POSITION PAPER 2018

DisclaimerThis Position Paper is a collective expression of the views of the members of the EBG Federation and its knowledge partners on key aspects of the business environment in India that affect the development of India-EU business relationships.

The views expressed in each chapter are generally in conformity with the views of EBG Federation. Information in this Position Paper is therefore intended for general guidance only. The views and recommendations put forward in this Position Paper are proposed only to stimulate discussions and offer suggestions to make Indian business environment more competitive. Whilst efforts have been made to ensure that the information contained in this Position Paper is accurate to the best of our knowledge, EBG Federation and its Knowledge Partners namely Deloitte Touche Tohmatsu India LLP, EY, Grant Thornton, JMP Advisors, KPMG in India, OPPI, PwC and TMF-Group does not assume any liability or responsibility for the outcome of any decision taken by any reader on the basis of this position paper.

This Position Paper is intended for and is strictly for the use of members of EBG Federation and other interested parties. Its contents shall not be reproduced in whole or in part without the prior consent of EBG Federation. The exchange rates for the purpose of conversion are based on the exchange rates prevalent in the period of March-April 2018. [Exchange rates: ET Markets, 23 March 2018]

Disclaimer

ACKNOWLEDGEMENTSCONTRIBUTIONS – Position Paper 2018

EBG acknowledges the key support of our Sector Committee Chairs, Vice Chairs and its Members and the support provided by the knowledge partners.

EBG acknowledges the contribution of Richa Gupta and Umang Aggarwal for the Introduction.

S.No Sector Committee Chairperson Contributors – Knowledge Partner

1. Agrochemicals K S Thyagarajan Paolo Prisco & Jiwanjot Singh – EY

2. Alcoholic Beverages Rajnish Singh – Moet Hennessy Prashant Mehra – Grant Thornton

3. Automotive Vinod Pandey – BMW India Rakesh Batra, Rajnish Gupta & Abhinav Chauhan – EY

4. Banking Radha Dhir – Deutsche Bank Jairaj Purandare – JMP Advisors

5. Chemicals & Petrochemicals

Abhinay Desai – BASF Karishma R Phatarphekar – Deloitte Touche Tohmatsu India LLP

6. Civil Aviation – Amber Dubey & Captain Vinod Narasimhamurthy – KPMG in India

7. Defence Manod Jinnuri – SAAB India Dhiraj Mathur, Cdr Gautam Nanda, Nipun Aggarwal & Ruchika Verma – PwC

8. Financial Services Rajeeb Ranjan Mallick – Home Credit

Achin Malik & Sameer Sheth – TMF-Group

9. FMCG Rajeev Batra (Senior Advisor) Sumeet Hemkar – Deloitte Touche Tohmatsu India LLP

10. Homeland Security Rupan Sidhu – G4S Dhiraj Mathur, Cdr Gautam Nanda, Nipun Aggarwal & Ruchika Verma – PwC

11. ICT Sanjeev Verma – Altran India Mahesh Jaising, Manoj Kumar & Sangita Prakash – Deloitte Touche Tohmatsu India LLP

12. Logistics Julian M Bevis – Maersk Group –

13. Oil & Gas – Gokul Chaudhri, Debasish Mishra & Sumit Singhania – Deloitte Touche Tohmatsu India LLP

14. Pharmaceuticals Ranjit Shahani Kanchana TK, Dr Ajay Sharma & Nitika Garg – OPPI

15. Power – Gokul Chaudhri, Shubhranshu Patnaik & Sumit Singhania – Deloitte Touche Tohmatsu India LLP

16. Retail Patrik Antoni – IKEA Gaurav Karnik & Akshay Anand – EY

17. Telecommunications T V Ramachandran, Satyen Gupta – Vice Chair (Blue Town)

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An introduction toEBG Federation in India

Founded as the European Business Group (EBG), in 1997 as a joint initiative of the European Commission and the European Business Community in India, EBG has come to be recognized by the Indian Government and the European Commission as the industry advocacy group representing the interest of European companies and Indo-European Joint Ventures in India. EBG Federation was established on March 11, 2015 as a Section 8 company under the Companies Act 2013 in order to ensure long term stability and broaden its sphere of activities offering support and advocacy for European businesses in India.

EBG Federation is supported by the Delegation of the European Union to India and works towards promoting, propagating and safe guarding European business interests in India. The EU Ambassador is our Patron.

Currently EBG Federation has Chapters in Delhi, Mumbai, Bengaluru and Chennai with approximately 160 companies as Members.

The primary objective of EBG Federation is to actively support growth in India-EU trade relations, and become the most relevant advocacy group for European business in India and ensure that the needs of European business are well presented to policy and decision makers.

Every year the EBG publishes an influential ‘Position Paper’ which highlights the group’s views on policy. The EBG Position Paper is a collective expression of the views of the members of EBG and supported by knowledge partners on key aspects of the business environment in India such as Ease of Doing Business. The EBG Position Paper proposes key policy reforms that will be conducive to the growth of business and what we believe are in the realm of possibility for the Indian government to put in place.

The 2018 edition of the EBG Position Paper covers the following key sectors, including Agrochemicals, Alcoholic Beverages, Automotive, Aviation, Banking, Chemicals & Petrochemicals, Defence, Energy – (Oil & Gas, Power), Financial Services, FMCG, Homeland Security, ICT, Logistics, Pharmaceuticals, Retail and Telecommunication.

EBG FEDERATION

Message from Mr Raman Sidhu, FCAChairman, EBG Federation, India

EBG Federation, India, functions as the focal advocacy point for European Corporates and Indo-European Joint Ventures, which operate in India. EBG Federation continues to promote Europe as India’s most preferred business partner and to help to create an environment that allows European Businesses to flourish in this country. EBG Federation works to assist, propagate and endeavours to protect our Members’ business interests in India in order that they can work towards their business and investment goals more effectively.

Over the past 15 years, EBG has been publishing The Annual Position Paper which brings together the views of its Members reflected through the relevant sector committee. The sector committee is supported by our Knowledge partners on some key aspects of the business environment that prevails in India and which has a direct bearing on the ease of doing business in the country. The sector committees also recommend solutions which are in the realm of doability. This paper continues to act as the base document for the next 12 months and intends to facilitate discussion with the regulators and other relevant and key stakeholders to seek action on the concerns raised by European Investors in India.

It is indeed my privilege to once again present EBG’s Position Paper, 2018 which covers a plethora of sectors important to both Europe and Indian businesses. This 16th Position Paper covers an additional important sector – Pharmaceuticals. If any major sector coverage is not there, it is mainly due to the fact that we currently do not have enough significant players from that area as our Member to form a committee.

