Transport and LogisticsPost-budget sectoral point of view

Union Budget 2015Inspiring confidence,

empowering change in India

Table of contents

1. Context

2. Key policies/fiscal and tax proposals

3. Unfinished agenda

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Context

Where are we India has witnessed an attractive growth story in the Transport and Logistics (T&L) sector, on the back of factors such as rapidly growing economy, increase in outsourcing of logistics, steady supply side changes, significant government investment in core infrastructure projects and landmark changes in tax and regulatory policies. The sector is experiencing a number of supply and demand side changes, which are carving a way for innumerous opportunities.

The growing emphasis on alternative transport modes, thrust on outsourcing driven by growing business complexity, significant drop in fuel prices and the imminent roll-out of GST are expected to be positive enablers for the sector. From a policy and regulatory perspective the integration of various logistics ministries, the government's ‘Make in India’ campaign and the launch of mega-infrastructure initiatives in the sector are expected to lay a foundation for growth of the sector.

Key issues/challenges• A highly fragmented market, along with below par infrastructure and low IT penetration, resulting in

acute operational efficiencies

• Unfavourable modal mix which is skewed towards road as a major mode of transportation alongwith under utilisation of other modes such as rail, coastal shipping, ports, etc.

• Lack of a unified regulatory logistics body for integrated planning at the Union level across shipping, road, aviation and warehousing segments

• Lack of a focussed plan to upgrade skill set in the wider Indian logistics landscape

• Regulatory challenges including lack of policies to push development in coastal shipping, inland waterways and ports to develop these modes, which are not yet fully used

• Delay in the implementation of GST has been impacting the readiness of logistics service providers and end users.

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What was expectedConsidering the government’s vision to uplift the Indian infrastructure and transportation sector to global standards, following are some aspects that were expected to provide an impetus to the sector.

• Infrastructure development: Focus on infrastructure development in the logistics industry to help organise the sector, boost private investment and accelerate the supply chain. Develop time-bound action plans to decongest airports and seaports, shift cargo-clearance activities to inland ports or airport locations, in addition to improving hinterland connectivity. Develop waterways and national logistics parks for faster and efficient movement of cargo

• Regulatory authority: Formalise a regulatory logistics body by uniting key policy stakeholders across ministries for an integrated approach towards project planning and development. Also, focus on improving, ‘ease of doing business’ in the transportation sector via easing licensing regulations

• Integrated transportation: Provide a policy-based push towards integrated transportation by channelising the movement of commodities via suitable modes of transportation such as; railways and waterways to progressively reduce the over-burdened road networks

• Warehousing: Launch policies to set up free trade warehousing zones in India, in addition to infrastructure development for cold chain logistics

• Skilled workforce: Augment the current skill development initiatives by focussing on transportation, warehousing and the cold chain sector. This would include setting up aeronautical and maritime universities that focus on providing sector specific knowledge and exposure to individuals

• Private investments: Policy driven promotion of the Public Private Partnership and EPC models for infrastructure development in the transportation sector

• Cross-sector collaboration: Provide a thrust to the transportation sector in tandem with the ‘Make in India’ programme that promotes innovation, investment and skill development in the country, across sectors

• Goods and Services Tax (GST): Provide an implementation plan for GST along with the associated timelines

• Taxation: Provide clarity on various direct tax issues like procedural tax assessment for regular and occasional shipping business, transfer pricing on outbound/inbound leg of freight forwarding transactions, etc., which are currently bunged in litigation.

While the sector expects several regulatory and functional developments, some of the key ones discussed above could provide a strong base to the industry. Overall, industry stakeholders and policy makers expected an infrastructure and investment-oriented budget that is able to address the associated regulatory concerns and provide the required stimulus to the sector.

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Key policies/fiscal and tax proposals

Key announcementsThe Finance Minister announced an infrastructure-oriented budget, including the following key budget proposals around the transport and logistics sector.

Sector view• Investment of INR70,000 crore in infrastructure, including INR14,031 crore for roads and INR10,050

crore for railways

• Completion of one lakh kilometre of roads currently under construction plus sanctioning and building another one lakh kilometre of road to connect all unconnected habitations

• GST to be implemented by 1 April 2016

• Tax-free infrastructure bonds for projects in the rail and road sector

• PPP model for infrastructure to be revitalised and realigned

• Government to consider plug-and-play projects in infrastructure such as roads, ports, rail lines and airports

• Ports in the public sector will be encouraged, to corporatise, and become companies under the Companies Act.

