June 23, 2017, and the final list was announced in January 2018.

Under the mission, the Centre allocates Rs 500 crore to each of the cities for implementing projects proposed by it. This amount is matched with a grant of the same amount by the respective state.

10-yr bond yields hit treasury math; moves up about 30 bps since rate pause

Market is waiting for the Budget to get more clarity on numbers, say experts.

Business Standard : The yield on the 10-year government bond has moved up about 30 basis points (bps) since the December 5 rate pause by the Reserve Bank of India (RBI) and, like the central bank, the bond market is also waiting for the Union Budget in February to get more clarity on numbers.

The bond yield closed at 6.80 per cent on Monday, as against 6.47 per cent on December 4.

“The market is expecting more clarity in the upcoming Budget to gauge the fiscal position of the government," said Hemal Doshi, vice-president — treasury at SBI DFHI, a primary dealer.

Till further cues, the 10-year bond yields should remain range-bound within 6.75-6.85 per cent, market participants, including Doshi, said.

B Prasanna, head of global markets and proprietary trading group at ICICI Bank, said the yield movement in the 10-year bonds had been enough for now and it should consolidate around the present level.

However, that would also mean that the 135-bp rate cut since February, which resulted in 137-bp transmission in money market rates and about 87-bp transmission in the 10-year bond yields, has reversed by at least 30 bps.

An elevated yield level also makes borrowing by the government costly, as it would likely hit the market with extra borrowing, unless it cuts its expenditure drastically to balance out low revenue collection from taxes.

At a time of growth slowdown, when the central bank and the government want banks to pass on rates, banks will also have no obligation to cut their rates if the underlying market instrument moves up and small savings certificates continue to offer high interest rates.

“There will be no transmission in lending rate as banks are unlikely to cut deposit rates any further,” said a senior banker, requesting anonymity. The rise in yields would also be a bit uncomfortable for bank treasuries as they were betting on a handsome return on their bond portfolio. As yields rise, prices of bonds fall. However, that doesn’t mean that banks would be incurring losses.

“In a shorter tenure, banks would still be ‘in the money’, whereas for a longer tenure, banks would be somewhat ‘out of money’...Budget 2020

Budget 2020: Centre may announce increase in FPIs' debt limit to 10%

India seeks entry into global bond index.

Budget 2020 : The Centre is considering increasing the government bond investment limit of foreign portfolio investors (FPIs) to at least 10 per cent of the outstanding, from 6 per cent now, with an aim to incorporate local bonds into global bond indices, according to sources close to the matter. The decision may be announced in the upcoming Budget.

FPIs, including long-term investors, can currently invest up to Rs 3.61 trillion in government bonds, of which they invested Rs 2.16 trillion as of December 12. However, the share allotted to FPIs is inadequate to be included in global bond indices such as those by JP Morgan and Bloomberg-Barclays.

The finance ministry, according to sources, has written to JPMorgan and Bloomberg to advance such inclusion, sources said.

Typically, to be eligible for these indices, the criterion is to offer 15-20 per cent of the outstanding stock to foreign investors and to ensure there is adequate liquidity, as well as choices of derivatives available to hedge the investment risk.

Sources said India’s plan might include a possible sovereign bond, but the Reserve Bank of India (RBI) is opposed to it as the central bank doesn’t want to face a currency risk. However, inclusion in the index itself becomes quasi-sovereign bonds as any investor can invest and transact in those bonds.

The RBI is also not open to more than doubling the investment limit to 15 per cent of the outstanding, which is considered to be a prerequisite for the inclusion. But the central bank wants the government to go slow and first check how the currency risk is covered from the issuer perspective, before increasing the limits further. Hence, any further increase could take another year or two after the 10 per cent limit is declared, possibly in the Union Budget in February.

Financial information firm Bloomberg LP is helping the finance ministry in this respect, and international bodies such as the Asia Securities Industry & Financial Markets Association (ASIFMA) are chalking out how the currency risk, tax issues, and other roadblocks can be overcome. PwC is helping ASIFMA in India in this regard, said sources.

When a sovereign bond is included in a global index, the inflow in that country increases manifold.

Budget 2020: FinMin seeks industry inputs on direct, indirect tax changes

'Views may be supplemented and justified by relevant statistical information about the production, prices, revenue implication of the changes suggested'.