It is important to note that this year’s paper carries messages of encouragement and support from 24 European Embassies. I am grateful to the Ambassadors/Heads of Mission/Economic and Commercial Counselors of these Embassies for supporting this year’s EBG Position Paper.

EBG maintains a regular interaction with the EU Delegation and other European missions and agencies. I would like to reiterate that one of the focus areas of the current and next year is to build and consolidate on EBG’s working relationship with as many as possible, bilateral European Chambers of Commerce & Industry and other independent European associations

EBG remains grateful to its Chapter Chairs & Co-Chairpersons, Sector Committee Chairs & Co-Chairpersons and their Members, Mr Rajeev Gupta, Senior Advisor, EBG Sector Committees and Position Paper, Ms Neema Sunil Kumar & Ms Tania D’Souza of the EBG Secretariat for their collective support. I express my gratitude to Deloitte Touche Tohmatsu India LLP, EY, Grant Thornton International, JMP Advisors, KPMG in India, OPPI, PwC and TMF-Group for fully supporting us for certain sector papers as our knowledge partners and for their time bound support and commitment to bring this Position Paper 2018 to fruition. I also express our sincere gratitude to all concerned Government departments and agencies for giving us time to hear our Members’ concerns on ease of doing business and for addressing them to the extent possible.

I am no doubt sure that all my colleagues in EBG, Heads of Mission and their Commercial/Economic Counsellors and respective teams, knowledge partners join me in wishing all success in our collective efforts.

Message from Mr Gokul ChaudhriPartner, Deloitte Touche Tohmatsu India LLP

Growing strength of India-EU ties goes back decades with India being amongst the first to forge bilateral economic and diplomatic association with the European Union, then known as European Economic Community. The partnership stood reinforced at the beginning of 21st century, as India and EU became ‘Strategic Partners’ and agreed on a Joint Action Plan in 2005 (updated in 2008). At the 14th India-EU summit held in October 2017 in New Delhi, the countries celebrated 55 years of diplomatic relations and committed to deepening bilateral trade cooperation and broadening diplomatic engagement on global and regional issues.

On the trade front, India-EU relationship has flourished over years with EU emerging as India’s largest trade partner. India continues to remain hugely attractive investment destination for EU investors, and is ninth-largest trade partner for the EU. With political leaders on both sides recognizing India and EU nations as natural partners, India-EU relations appear to have hit a sweet spot particularly in recent years with many historical deals in defence, energy and infrastructure space. One would expect this partnership to grow even stronger in coming years as the nations are set to resume negotiations on Bilateral Trade and Investment Agreement (BTIA) later this year, which is a crucial development, especially in the backdrop of global trade war fears and growing wave of economic protectionism.

There is no gainsaying that while both sides have come far in this continued evolution of their bilateral relationship, the engagement continues to hold tremendous growth potential. India grows in its stature as amongst the most attractive investment destinations given the sound macro-economic fundamentals and sustained growth outlook, promising demographics and ever-burgeoning domestic market. Under the present regime, unprecedented focus on scaling up infrastructure capabilities, growing thrust on industrialization and indigenization, and creating employment through R&D and technological advancements hold out tremendous potential for European businesses at large. In fact, interest already evinced by EU businesses in the government’s flagship programmes – Make in India, Skill India and Digital India is quite encouraging. India has scaled up many notches to be among top 100 countries in ‘ease of doing business’ rankings and the government is committed to improve it further. Successful roll out of a comprehensive GST regime and overarching resolve of the government to simplify tax legislations and modernize tax administration are important steps in this regard.

Against the rapidly evolving geo-economic landscape, EBG Federation India, has played a pivotal role in facilitating trade and investment flows as well as emerging as a credible voice of the EU businesses in bringing forth concerns and recommendations of businesses for deliberation by the Indian policy makers. The EBG Position Papers for many years have been instrumental in shaping policy discussions across industries and successfully enhancing the dialogue on ways to deal with impediments for cross-border trade and investments.

I would like to congratulate the EBG Federation on the 2018 edition of this annual publication.

Message from Mr Kersi Hilloo Vice Chairman, EBG Federation, India Chairman, EBG Federation, Mumbai Chapter

This 16th Edition of the Position Paper 2018 emphasizes the pivotal role that EBG Federation plays in not only ensuring that India remains one of the major businesses and trade partners for European Union (EU) Corporations but also actively supporting and strengthening the EU and India’s rapidly growing relationships.

India is currently the fastest growing economy in the world and a strategic partner for the EU, representing a sizeable and dynamic market of 1.25 billion people. For these reasons, the EU and India are committed to further increase their bilateral trade and investment through the Free Trade Agreement negotiations, with discussions focused on key outstanding issues that include improved market access for some goods and services, government procurement, geographical indications, sound investment protection rules, and sustainable development. The EU is India’s number one trading partner.

The Position Paper continues to remain a key instrument in the development and growth of our dedicated sectors and the goal is to widen the scope of partnerships between Europe and India with our shared vision and commitment towards EU corporations in India.

Our primary focus in EBG Federation continues to be on ‘advocacy’ and strengthening the partnership between India and EU companies.

Message from Ms Rekha KhannaChairperson, EBG Delhi Chapter

It is, once again, a real honour and great pleasure to express my sincere gratitude to our Sector Committee Chairpersons, Co-Chairpersons, Members and colleagues on EBG’s Councils for their active support and actions.

EBG has been able to sustain and build on its clear vision to be the most effective voice of European business in India through a number of impactful meetings with key policy and decision makers ensuring that our Members issues/needs are well understood. This business driven agenda will motivate all our actions moving forward to ensure that EBG continues to deliver sustained value for its Members.

The 16th edition of the EBG Position Paper highlights the breadth and depth of EBG membership and European business presence in India. It effectively showcases the crucial role that European companies play, their requirements, the path to enhance their contribution even further and the great work done by the different Sector Committees in highlighting this. The Position Paper plays a critical role, providing an effective platform for presenting our contribution and issues, generating vital discussion and laying the ground work for future action.

We believe that EBG does and must play an increasingly pivotal role in the dialogue between European business, the authorities in India and all vested stakeholders to further develop this vibrant partnership for the benefit of all. The Position Paper is a unique expression of what is and what can be to sustain the strong link between India and the European Union as favoured business and trade partners.

EBG’s focus is on supporting our Membership effectively, to make Ease of Doing Business a reality and identifying relevant ways to enlarge the scope of partnerships, with EBG’s Position Paper as a key instrument.

Message from Mr Sanjeev VarmaChairman, EBG Bengaluru Chapter

As the chair of EBG Bengaluru Chapter, it is a pleasure and honour to contribute to the Indo-European community through EBG. EBG Bengaluru has contributed to the ICT paper this year which would not have been possible without inputs from our Knowledge Partners, Deloitte Touche Tohmatsu India LLP. This has been a complete team effort where representatives from various European companies came together to contribute their ideas to make it a success. This year’s ICT position paper provides insights into the IT&ITeS industry landscape, recent macro-economic developments and covers some of industry issues and suggestions.