Direct tax• Corporate tax rate has been proposed to gradually decrease from 30 to 25 per cent over the next four

years from FY2016-17 and certain exemptions and incentives to be rolled back in a phased manner.

• Surcharge on domestic companies increased from five to seven per cent in case total income exceeds INR1 crore but does not exceed INR10 crore and from 10 to 12 per cent in case total income exceeds ten crore rupees. Maximum effective tax rate in case of domestic companies would increase from 33.99 to 34.608 per cent.

• Corporate income tax rate for foreign companies remain unchanged

• Surcharge on DDT increased from 10 to 12 per cent.

• Surcharge on tax on buy-back of shares under Section 115QA of the Act increased from 10 to 12 per cent, thereby increasing the effective rate to 23.072 per cent

• Tax rate on royalty and fees for technical services paid to non-residents reduced to 10 per cent from 25 per cent

• Implementation of GAAR provisions deferred by two years; to be made applicable from FY2017-18. Further investments made up to 31 March 2017 to be outside the ambit of GAAR.

• Wealth-tax law abolished

• Share of a member in the profits of an AOP to be excluded for computation of book profits under the MAT provision

• In line with internationally accepted norms, concept of Place of Effective Management (POEM) introduced to determine residential status of a company in India

• Sale of units of Infrastructure Investment Trusts by the Sponsor, allotted in exchange of shares of SPV: − Long-term capital gains exempt− Short-term capital gains taxable at a concessional rate of 15 per cent.

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Indirect tax• Increase in service tax rate to 14 per cent, subsuming of cess under excise, removal of certain

exemptions, etc. are steps towards convergence of the GST regime• Time limit for taking CENVAT credit on inputs and input services increased from six months to one

year in line with industry’s demand

• ‘Swachh Bharat’ cess may be imposed on all or any of the taxable services at the rate of two per cent of the value of taxable services. The impact on the sector would need to be watched out

• Service tax exemption to transportation of food stuff by rail, vessels or road will now be restricted to milk, salt and food grain including rice, pulses and flour

• Service tax exemption for certain pre cold storage services for fruits and vegetables

• Service tax exemption on transportation of goods in a goods carriage by a goods transport agency provided to an exporter extended to transport of goods to the land customs station

• Uniform abatement prescribed for transportation of goods by rail, road and vessel, wherein service tax would now be payable on 30 per cent of the value of services subject to a uniform condition of non-availment of Cenvat Credit

• All services provided by the government or local authorities to business entities are removed from the negative list and hence would now be taxable

• Increase in base for levy of service tax on air travel for all classes except economy from 40 to 60 per cent

• Concessional BCD of 10 per cent on import of specified commercial vehicles in completely knocked down state and 20 per cent in any other form

• Exemption from BCD extended up to 31 March 2016 for specified goods used in manufacture of hybrid and electrically operated vehicles

• Excise duty on chassis of ambulances reduced from 24 to 12.5 per cent subject to actual user condition

• Manpower supply and security services provided by an individual, HUF, partnership firm to a body corporate are being brought to full reverse charge from partial reverse charge mechanism

• Cenvat Credit of Service tax paid under partial reverse charge by the service receiver allowed without linking to the payment to the service provider.

ImpactThe budget is balanced and lays a road map for the economy. Strong focus on infrastructure, along with ongoing emphasis on the ‘Make in India’ programme is likely to provide a thrust to the economy and the T&L sector at large.

Policy impactInfrastructure reinforcement appears to be a clear focus for the government with an additional INR70,000 crore investment announced for the sector.

The proposed addition of one lakh kilometre of road network in the coming year would be welcome, as roads which account for a significant part of the country's freight movement have long been faced with the problem of over-congestion. Overall, the announcements made in the previous year’s budget around coastal shipping, inland waterways, metro rail, networking ports along with various initiatives proposed by the recent railway budget, fairly balance out inclusive development in the sector. Corporatisation of ports although has been a part of the current budget, it may not be implemented in the near term.