Budget 2020 : The finance ministry for the first time has sought suggestions on changes in direct and indirect tax rates from the industry. This comes at a time when a revenue shortfall and consumption slowdown are threatening to upset the government’s finances.

In a letter to industry associations, the department of revenue has sought suggestions for “changes in the duty structure, rates and broadening of tax base on both direct and indirect taxes”.

Finance Minister Nirmala Sitharaman announced tax cuts for the corporate sector besides other sops after the Budget in July as urgent measures to arrest economic slowdown.

Sitharaman will be presenting her second Union Budget on February 1. The comments need to be sent to the department by November 21. The finance ministry will begin its pre-Budget consultations with representatives of different sectors and stakeholders.

“Your suggestions and views may be supplemented and justified by relevant statistical information about the production, prices, revenue implication of the changes suggested and any other information to support your proposal,” the ministry said.

Sitharaman in September announced steep cuts in corporation tax, effective April 1 this fiscal year.

The corporation tax rate was cut to 22 per cent from 30 per cent for existing companies that do not enjoy any exemptions, and to 15 per cent from 25 per cent for new manufacturing companies.

With surcharge and cess, the effective tax rate for the existing companies has come down to 25.17 per cent from 35 per cent.

As against initial estimates of a revenue outgo of Rs 1.45 trillion, the income tax department is estimating a reduction of around Rs 1 trillion.

The corporation tax rate cut has triggered a demand for a reduction in personal income tax rates as well.

Business Standard

New policy to be unveiled to make India educational hub: Budget 2019

The finance minister also said that a National Sports Education Board will be set up under the Khelo India scheme.

Finance Minister Nirmala Sitharaman Friday said the government will bring a new national educational policy and Rs 400 crore has been provided for world class institutions.

Presenting the first Budget of the Modi government in its second term, she said a draft legislation for higher education commission will be presented.

India has potential to become educational hub, she said while proposing Study in India programme to attract foreign students.

The finance minister also said that a National Sports Education Board will be set up under the Khelo India scheme.

To sensitise youth about Mahatma Gandhi's ideas, Sitharaman said a 'Gandhi-pedia' is being developed.

She said railways will be encouraged to invest in suburban railways through special purpose vehicles (SPVs) and enhance metro rail network through PPPs (public private partnerships).

Keep Reading : Budget 2019

Govt my enhance start-up fund to Rs 20,000 cr in Budget 2019: Sources

Even the Economic Survey which was presented on Thursday highligthed the importance of the segment.

In a bid to rev up the economy, the government might enhance the Start-Up fund in the Budget 2019-20.

According to highly-placed sources, the government is likley to come good on its poll promise of enhancing the fund to Rs 20,000 crore.

The Start-up India programme had created the 'Fund of Funds for Startups (FFS)' with a corpus of Rs 10,000 crore to provide support for Start-ups, over a period of XIV and XV Finance commission cycles.

The Fund was set up with the approval of Union Cabinet in June 2016 and is managed by Small Industries Bank of India (SIDBI) and contributes to the corpus of Alternate Investment funds (AIFs) for investing in equity and equity linked instruments of various start-ups.

Even the Economic Survey which was presented on Thursday highligthed the importance of the segment.

It recommended that the government rationalise the tax policy and its implementation for start-ups to foster innovative investments in the Indian economy.

"Several studies have also suggested that capital gains tax can have significant economic consequences for individual investors in terms of its lock-in effects and associated deterring incentives to use capital gains into riskier investments," the survey said.

Business Standard

Budget likely to raise military spending slightly, delaying modernisation

The army, a large part of which is deployed on the border with traditional foe Pakistan, has been seeking everything from assault rifles to surveillance drones and body armour.

The government is likely to stick to a modest rise in defence spending in the 2019/2020 budget due on Friday because of government finances, officials said, further delaying a long-planned military modernisation programme.

Keep Reading : Budget 2019

India's air force desperately needs hundreds of combat planes and helicopters to replace its Soviet-era aircraft while the navy has long planned for a dozen submarines to counter the expanding presence of the Chinese navy in the Indian Ocean.

The army, a large part of which is deployed on the border with traditional foe Pakistan, has been seeking everything from assault rifles to surveillance drones and body armour.