Building a common platform for European companies to come together, share ideas and network would be EBG Bengaluru Chapter’s priority. I look forward to active participation and support from existing members of EBG and hope to on-board new members who share a common agenda.

Message from Mr Rajeev Gupta Managing Director, RDI & Senior Advisor, EBG Sector Committees & Position Paper

Friends,

I do not know how many of us still believe, as I do, that we will in times to come see a new India which is for sure bigger, better, stronger, corruption free, peaceful and more prosperous than ever before.

I do not know, how many of us still feel that India is moving in the right direction and that some bold decisions of the past like demonetization, our foreign policy changes, the GST bill, the choice of leadership in Uttar Pradesh etc. are all a reflection of the emergence of a more powerful and self-reliant nation.

But I can say with even more confidence that India is slowly emerging from the shadows of the past and will play an increasingly important role in World Trade, World Politics and World Economics.

It is hence pertinent and important for all Global Powers to look at India as a Country with huge potential and participate and Partner with it, in its Journey of Growth. I also feel strongly that the Indian challenges are unique and hence the solutions to succeed will also have to be new and unique.

It has thus been our endeavour at EBG to engage with Policy Makers to further facilitate an environment which results into the emergence of a more vibrant, conducive and powerful India through greater Indo-European trade and collaboration. Our focus has been and continues to be, to have serious and open discussions and to come out with innovative solutions which while taking care of National Interests, can hasten the pace of growth by leveraging the strengths available elsewhere.

These position papers, which are a result of a series of intensive brainstorming sessions involving hundreds of man-hours of some of the best brains available in the business world, in the seventeen key sectors and representing the who’s who of European businesses, is our attempt to draw the attention of stake holders in general and Policy Makers in particular to the contributions made by European players in this growth journey of India and the possible corrective actions required in the policies to facilitate higher growth and participation.

We are confident that a continued and closer engagement between the two sides would go a long way in creating a win-win for all and help Europe to be a preferred Partner in India’s Journey of Growth

Message from H.E. Mr Tomasz KozlowskiAmbassador of the European Union to India

The Delegation of the European Union (EU) to India is once again delighted to support EBG Federation’s 2018 Position Paper. The Position Paper reflects the devotion and hard work of European businesses in India and the commitment by EBG in advocating and advancing EU-wide economic and trade relations with India.

EBG’s annual Position Paper is my preferred reference document to apprehend and get an overview of the challenges that EU businesses face in India: it identifies, by sector, the key concerns related to India’s business environment, followed by proposals for solutions aiming at making the Indian market more conducive and attractive for European investors.

The EBG is an important companion for EU companies having invested or willing to invest in India. It is organized in different sector committees which have acquired, in their specific sector of interest, an in-depth knowledge of the Indian business environment and which have the aim of advocating for EU interests and advancing EU-India economic cooperation in these sectors.

India, with its large market and impressive growth rate, represents an important opportunity for EU companies. Nonetheless, many EU companies, in particular small and medium-sized enterprises (SMEs), experience challenges operating in India relating to market access, non-tariff barriers to trade and investment and lack of accurate information about the regulatory regimes applicable to them.

I will continue to provide my full support to the EBG. At the same time, I would like to encourage EBG to further develop its advocacy role by deepening the already good cooperation with the various bilateral chambers of the EU member states and with industry associations. Better coordination of mutual interests will serve best our common goals and it is essential that we find means to provide the best framework for allowing all European companies established in India, and in particular SMEs, to benefit from the advantages of being part of a strong and united EU-wide business voice.

Message from H.E. Ms Brigitte Öppinger-WalchshoferAmbassador of Austria to India

On behalf of the Austrian Embassy, New Delhi, I would like to express my warmest congratulations on the occasion of this year’s publication of the EBG Federation’s Position Paper.

The annual Position Paper by the EBG Federation has gained a unique reputation as one of the most successful manifestations of business relations between Indian and European business. Both the great variety of business fields covered as well as in-depth analysis by experts result in an outcome useful to business partners from both sides.

It is not only used as a source of information, but especially as a possible guidebook for new and further developments. India’s economic growth must not be ignored and needs to be part of the European Union’s (EU’s) future trade policies. With the necessary strengthening of international trade routes and increased attractiveness for foreign investment, India and the EU need to develop strong ties with each other in order to remain competitive.

There are currently more than 150 Austrian branch enterprises and joint ventures in India, which typically operate in market niches. Austrian companies are mostly represented in the areas of mechanical and plant engineering, automotive industry, infrastructure and energy sectors, electrical engineering and electronics. Consumer goods, food and lifestyle products are considered as potential options for future expansion. Hence, the Austrian Embassy, New Delhi strives to optimize the business relations between India and Austria and emphasizes the need to ensure collaborative development. We focus not only on the bilateral relations between India and Austria, but also on the joint development of the EU’s multilateral economic relations with India.

The Position Paper as a collective expression on India’s business environment is needed to foster international trade relations. We know that Austrian business partners can rely on a strong relationship with the EBG Federation and therefore fully support the annual Position Paper 2018.

Message from H.E. Mr Jan LuykxAmbassador of the Kingdom of Belgium to India

Their Majesties the King and the Queen of the Belgians came on a state visit to India in November 2017, thereby highlighting the 70 years of excellent diplomatic relations that exist between India and Belgium.

As part of the programme of Their Majesties, several business-oriented activities were organized by the regional trade commissioners (Flanders Investment and Trade, AWEX and Brussels Invest and Export) of the Belgian network in India. In New Delhi and Mumbai important areas of potential cooperation were highlighted such as sustainable cities, healthcare, tourism, innovative technologies for the heavy industry, innovative technologies in the food industry, clean technology solutions for smart cities and industries and digitization.

The large business delegation that joined the state visit shows us that India is considered to be an important place to do business for our companies.

To be able to fully exploit the potential of doing business between India and Belgium, and thereby with Europe, it is however very important that the European Union (EU) and India take up the thread again of the stalled Bilateral Trade and Investment Agreement negotiations. After two consecutive successful summits between India and the EU in 2016 and 2017 there should be no more hesitation to go in for an ambitious and a substantive result in this regard.

I commend the EBG Federation for steadfastly promoting the interests of the European business community in India and I encourage it to continue these efforts in the future with the same vigour and energy.

Message from H.E. Mr Petko DoykovAmbassador of the Republic of Bulgaria to India

I would like to convey my congratulations to the EBG Federation for the release of its Position Paper for Year 2018 as well as EBG’s efforts and activities to promote European-Indian trade and investment relations.

