Budget 2019: Boosting new investments through tax-strategy

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Taponeel Mukherjee | 30 Jun, 2019
All eyes are on what policy mechanisms will the Hon. Finance Minister of India use in Budget 2019-2020, to boost consumption and investments in India. Amongst the wide variety of available strategies, a focus on utilising tax-rebate strategies such as allowing high accelerated depreciation to promote new investments in areas of the economy that require investments is one that can help significantly. Strategies such as accelerated depreciation at a fundamental level can be understood to be ones that allow a business to make capital investments and utilise a higher percentage of the value of the investment to lower profits upfront to pay lower taxes. The primary aim of the Indian government to employ the strategy mentioned above in this years budget is to create incentives for investors to invest in capital formation in mission-critical sectors.

While the aim always is to boost investment and consumption in an economy, certain areas like social infrastructure assets such as water, low-cost housing, urban transportation like metro and waste-to-energy businesses need additional impetus since at times the financial returns alone do not capture the real economic value that the underlying asset creates. Therefore, tax strategies that incentivise capital formation assume prime importance for such sectors.

The investment areas, as mentioned earlier, tick the box regarding three crucial points - 1. The areas mentioned are seeing a growing natural demand driven by consumption patterns and lifestyle changes, 2. There are significant gaps in terms of available infrastructure and required investments, and 3. The user charge one can generate may not suffice to pay for the investment returns that risk-taking investors will expect. For example, the recent water crisis in Chennai along with the impending need for India to invest into water infrastructure is a pointer towards the requirement that the budget must allow for strategies such as accelerated depreciation that encourages investments in new water assets.

The focus must be on the creation of necessary assets, that provide not only valuable services but also boost investments, credit-flow and employment generation. The "notional tax revenue" foregone through tax-rebate strategies for mission-critical assets pales in comparison with both the financial and social value generation that vital assets provide. Primarily, the creation of much-required assets and infrastructure will provide significant economic and social benefits. Therefore, short-term notional tax collection requirements must be understood to be what they are, i.e. short-term.

Additionally, new investments lead to the flow of credit, creation of jobs, upgrade in the skill sets of the workforce, greater confidence in the Indian investment horizon for investors and, most importantly, the availability of much-needed infrastructure services for the public. Essentially, all the aims that a budget and, more importantly, the government looks to achieve.

It is essential to realise that effective tax-rebate strategies must be utilised not only in this year's budget
but must continue to be used in the future to boost investments in sectors that require significant capital inflow. A pick up in capital inflow must not act as a deterrent to such policies in the future. On the contrary, sectors that do benefit from tax-rebate strategies may need extended periods of such approaches to create the volume of assets indeed required.

Given the wide variety of investments and expenditure that the government needs to make on its account, "tax-rebate" from both this year's budget and future policies must be looked at in detail. We must also realise that private capital needs to earn a healthy rate of return to both attract investments in the first place and for entrepreneurs to be able to reinvest the money. That said, a delicate balance will have to be maintained to ensure that excessive profiteering isn't indulged in by private capital and the sectors that receive such "tax-rebate" strategies are genuinely deserving of these rebates. The tax-rebates must also be available for both domestic and foreign capital. Allowing a higher flow of capital across investments will only help both attract more significant investments and bring down the cost of capital.

While the Budget 2019-2020 will address a wide-ranging set of issues in an economy as diverse and complex as India, a renewed focus on utilising tax-benefits in areas that both require investment and have high-demand will be one that merits attention. In the long-run, prudent policies and consistent implementation will be the two pillars of boosting investments and consumption in India.