But these plans have been on hold for years because governments have not been able to set aside large sums and most of the defence expenditure goes on salaries and pensions for a 1.4 million standing military, the world's second largest after China.

In an interim budget announced in February before national elections, the government allocated Rs 4.31 trillion ($62.27 billion) for defence, a 6.6 per cent rise over the previous year, raising concern at the time it wouldn't be enough for modernisation.

But a finance ministry official told Reuters there was unlikely to be any change to that allocation when Finance Minister Nirmala Sitharaman presents the federal budget in parliament.

"Defence is our major spending and we give it as much as the budget allows. But this year, a significant rise to what has already been allotted looks difficult," the official involved in the budget preparations said.

China, by contrast, in March announced defence spending of around $180 billion, a 7.5 per cent increase over 2018 and faster than the economic growth target. While China doesn't give much break-up, it is largely assumed that a substantial portion of it goes towards modernisation, helped also by a cutback in maintenance costs.

Since Chinese President Xi Jinping took office in late 2012, he has made strengthening and modernising the military a very key part of his policy platform. Part of that has been reduction in troops by about 300,000 and the money saved in this is invested in much more advanced equipment and research and development.

Business Standard

Budget 2019: After election, it's Modi's key chance to spur waning economy

Growth slowed to a five-year low of 5.8% in the first three months of 2019 -- well below China's 6.4% expansion -- putting pressure on Modi to deliver on a stimulus plan to kickstart consumption.

Budget 2019 : Prime Minister Narendra Modi has his first chance since a decisive election win to spur an economy that’s quickly lost its status as the world’s fastest-growing major one.

Newly appointed Finance Minister Nirmala Sitharaman is expected to boost spending and provide tax relief to consumers in her maiden budget on Friday. That will probably widen the budget gap to 3.5% of gross domestic product in the year started April 1 from 3.4% targeted in February’s interim spending plan, according to a Bloomberg News survey.

Growth slowed to a five-year low of 5.8% in the first three months of 2019 -- well below China’s 6.4% expansion -- putting pressure on Narendra Modi to deliver on a stimulus plan to kickstart consumption, a bedrock of the economy. With the global outlook turning gloomy amid heightened trade tensions, and the Reserve Bank of India already cutting interest rates three times this year, the focus is shifting to the government to play its part.

“For the next budget exercise, the development goal might supersede the rigid objective of fiscal austerity,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India in Mumbai. “Sticking to a particular fiscal number is not that important in the current scenario.”

Sitharaman will need to balance allowing the budget deficit to widen without risking a credit-rating downgrade and rattling bond markets. Key to that will be finding additional revenue to finance higher spending and keeping borrowing under control.

Here are other key things to watch for in the budget:

Taxes

Revenue from consumption taxes and customs levies undershot targets last year, and Sitharaman will need to find additional resources to fund welfare programs without increasing the tax burden on individuals. She’s expected to give consumers relief by increasing the personal income tax threshold for some individuals in the budget, according to people familiar with the matter.

Analysts at Kotak Mahindra Bank led by Suvodeep Rakshit estimate that tax revenue will probably be 1.4 trillion rupees ($20 billion) lower than was forecast in the interim budget. “This will be the most significant threat to the fiscal math,” the analysts said in a note.

Business Standard

Budget 2019: The toughest balancing act for India's new finance minister

On July 5, Sitharaman makes her first major public appearance in her new role, presenting India's budget at a time when she's under pressure to spend more to reinvigorate the economy.

India’s first female finance minister in almost five decades, Nirmala Sitharaman, has held a wide range of jobs: She rode aboard a fighter jet as defense minister. As head of the trade department she grappled with falling exports. She’s been a national spokeswoman for her party, and in younger days worked in London as a home decor saleswoman.

Keep Reading : Budget 2019

Now Sitharaman, 59, faces what might become one of the toughest balancing acts of her career. On May 31, within hours of her arrival at her new office in New Delhi, she was greeted with India’s worst economic news of the year: Unemployment had touched a 45-year high, and India had lost its tag of the world’s fastest-growing major economy to China in the last quarter of the fiscal year.