Six decades after the Treaty of Rome, which set the foundations of the European Union (EU), the EU is a big family of a half billion people, the world’s largest economy and the biggest investor and recipient of foreign direct investments.

The EU is India’s first partner in terms of trade and investment inflows. EU-India trade in goods and services is well beyond the mark of €100 billion and there is a great potential for a further increase of the EU-India turnover.

From January 1 to June 30, 2018 Bulgaria is holding the Presidency of the Council of the European Union for the first time since the country’s accession to the EU in 2017. The Presidency is under the motto ‘United We Stand Strong’ and the main 4 priorities are: Future of Europe and Young People; Western Balkans; Security and Stability; Digital Europe. The Bulgarian Presidency of the Council of the EU in the first half of this year creates new opportunities for the enhancement of Bulgaria-India economic cooperation.

India is a major economic partner for Bulgaria. Over the years our countries have developed a longstanding amicable relationship and businesses from Bulgaria and India have established mutually beneficial partnership. The increase of Bulgaria-India trade volume over the last ten years was almost threefold.

With the official visit in the beginning of March 2018 in New Delhi of the Deputy Minister of Economy of Bulgaria, Mr Alexander Manolev on the occasion of the 18th Session of the India-Bulgaria Joint Commission for Economic, Scientific and Technical Cooperation, held on 06.03.2018 in New Delhi, co-chaired by Indian side by Ms Rita Teaotia, Commerce Secretary, Ministry of Commerce and Industry, Bulgaria and India took an important step in renewing and expending bilateral cooperation in the field of trade and investment. Bulgarian business delegation took successfully part in the 4th India-Europe 29 Business Forum, organized by FICCI. I believe that this forum has been a good opportunity to promote business contacts between Bulgaria and India and the participation of leading Bulgarian companies in the forum was a convincing proof of this.

The last few years the interest of Bulgarian business towards India has led to the implementation of large-scale projects under various programmes of the Indian government, such as Make in India and Clean India. We take pride that in recent years Bulgarian entrepreneurs have strengthened their position as the fastest growing Internet provider in New Delhi and Hyderabad. Bulgarian companies have established production facilities in India and are currently operating the largest facility for bitumen packaging in Asia (located in Mumbai) as well as a manufacturing plant for veterinary medicines in Pune. In 2017 Bulgarian and Indian companies have launched ambitious investment projects under the Make in India initiative in the field of bio-toilets production and solar energy. We are ready to extend our support to future Bulgarian projects in India.

At the same time, Bulgaria is an attractive place for the foreign investors due to its strategic location and the favourable tax and investment regime which makes us a competitive investment destination in Europe. These opportunities have been recognized by the Indian enterprises, who are operating successfully in our country. We appreciate greatly the activity of Indian companies in Bulgaria in such fields as IT and BPO, agriculture, pharmaceuticals and cinema industry. We are prepared to support new business initiatives as well as the expansion of Indian business presence in Bulgaria.

To conclude let me once again congratulate EBG for their support for the European companies in India and to wish a great success to all its activities!

Message from H. E. Mr Petar LjubicicAmbassador of the Republic of Croatia to India

At the outset, I would like to congratulate the EBG Federation on the release of its latest Position Paper, which is yet another milestone in paving the road towards strengthening bilateral relations between the European Union (EU) and India and furthering the cooperation of the two entities. That process is not always an easy ride, so setting up a paper aimed at defining the guidelines of that complex journey is a highly commendable effort.

Both entities endeavour to provide a clear and rewarding framework for cooperation of the respective economies and companies, having in mind both the well-being of their citizens as well as global sustainability, the global environment and community responsible entrepreneurship. I hope the 15th EU-India Summit will provide expanded frontiers and enhanced opportunities for both sides.

Croatia and India have a history of mutual contacts that goes back long before Croatia gained its independence. Historically, the two nations were connected by cultural exchanges of early travellers and scholars. One of the flagship faculties of the University of Zagreb is a cathedra for Indology established in 1959. It was preceded by two centuries by Croatian scholar Filip Vesdin who compiled the very first grammar of Sanskrit published in Europe.

Cooperation of the two economies however ensued only in the last couple of decades. In 2017, the regular biannual meeting of the economic ministries of India and Croatia was held in New Delhi, aimed at boosting cooperation between the two economies. We are witnessing yearly growth of Indian tourists in Croatia of approximately 50 per cent per annum. Among the industries, the pharmaceutical industry is leading the way, followed by several projects of Croatian-Indian joint ventures in pipelines. Establishing of a cathedra for the Croatian language at University of Delhi indicates emerging mindfulness of Indian youth of Croatian perspectives and in return Croatia offers good and affordable education for Indian students. We shall endeavour to enhance all these processes and add more fields of cooperation to the table.

Croatia is the youngest member state of the European Union and its economy has a long way to go before reaching the level of the founding countries. In that respect, endeavours extended by the EBG Federation are certainly a vehicle that will help in completing that journey.

Message from H.E. Dr Demetrios A Theophylactou High Commissioner of the Republic of Cyprus to India

It is a pleasure to address, on behalf of the High Commission and the Cyprus government, the 2018 edition of the EBG Federation’s Position Paper. As in previous editions, we maintained an active interest in the work of EBG as we highly appreciate its consistent work aimed at fostering closer economic ties between India and Europe. EBG has facilitated both synergies and partnerships for our mutual benefit. It also serves as a forum to further engage our private sector and business communities with a view to promoting public-private partnerships. The Position Paper clearly has an added value in so far as new ideas and innovative approaches to business are concerned.

Exchange forums like EBG provide significant venues of cooperation and innovation, where India and Europe can further share experiences and best practices. They also open up new opportunities to foster research and development, particularly in innovative sectors where talents and startup companies on both sides can benefit, knowledge-wise and business-wise. Indeed, EBG actively promotes people-to-people contacts, notably amongst young entrepreneurs who eagerly look for new frontiers. India is a fertile ground for European business, much as Europe continues to be a desired destination for Indian entrepreneurs. New initiatives actively pursued by the Hon’ble Prime Minister Narendra Modi, like Make in India, serve well to this end.

As for the next steps, EBG can foster practical and results-oriented collaboration, as well as exchanges at the highest level. Ministers from Europe are eager to experience first-hand Prime Minister Modi’s innovative policies. The common objective is to foster growth and promote employment, particularly amongst young entrepreneurs, through innovation and partnerships. India and Europe can achieve wonders when they work together and maximize the scope of innovation and synergies. This requires political will in order to allow the private sector in Europe to reap the benefits of a rapidly growing Indian economy. Likewise, India can benefit from European industrial and technological prowess. Working together is the way ahead, and EBG can actively assist to this end.