The transport sector, especially roads, rail and ports would all benefit from the positive economic outlook facilitated by enhanced investment in infrastructure, focus on improving rural India, Ease of Doing Business, Make in India related impetus, GST and a more predictable tax environment assured by the Finance Minister.

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Tax impactExcept the laydown of a clear road map for GST, the budget did not have any significant impact on the T&L sector.

• The government’s commitment to implement GST by 1 April 2016 is a much needed step which would significantly improve the supply chain efficiencies and reduce losses

• Reduction of rate of Royalty and Fees for Technical Services is a welcome move which would go a long way to facilitate technology inflow to offer new global technologies

• Deferral of GAAR, abolition of Wealth tax, clarity on Indirect transfer and exclusion of AOP members’ share for the purpose of MAT would boost investor confidence

• Rationalisation of capital gains regime for the sponsors on sale of units included in the initial offer and listed subsequently on recognised stock exchange is a positive step.

SummaryThe Union Budget has attempted to create an institutional and regulatory framework for the future. The government’s focus on the ‘Make in India’ programme is further expected to provide a boost to the transport and logistics sector. Overall, the budget has been greeted with positive reactions from the stakeholders.

Road map to the implementation of GSTThe Budget laying down a clear road map for the implementation of GST by April 2016 has been lauded by the industry and the markets at large. Further to it, the increase in service tax rate, subsuming of cess under excise, along with the removal of certain exemptions are an indication towards the GST regime. The increase in rates is also a precursor to GST so that the industry does not feel the steep tax increase on introduction of GST, with proposed rates at 16 per cent or more.

Addressing the Direct Tax RegimeThe budget has also attempted to provide a road map for direct tax regime including reduction of corporate tax over the next four years, deferral of GAAR by two years and abolition of wealth tax.

Announcements on various tax issues/incentives missingThe industry expects more clarity in the future, on various direct tax issues which are clogged in litigation, such as procedural tax assessment for regular and occasional shipping business. Further, the expectations of the industry with regard to tax incentives such as infrastructure status for port support services, extension of tax incentives for all warehouse facilities, etc. need to be clarified in the near future.

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Unfinished agenda

What remains Direct tax• Service tax collected on specified shipping income to be excluded in ‘gross freight’ for computing

deemed taxable income under Section 44B• Clarity on claiming tax holiday under Section 80-IA by ICD and CFS• Appropriate guidelines to be provided in respect of ‘regular’ and ‘occasional’ shipping business• Extension of benefit of deduction under Section 80-IA in respect of upgradation and extension of

existing airports• Providing tax benefits to Maintenance, Repair and Operation (‘MRO’) companies for setting up

facilities in India.

Indirect taxDemand for exemption to transportation of LNG using chartered vessels, maintenance of rail projects (including metro projects), transportation of goods by road to places outside India to countries like Nepal, Bhutan, etc. not considered.

What is expected going forwardThe Finance Budget must be lauded for the emphasis laid down on infrastructure development, thereby improving the operational efficiency for roads, and railways, to improve the modal mix and bring down transportation costs. Following are some of the recommendations that can be considered to develop a universal road map for the industry:

• Channelise the movement of commodities to suitable modes of transportation to improve the modal mix. Divert the transportation of bulk commodities from road to increasingly appropriate modes such as rail and waterways, thereby freeing up capacity for fast moving goods

• Increased co-ordination between the various ministries to integrate and expedite decision making

• Set benchmarks and standards for the industry, to drive uniformity in warehouses, storage, and transportation equipment and bring them up to high quality levels

• Focus on decongesting airports and seaports, shifting cargo-clearance activities away to inland or port or airport locations

• Provide clarity on the various ongoing tax issues so as to mitigate litigation and thereby provide a boost to the ailing sector

• In light of the overall theme of rationalisation of the tax regime, GST is expected to come to the rescue in the near future.

The information contained herein is of a general nature and is not intended to address the circumstances

of any particular individual or entity. Although we endeavour to provide accurate and timely information,

there can be no guarantee that such information is accurate as of the date it is received or that it will

continue to be accurate in the future. No one should act on such information without appropriate

professional advice after a thorough examination of the particular situation.

© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All

rights reserved.

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