On July 5, Sitharaman makes her first major public appearance in her new role, presenting India’s budget at a time when she’s under pressure to spend more to reinvigorate the economy. She must find resources for welfare programs announced by Prime Minister Narendra Modi’s government, including 870 billion rupees ($12.6 billion) for a new measure to support farmers. And she must do all that while keeping the national deficit below 3.4% of GDP, a target credit rating companies are watching closely.

A surprise pick by Modi, the new minister remains a relatively unknown entity to the financial world. Her critics say there’s a risk she could simply become a figurehead, with polices shaped by the prime minister. Her supporters argue that her reputation for prudence and team spirit will help her work out a middle ground.

“It is difficult to predict what Minister Sitharaman will do in her new role as finance minister,” said Richard Rossow, senior adviser at the Center for Strategic and International Studies in Washington. “She will need to balance fiscal prudence with Modi’s desire to continue expanding key social programs like subsidized cooking gas and electric power access.”

The minister didn’t respond to an email requesting an interview, and a call to her office wasn’t answered.

Economic growth is high on the agenda and the government is undertaking various reforms to achieve this, Sitharaman told lawmakers on Tuesday.

Business Standard

Budget 2019: Govt may cut taxes on biz, hike spending for economic growth

In January-March, annual growth slumped to 5.8%, the slowest pace in 20 quarters. Growth for the financial year that ended in March was 6.8%, also a five-year low.

Budget 2019 : Prime Minister Narendra Modi's government on Friday will unveil a budget that is expected to cut taxes on business and raise spending in a bid to shore up consumption and faltering economic growth.

Analysts say Modi, boosted by a sweeping election victory, hopes to use the budget to restart reforms and deal with a series of economic woes.

In January-March, annual growth slumped to 5.8%, the slowest pace in 20 quarters. Growth for the financial year that ended in March was 6.8%, also a five-year low, and indicators such as plummeting industrial output and automobile sales have stoked fears of a deeper slowdown.

A shortfall in monsoon rains, pivotal for the farm sector that employs nearly half of India's workers, has increased concerns of rural distress and strengthened the case for intervention, a leader of Modi's ruling Bharatiya Janata Party (BJP) said.

"The focus of the budget will be to boost domestic consumption, address the rural crisis and support small manufacturers," Gopal Krishna Agarwal, BJP's economic affairs spokesman, told Reuters.

Shilan Shah at Capital Economics in Singapore said in a note "Given the recent economic slowdown, the finance minister is likely to announce more accommodative tax and spending measures."

In February, then-Finance Minister Piyush Goyal presented an interim budget for the year beginning April 1, to maintain government functions while a weeks-long election was under way.

BIG INVESTMENT PLANS

On Friday, new minister Nirmala Sitharaman will present a full-year budget that Agarwal said could lower corporate taxes for small and medium-sized businesses as well as personal ones to revive consumption by the middle class that gave Modi a second term, while withdrawing some tax exemptions.

In 2018, Indian government reduced the corporate tax rate to 25% from 30% for companies with annual turnover of 2.5 billion Indian rupees ($36.3 million) or less.

Following election promises, the government could present a plan for investing up to 100 trillion rupees ($1.45 trillion) on highways, railways and ports while budgeting another 25 trillion rupees for increasing farm productivity over five years, BJP officials said.

Budget 2019: Traders have a challenge spotting govt's hidden, growing debt

There's growing expectations that the government will do an accounting sleight of hand to keep its deficit in check: borrow via state-owned firms and issue special bonds.

Bond traders have one question as they head into India’s budget 2019 on Friday -- how big are the off-balance sheet borrowings?

There’s growing expectations that the government will do an accounting sleight of hand to keep its deficit in check: borrow via state-owned firms and issue special bonds. That’s a concern since total public sector borrowings have reached as much as 9% of gross domestic product by one estimate.

“Extra-budgetary resources are exerting pressure on corporate bond yields because the government is channelizing a lot of borrowings through state-run entities,” said Shailendra Jhingan, chief executive at ICICI Securities Primary Dealership Ltd. in Mumbai.

Prime Minister Narendra Modi may have few options left as a slowing economy crimps tax revenue, while investors are already smarting from his plans to borrow a record Rs 7.1 trillion ($103 billion) this fiscal year.

State-linked companies, including the Steel Authority of India Ltd., will probably raise Rs 1.8 trillion selling bonds and debentures for the 12 months ending March 2020, documents from February’s interim budget show.