Message from H.E. Mr Milan HovorkaAmbassador Extraordinary and Plenipotentiary of the Czech Republic to India

It is a great pleasure for me to have once again a chance to praise the EBG Federation for its work and to express my gratitude for its constant efforts to play a pivotal role in strengthening and deepening bilateral relations between the European Union (EU) and its member states and India, while raising a strong voice to promote the interests of European companies in India.

The EBG Federation has become an increasingly relevant part of the EU’s team of partner institutions and has emerged as a reliable associate of its member-states representations in pursuance of the objectives. It continued in pushing the agenda of strategic partnership with India to advanced level and expanding the existing potential of further collaboration in many areas such as trade in goods and services, foreign direct investment, entrepreneurship development, research and development, education, skill development and naturally basic people-to-people contacts.

I should congratulate the EBG Federation for handling smoothly and professionally transformation of its structure. I am glad to see that EBG is able to reach out of the Indian capital city and to develop its network around India with focus on economic centres such as Mumbai and other metropolitan cities. Increasing importance, wide territorial reach and growing membership will only help the EBG Federation in communication and in relation with the Indian authorities.

The voice of the Czech Republic within the EBG Federation is clearly heard in many aspects. I am pleased to note that one of the Czech Republic-based companies, namely Home Credit, is reported to be one of the most active EBG Federation members and that it has contributed its part in every year’s Position Paper preparation work. I believe that other Czech companies with commercial presence in India will follow this example.

Let me use this opportunity to express my satisfaction with the development of the bilateral friendly relations between Czechia and India in the year 2017. One of the pillars of this relationship has traditionally been trade. I am pleased to note in this respect that bilateral trade has further increased by 7.9 per cent to reach US$ 1.46 billion (€1.18 billion). Participation of India as the partner country at the International Engineering Fair in Brno in October last year was one of highlights of activities jointly developed by the two countries’ governments to intensify trade and investment ties. It is equally gratifying to note that bilateral people-to-people contacts have continued to expand by way of increased tourism, cultural exchanges and cultural cooperation.

With regards to the new Position Paper I would like to once again congratulate to the EBG Federation for being able to meet their own standards of the highest professionalism and huge amount of effort and to prepare in collaboration with European companies in India another comprehensive assessment of the regulatory framework and description of conditions for doing business in India.

Message from H.E. Mr Peter Taksøe-JensenAmbassador of Denmark to India

I would like to begin by congratulating EBG Federation on the release of its Position Paper for 2018 and its successful efforts in providing a platform for the expansion of Indo-European cooperation. More and more European companies derive advantages from increasing Indo-European collaboration, and EBG is highly valued for its key role in representing European business interests in India.

In 2017, the ties between India and Denmark have strengthened. I wish to highlight the significant improvements in people-to-people contact, which is crucial in bringing countries closer together. In September 2017, Air India began operating a direct route between New Delhi and Copenhagen. Since then we have witnessed its important implications in terms of improved business and two-way tourism. In that regard, I am pleased to report a 20 per cent increase from 2016 to 2017 in the number of Schengen visas issued to Indian nationals by the Danish Embassy in New Delhi.

The year 2017 saw another highlight in terms of Indo-Danish cooperation within agriculture and food. Denmark’s participation as a partner country in the World Food India summit in November represents a milestone in attracting Danish investments to India’s food-processing sector. The Danish Minister for Environment and Food, Mr Esben Lunde Larsen, attended the summit while spearheading a Danish business delegation of 21 companies, which are active across the agro-food value-chain.

Agriculture and food not only presents a promising strategic match between Danish capabilities and Indian market developments but it also feeds into the Indian government’s agenda of ‘doubling farmers income by 2022’ and the Make in India initiative. Furthermore, Danish solutions and competencies would support India in the process of attaining several of UN’s Sustainable Development Goals.

We see many exciting opportunities for Indo-Danish cooperation in the maritime and Smart City sectors. Similarly, the Indian government’s goals to reach a sustainable energy capacity of 175 GW by 2022 and increase the share of renewable energy to 40 per cent by 2030 represents an attractive opening for further bilateral cooperation. This led the Danish Energy Agency and Ministry of Energy, Utilities and Climate to visit New Delhi in December in an attempt to identify key areas and develop a strategic model of cooperation with Indian counterparts. Denmark has strong competencies within wind power, smart grid energy systems and bio-energy, where Danish companies are already contributing to the growth in renewables and increased energy efficiency throughout the Indian economy.

On that note, I wish to thank EBG for its sustained efforts in promoting Indo-European business cooperation and for its support to European businesses in India. I am confident that this year’s Position Paper once again will be successful in highlighting the many opportunities that are in the pipeline for cooperation between the European Union and India.

Message from H.E. Ms Nina VaskunlahtiAmbassador of Finland to India

The strong ties between Finland and India are rapidly growing. Today, there are over 100 Finnish companies established in India and some 25 Indian companies in Finland. The Finnish business sector here is diverse: from solar power plants to network operations, from machinery and ship engines to mining equipment and fork lifts. Finnish IT companies know well the strengths of Indian expertise, and thus employ jointly over 8,000 R&D experts in the country. Mumbai, Chennai, Bengaluru and New Delhi are well known locations for Finnish companies and states such as Uttar Pradesh, Rajasthan, Andhra Pradesh and West Bengal are emerging regions that interest Finnish companies.

The volume of trade in goods and services between Finland and India in 2017 was over €1 billion. However, the trade is far below its potential. A real boost for growth would be a Free Trade Agreement between the European Union and India. Finland, a member state of the European Union since 1995, is an open economy, firmly believing in free trade being the vehicle for growth and wellbeing for all nations.

The scope for business and cooperation between Finland and India is vast. In India, there is growing interest in education, clean technologies, health sciences and logistics. Finnish companies do have environmentally sound and sustainable solutions i.a. for Smart Cities and Clean India. Finnish export offer is also diverse: from raw materials such as timber, pulp and paper to high optics. Finland is the fourth largest exporter of high quality sawn softwood – 80 per cent of the Finnish surface is covered by forest – in the world. What would be a better Make in India example than state-of-art manufacturing of furniture and interior elements in India based on Finnish raw material.

Tourism between the two countries is on the rise. Finland offers the ‘last wilderness of Europe’ with snowy winters when the skies are decorated by Northern Lights and endlessly light and long summer days. Last year we saw over 40 per cent increase in the overnights spent by Indian tourists in Finland. And the rich and diverse Indian culture is attracting more Finnish visitors. The direct flight between Helsinki and New Delhi makes travel easy and hassle free. During the winter months there is even a direct flight between Helsinki and Goa.