Some state firms also issue a class of bonds serviced by the government where the coupon is accounted for in the budget only in the year when payments are made. When the debt is redeemed, it shows up as an expenditure in the budget.

Thanks to extra-budgetary borrowings, the spread between sovereign bonds and top-rated state company debt will remain wide at 80 to 90 basis points, said Gopikrishna Shenoy, who oversees $20 billion as chief investment officer at SBI Life Insurance Co.

Funding Subsidies

This is not the first time that an administration shifted debt from one hand to another to mask the actual deficit. Ruling parties have in the past regularly issued bonds for bank capitalization, and oil and fertilizer subsidies, which were listed as below-the-line items in federal accounts.

While Modi has an official fiscal deficit target of 3.4%, it’s probably in the 4% to 4.25% range once the off-balance sheet items are added, according to Anubhuti Sahay, head of South Asia economic research at Standard Chartered Plc.

The risk is that the additional borrowings dampen the impact of rate cuts by the Reserve Bank of India, she said.

Business Standard

PSU bank recap, growth revival, fiscal prudence: Expectations from Budget

The government, experts say, is likely to continue with the off-budget route for carrying out infra-related spending.

Given the slowdown in the economy and the possibility of oil prices moving north over the next few months on the back of likely supply cuts by Organization of the Petroleum Exporting Countries (OPEC), market experts expect the upcoming Union Budget 2019 to focus on reviving growth and yet maintain fiscal prudence.

That apart, re-capitalisation of banks is also a key monitorable. The government, they say, is likely to continue with the off-budget route for carrying out infra-related spending.

“We believe that the government will focus on maintaining continuity in policy and spending on schemes allocated per the interim budget. As such, we maintain our fiscal deficit estimate at 3.5 per cent of GDP (3.4 per cent of GDP as per the interim budget), since the government has introduced the farmer income support scheme and also recently increased its scope,” wrote analysts at Morgan Stanley in a recent co-authored report led by Ridham Desai, their India equity strategist.

For the January – March quarter, the gross domestic product (GDP) came in at a dismal 5.8 per cent, sharply down from 6.6 per cent in the previous quarter, well below forecasts and the slowest in over four years.

Growth expectations have also been trimmed. DBS, for instance, now pegs India's FY20 GDP at 6.8 per cent on weakening exports, down from 7 per cent projected earlier. Fitch, too, has cut its expectation to 6.6 per cent for the current fiscal (6.8 per cent earlier).

“Beyond the fiscal numbers, markets will also be looking for other details – the credibility of tax revenue and growth assumptions, off-budget expenditure, quality of spending and themes that are likely to be championed by the recently re-elected government. The implication for the fiscal and monetary policy mix is clear in our view. While there is some space for monetary easing, there is no space for a higher fiscal borrowing,” said Pranjul Bhandari, chief economist for India at HBSC.

Markets, however, have seen a good run over the past few months. In the first half of calendar year 2019 (H1CY19), the S&P BSE Sensex and the Nifty50 have gained around 9 per cent each. The S&P BSE Mid-cap and the S&P BSE Small-cap indices have underperformed and have slipped around 4 per cent and 3 per cent, respectively during this period.

The performance of consumption-related sectors has also been dismal. The auto and fast moving consumer goods (FMCG) indices on the National Stock Exchange (NSE) have underperformed and lost nearly 15 per cent and 3.5 per cent, respectively in H1CY19.

Need to reduce centrally sponsored schemes to improve spending: N K Singh

Revenue buoyancy continues to be weak in the area of indirect tax, said Singh.

Budget 2019 : Fifteenth Finance Commission Chairman N K Singh has said the number of centrally sponsored schemes currently exceeds 150 that needs to be reduced for better spending, as revenue buoyancy in indirect taxes remains weak.

"The central outgo is spread over 700 different outlay schemes. The number of centrally sponsored schemes exceeds 150. We need to thin this spread for better spending. Revenue buoyancy continues to be weak in the area of indirect tax," said Singh, at the SKOCH Summit on 'ModiNomics 2.0' held on Saturday.

He said the Goods and Services Tax (GST) needs to be watched carefully in the years to come. Compliance needs to be raised and leakages minimised.