The World Economic Report ranks Finland as the 10th most competitive country in the world. Finland takes pride in its open economy, investment friendly and transparent business climate, functioning logistics and capable, well educated, skilled work force and invites Indian investors over.

I take this opportunity to also thank EBG Federation for preparing the Position Paper highlighting the European business presence in India at large. It is an effective way to bring forth the interest, views, requirements and challenges of the European companies. The paper plays a crucial and critical role for providing an effective platform for information, discussion and future action.

Message from H.E. Dr Martin NeyAmbassador of the Federal Republic of Germany to India

‘Red carpet instead of red tape’: It is with this mantra that the Indian government has made tremendous efforts to attract foreign companies to Make in India. The record influx of foreign direct investment underlines that the endeavour has been a rather successful one. But which policy framework do German and European enterprises need to succeed in India? What are the sector-specific recommendations? How can our industry contribute to India’s ambitious growth trajectory?

The EBG Federation has been instrumental in finding answers to these questions. Its annual position paper is the result of a comprehensive consultation process with key stakeholders from a wide array of sectors. It has become one of the central documents to make the interests as well as concerns of the European business community heard in India.

I would like to thank the EBG for its commitment in furthering EU-India relations and am confident that the 2018 edition will continue to be a valuable input for the policy-making process.

Ahead of China and the United States, the European Union is India’s largest trading partner, with Germany as the single-most important contributor to the trade relations. European companies significantly contribute to India’s economic development and job creation with an accumulated investment of well over €50 billion. Employment by German companies alone, directly and indirectly, amounts to around 600,000 people.

Yet the untapped potential in trade relations remains considerable. A Free Trade Agreement including investment protection between the world’s largest democracy and the world’s largest trading bloc would unleash new opportunities on both sides. It would send a strong signal to protectionist forces elsewhere in the world. It would give two partners, who share the fundamental values of democracy and rule of law, the chance to set standards for the rest of the world.

I therefore encourage the EBG, its members and partners, to actively point out the advantages of a Free Trade Agreement and push for a timely resumption of negotiations on this essential step to further strengthen trade relations. Rest assured that Germany will firmly stand on your side.

Message from H.E. Panos KalogeropoulosAmbassador of Greece to India

For more than 20 years, EBG Federation and its preceding relevant organizations have been promoting Indo-European business relations. EBG, covering the business area in Delhi and some other important Indian economic hubs, is a valuable partner, a networking institution, supporting our companies to access the huge but challenging Indian market through services and information provided to them; a market whose everyday trading volume with Europe, is estimated at €300 million.

Thus, I convey my congratulations to the EBG Federation for the annual release of its new position paper, a useful business tool traditionally appreciated by the Indian and the European business communities. It demonstrates the bilateral EU-India potential in several sectors, like trade, investment, entrepreneurship, innovation, research or development.

The Greek firms, with a certain delay, mainly due to the restricted financial adjustment programmes implemented in Greece since the year 2010, have been activating recently more and more in the Indian market. For the time being they are involved in trade of goods, services, telecommunication components and in the new and renewable energy sectors. Twenty of them have invested in Maharashtra, Haryana and few other emerging or economically vibrant states, improving in a significant way the annual trends in trade or tourism. If a new comprehensive foreign investment protection framework is adopted by the Indian government and a balanced Free Trade Agreement with the European Union is concluded, a certain boost of our bilateral business cooperation will certainly follow.

The successive official visits of members of the Hellenic government since December 2015 and planned high level visits from the Indian side in the near future, prove the mutual will to deepen and further energize bilateral relations between the oldest and the biggest democracies in the world.

Message from H.E. Mr Gyula PethőAmbassador of Hungary to India

On behalf of the Embassy of Hungary I would like to congratulate the EBG Federation on the release of the latest edition of the EBG Position Paper. As every year, this important document showcases how the largest democracy, India can join hands with Europe.

2017 has been a momentous year in India. The adoption of the goods and services tax (GST) has redrawn the map for doing business in India by creating a single market for all. This is a tremendous challenge, but it is also a remarkable opportunity for Indian and Hungarian companies alike.

With the gradually shifting international tendencies, India is very much at the forefront of global growth, overtaking even China. I need to commend the efforts of the Indian government to change the business environment, a lot has improved, no wonder that India made the largest ever jump in the Ease of Doing Business rankings. Equally, the Hungarian government has made numerous and far-reaching changes to make life easier for companies, making Hungary – and the Central European Region – the engine of Europe, contributing the most to the growth of the old continent.

Still there is a lot to be done in India. The worryingly high level of air-pollution in the big cities, the challenges of the quickly dwindling water supply, the ever growing population, the aspirations of the new emerging middle class, the imperative of new job opportunities – all call for urgent solutions which Hungary can readily supply. Just like India, Hungary has a very long history of frugal engineering, of leveraging a highly skilled workforce and – most importantly – of innovation in many fields (agriculture, food processing, engineering, water management etc.).

India and Hungary has had a long history of cooperation, many Indian large corporates have a strong presence in Hungary. The latest examples are Apollo Tyres first ever greenfield investment outside of India which was inaugurated on April 7, 2017 by His Excellency Viktor Orbán, Prime Minister of Hungary, and a brand new factory – their fourth in our country, a testament in itself, to how conducive the Hungarian environment is to success – by the Sumi Motherson Group, inaugurated on November 16,, 2017, also by the Prime Minister of Hungary. This clearly shows how much Hungary values Indian businesses and Indian investments.

Tata Consultancy Services (TCS) is another excellent example. TCS has a large delivery centre in Budapest, employing close to 2,000 associates and serving their clients in 29 languages. Likewise, some Hungarian companies have also gained foothold in India, for example the pharmaceutical producer Gedeon Richter, which has a factory in Vapi, Gujarat, in cooperation with an excellent local partner.

I would like to congratulate the EBG on collecting opinions from our European companies and channelling their views and comments to the appropriate Indian parties. The EBG continues to play a vital part in improving the Indian business landscape. The position paper is an important contribution to expressing European views about the Indian business climate and fostering growth of Indo-European ties.

Message from H.E. Mr Brian McElduffAmbassador of Ireland to India

Trade and investment ties between Ireland and India are thriving, with strong growth in recent years. The value of annual trade in goods between our two countries surpasses the €1 billion mark and we estimate that trade in services is likely to be worth twice that amount.

More and more Indian companies look to Ireland as a base for their European operations, while simultaneously Irish businesses seek to link up with their Indian counterparts or to establish a foothold in the Indian market. There are now more than 60 Indian companies with operations in Ireland, including India’s top six information technology services companies which have a large footprint there. More than 70 Irish companies have operations in India and over 180 are actively doing business here.

While India is currently the strongest performing large economy, Ireland has enjoyed a remarkable economic turnaround in recent years following a severe financial crisis. Last year Irish GDP grew by over 7 per cent, nearly three times the Eurozone average. The strong economic performance of both countries augurs well for the future of Irish-Indian trade and investment links.

Ireland has benefitted enormously from its European Union (EU) membership. While the decision of our neighbours in the United Kingdom (UK) to leave the EU poses serious challenges to Ireland, we intend to remain both at the heart of Europe and open to the world. It is in our interests that the UK continues to have a harmonious and mutually beneficial trading relationship with the EU and we will where possible contribute towards this objective.

In the meantime, EBG Federation continues to play a valuable and much-needed role in promoting European business in India and I would like to join my EU colleagues in welcoming the launch of their 2018 Position Paper.

Message from H.E. Mr Lorenzo AngeloniAmbassador of Italy to India

I wish to congratulate the EBG Federation on its endeavours in support of European companies in India and its commitment to strengthen business ties between them and their Indian counterparts. We look forward to the release of the 2018 edition of the EBG Position Paper, an important reference tool for both the European Union (EU) and India in their quest to improve their partnership, remove existing hurdles and explore ever new pathways of cooperation.

The Indian and European industrial worlds of both large corporations and small and medium businesses are progressively integrating their respective activities in India and servicing each other’s needs to mutual benefit. Prime Minister Narendra Modi’s programmes such as Make in India, Digital India and the economic reforms promoted by his government will certainly serve to increase such synergies even further. Yet, there are still challenges to overcome.

In the recent EU-India Summit held in New Delhi, the EU leaders and Prime Minister Modi welcomed the steps that the two sides have taken to foster the resumption of the Broad Based Trade and Investment Agreement (BTIA) negotiations. The resumption of the BTIA negotiations is indeed the need of the hour as such a treaty would give a major boost to the further growth of EU-India business partnership, considering that the EU is the first investor and first trading partner of India.

In the huge and complex market that is India every source of sound information and well researched analysis is indeed precious. I commend the EBG Federation for their efforts and encourage them to continue to expand the scope of their Position Paper, as they have been doing in the past years, by progressively adding new sectors and new suggestions for improving EU-India partnership.

I wish the 2018 edition the best of success.

Message from H.E. Mr Aivars Groza Ambassador of Latvia to India

As an Ambassador of Latvia, which is an active and dedicated EU member state, I am happy to note that last year in October at the 14th EU-India summit in New Delhi the leaders reaffirmed their commitment to further strengthen the EU-India partnership in all its aspects, including continuous development of dynamic trade and investment relations. Dynamic trade and investment relations between the EU and India are not only economically important for our companies and people. They also strengthen and underline the political dimension of our relationship, where the EU and India share the same values of democracy, justice, human rights, and rules-based international order.

I am happy to note also the growing dynamics of economic exchange, but also diplomacy, education and culture, between Latvia and India. Especially as we mark round anniversaries – 100 years since Latvia became an independent state in 1918, 70 years since India’s independence in 1947, and 25 years of diplomatic relations between our two countries.

An important milestone in our bilateral relations has been the visit of our honourable Prime Minister, Mr Māris Kučinskis, with a business delegation, to India last November. As most promising areas for the business cooperation we have put forward transport and logistics, but also higher education and ICT. There are excellent opportunities for Indian exporters to make Latvia a distribution hub for their businesses and benefit from the efficient and affordable connectivity to transfer goods to EU and CIS. Given the geographical location and well-developed transport and logistics infrastructure, Latvia positions as an integral part of the Trans-Eurasian supply chain network.

I am confident that the EBG Federation is a solid platform to expand cooperation between Europe and India. I, therefore, convey my appreciation of the collaborative effort that has brought to light this comprehensive Position Paper. I have no doubt that the EU, Latvian and Indian business people are ready to consider new forms of cooperation for mutual profit and strategic positioning. Our common endeavour is to seize the opportunities that lie ahead and bring our countries and companies closer. In this regard I welcome the establishment of an Investment Facilitation Mechanism for EU investments in India, which is an important instrument to further improve the business climate and assist companies. And more can be done – I would like to see also more investments in the EU coming from India.

Message from H.E. Mr Sam SchreinerAmbassador of the Grand Duchy of Luxembourg to India

As in the previous years, I’m honoured to acknowledge the important work done by the EBG Federation, especially with its position paper, which clearly illustrates the opportunities and challenges of EU-India trade.

The European Union (EU) continues to be, by far, India’s large trade and investment partner. Bilateral trade and investment between Luxembourg and India continues to grow at a substantial pace. Luxembourg businesses show ever increasing interest in India and Indian companies and the Indian diaspora continue to grow in Luxembourg as well. Of a great interest to Indian businesses is of course Luxembourg’s highly sophisticated financial sector, which offers a large variety of services for Indian businesses. For instance, the Luxembourg Stock Exchange is the worldwide leader in international securities listings. Home to half of the world’s listed green bonds, it has recently inaugurated the Green Exchange, bringing together green issuers and investors. It has also been the first stock exchange to issue Masala bonds.

Luxembourg’s AAA rating proves the solid financial situation and political stability of Luxembourg. One thing that Indian companies dealing with EU customers can be absolutely certain of is that Luxembourg will never leave the European single market, with its 500 million customers and that Luxembourg will continue to welcome foreign investment and talent with open arms.

On the trade policy side, I hope that negotiations for an EU-India investment protection agreement can be launched soon, in order to give legal certainty to potential investors following India’s unilateral termination of all its bilateral investment protection agreements. I am also looking forward to the relaunch of negotiations for an ambitious, balanced and comprehensive Free Trade Agreement between the EU and India, taking into account the legitimate interests of all stakeholders.

I would like to warmly thank EBG Federation for its engagement in favour of more exchanges between Europe and India.

Message from H.E. Mr Stephen BorgHigh Commissioner of Malta to India

Malta and India are currently enjoying strong economic growth and are set on an equally robust trajectory. This is a result of sound and far-sighted economic policies. This convergence in economic output and prospects was highlighted by Malta’s Minister of Foreign Affairs and Trade Promotion, Carmelo Abela, during his visit to India in March 2018.

The International Monetary Fund’s Executive Board report published in January 2018 underlined the fact that “Malta’s economic growth remains one of the strongest in Europe, owing to favourable economic conditions and sound policies” and that “the Maltese economy remains on a strong growth trajectory”. In its Winter 2018 Economic Forecast, the European Commission described Malta’s strong GDP growth of 7.2 per cent in the first three quarters of 2017 as a positive development which was mainly driven by growing services exports.