"We cannot talk about macroeconomics leaving out important area of deep structural reforms which this economy needs. If the growth rate has been tenuous, we need macro stability but also in terms of reforms which can bring spending, saving and private investment," he said at the summit which also deliberated on budget wishes and the macroeconomic agenda of the new government.

Singh said the quality of compliance is as important as compliance itself. On expenditure, he said there is a long way to go.

Former Sebi chairman U K Sinha, who spoke on corporate governance, said Indian has moved from volatile, unpredictable, complex and arbitrary framework and the thinking has now shifted from short term to long term.

"People have realised that financial capital is not the only capital of a company. Influence, HR (human resource), and social capital are now being judged by the investors," Sinha said.

Sinha also added that India ranks higher than the US in terms of shareholder protection and is at par with the world in terms of corporate governance.

"We used to think that executive management of a company is responsible for everything. We now have series of examples where the NCLAT (National Company Law Appellate Tribunal) and the SC (Supreme Court) have passed orders against independent directors," he added.

India has covered a lot of ground but this is demand-led movement.

"We haven't covered the entire ground but my feeling is that shareholders and regulators have continued to be alert and vigilant," Sinha said.

Budget 2019: 7 ministries, depts yet to earmark funds for tribal schemes

The guidelines state that the 41 identified ministries and departments have to earmark at least 4.3% funds for DAPST.

Seven central ministries and departments have not earmarked funds for tribal welfare schemes in their budget for 2019-20 and 12 have "kept the provision below the level stipulated by the Niti Aayog", officials said Wednesday.

In 2017, the Niti Aayog developed new guidelines obligating 41 central ministries and departments to earmark funds for "Development Action Plan for Scheduled Tribes" (DAPST), earlier known as Tribal Sub-Plan.

An official said the guidelines were finalized in January 2019, which means complete adherence cannot be ensured this financial year.

"Since the ministries decide their allocations for various schemes by November-December and the guidelines were finalised in January, any corrective action is possible next year only," the official said.

The guidelines state that the 41 identified ministries and departments have to earmark at least 4.3 per cent funds for DAPST.

In January, the Department of Economic Affairs wrote to the Ministry of Tribal Affairs, saying 7 ministries/departments have not earmarked funds for DAPST and 12 have "kept the provision below the level stipulated by Niti Aayog", according to the official.

It had asked the 19 "deviating" ministries and departments to take "corrective action".

Budget 2019

Budget likely to charge up electric vehicle push with tax incentives

The govt is also examining extension of tax holiday for units operating or planning to set up operations in special economic zones.

With promotion of clean energy high on government agenda, the upcoming Budget 2019 is likely to incentivise manufacturing of electric vehicles (EVs) in the country.

This is also expected to drive foreign direct investment or FDI into the country.

In line with the government’s road map for EVs in the next four years, the Budget may offer investment-linked incentives to manufacturers with respect to capital expenditure incurred for setting up operations, according to officials in the know.

“With a clear timeline to switch to clean energy vehicles, we are examining tax incentives to encourage players into the EV segment. Besides operations, investment in technology transfers and R&D will also need to be encouraged,” said a government official.

The Budget for FY20 may allow deduction on account of capital expenditure incurred for setting up business under Section 35AD(1) of the Income Tax Act for environment friendly EVs. The move will help bring down tax liability of such firms, leaving them with more income to invest in technology transfers.

ALSO READ: Auto stocks decline post NITI Aayog's directive on electric vehicle

The move goes in hand with other measures to promote the sector, such as proposed reduction in the goods and services tax (GST) rate for EVs to 5 per cent from 12 per cent and that for its batteries from 18 per cent to 12 per cent.

The matter is currently with the fitment committee and a decision will be taken on this in the next GST Council meeting.

The government is also examining extension of tax holiday for units operating or planning to set up operations in special economic zones (SEZs), beyond the sunset date of 2020, for a few sectors, including EVs. The move will encourage foreign EV players with expertise to set up manufacturing base in the country and export to rest of the world. It will also aid swifter skill transfer to domestic players.

Section 10AA of the Income Tax Act, 1961, provides for tax exemption on profits made from export by a unit set up in an SEZ.

The exemptions include deduction of 100 per cent export-related profit for first five years and 50 per cent for the next five years.