The visit by a Maltese business delegation in March 2018 comprising a variety of sectors such as manufacturing, education, healthcare, renewable energy, financial services and aviation bears testimony to the diversity and dynamism of Malta’s business community and the renewed interest in strengthening commercial ties with India. Malta remains an attractive investment destination by Indian enterprises.

Maltese and Indian business relations are set to grow stronger in 2018. At this juncture I welcome the 2018 Position Paper of the EBG Federation as a valuable and well-targeted contribution to our common work for the benefit and well-being of our citizens in the European Union and India.

Message from H.E. Mr Alphonsus StoelingaAmbassador of the Kingdom of the Netherlands to India

India is a land of opportunities. There are several ways in which India and Europe can benefit from each other’s expertise. India holds the biggest future ‘talent pool’ in the world and its population constitutes a huge proportion of young people (50 per cent under 25). Europe has technologies to support India’s progress and Europe provides a lucrative environment for Indian businesses to function and flourish. By engaging in bilateral economic cooperation, India and Europe can forge partnerships that shape world economy.

Owing to its development oriented economic policies in the recent times, India has been emerging as a particularly attractive business destination for the Netherlands. By exchanging resources, technology, expertise and knowledge in sectors like agriculture, water, logistics, Smart Cities, life sciences and health, India and the Netherlands are headed towards substantiating their already concrete economic and trade ties even further.

India holds records of the highest projected BNP growth figures among the world’s large economies, with the consumer goods market expected to grow by 15 per cent in the coming years. Add to that India’s massive jump of 30 places in the World Bank’s Ease of Doing Business rankings. These promising reasons and more; make India a vital partner for the Netherlands.

During his visit to the Netherlands in June 2017, Prime Minister Narendra Modi and Dutch Prime Minister Mark Rutte discussed several areas of bilateral collaboration. Prime Minister Modi also referred to the Netherlands as India’s “natural partner”.

The Netherlands is the first recipient country of Indian exports to Europe, with 20 per cent of Indian exports to Europe entering through Dutch ports and airports. More than 180 Indian companies are based in the Netherlands, including almost all major information technology companies. Jet Airways, that started direct daily flights between New Delhi/Mumbai/Bengaluru and the Netherlands, is the latest addition to this impressive list.

Currently, over 250 companies from the Netherlands across sectors are functional in India. Did you know that all Dutch multinationals have their R&D centres based in India? And companies like Phillips have been active here since the 1930’s. They have become so well-integrated that they’re often perceived to be Indian. Indo-Dutch partnerships have had a history of being based on mutual win-wins, and we know this cooperation is bound to become only stronger with every collaboration.

The EBG Federation is well-placed to highlight business opportunities between India and Europe. I am convinced that this year’s Position Paper will further contribute to these efforts.

Message from H.E. Mr Nils Ragnar KamsvågAmbassador of Norway to India

I am pleased to join friends and colleagues in congratulating the EBG Federation on its 2018 Position Paper.

India and Norway may be geographically distant, but our trade and cooperation is significant. The overall Indo-Norwegian collaboration covers a number of areas such as energy and climate change, environment and biodiversity, clean technologies, geohazards, health, gender, local governance, culture and business. Our countries are actively exploring bilateral economic and technical opportunities for deepening ties.

There has been substantial growth in commercial relations between the two countries in recent years. This is particularly evident in areas such as oil and gas, shipping and maritime industries, renewable energy, offshore projects and service sectors.

Norway is a major food-supplier, being the world’s largest producer of Atlantic salmon. In India, we are working to ease access to the seafood consumer base. For this, we seek assistance from both the Indian private and public sectors.

As of 2017, over 100 Norwegian companies are established in India. The Norwegian government’s Pension Fund Global has invested around $9 billion (€7.29 billion) here, making it one of India’s largest single foreign investors.

I therefore warmly welcome the launch of the EBG 2018 Position Paper – a key document in the further strengthening of a mutually beneficial Indo-European partnership.

Message from H.E. Mr Adam BurakowskiAmbassador of Poland to India

Poland and India enjoy great bilateral relations with trade and investment being important pillars of our successful cooperation. 2017 brought a rise in mutual trade by approximately 16 per cent reaching almost US$ 3.2 billion (€2.59 billion). Polish exports to India in 2017 have risen by approximately 10 per cent year-on-year and imports by around 15 per cent respectively. India has become the number one Asian market for Polish direct investments, while Poland is the main destination for Indian FDI in Central Europe.

One can observe an ever rising mutual interest to tap opportunities in both countries. The Polish side recognizes the potential for manufacturing in India and has a wide array of technologies at its disposal. Indian counterparts are attracted to Poland by, inter alia, skilled work-force and geography – Poland’s location in the heart of Europe. Cooperation between both, central and state governments, aims to strengthen the potential of business cooperation by the creation of legal infrastructure as, in the recent case, where Polish phytosanitary certificates for apples, poultry and other products were recognized by the Government of India.

Polish entrepreneurs are well aware of the high demand for innovative solutions in India, whatever the company’s profile. This has been the key for their growth and success. Their example, together with the ever improving conditions of doing business in India and the fast growth of its economy would attract new investments from Poland, especially in the crucial sectors of food processing, water and wastewater management, renewables, modern urban transportation, clean coal technologies, services and many others.

For the last 25 years in a row Poland has been able to sustain a positive GDP growth rate. Some of its positive economic indicators are: GDP growth was reported as 4.6 per cent in 2017 by the Central Statistical Office, inflation at approximately 2 per cent, low unemployment rate, etc. are a good reflection of the condition of the Polish economy, and creates favorable conditions for investors and traders. During the last dozen years the average income in Poland has doubled.

Our mutual endeavours receive a significant and valuable support from partners who promote and facilitate contacts between business and other stakeholders engaged. Therefore EBG’s role should be lauded for all their activities. I am grateful for our cooperation and look forward to go ahead together.

Message from H.E. Mr Radu Octavian DobreAmbassador of Romania to India

EBG Federation is one of the organizations which support and encourage the development of the European ties with India and I would like to congratulate you for the excellent work that you are doing. I consider that EBG could be a milestone for the Romanian companies who are looking to expend their business in India, in order to understand better the Indian market and to engage with reliable local partners.

Especially now, when India is on an upward slope of economic development and economic reforms, we think that EBG could gather the European companies under a visible European Union (EU) umbrella to contribute for the fulfilment of the flagship projects of the Indian government like Make in India, Smart Cities, Skill India, Clean Ganga, etc.

2018 is an important year for bilateral relations between Romania and India due to the fact that we celebrate 70 years since the establishment of our diplomatic relations. There will be an opportunity to boost our extensive partnership by promoting the complementarity of our two economies to achieve the goals of prosperity and success for our people. It is worth to mention that in 2017 the bilateral trade relations between our two countries has registered a substantial growth of 27 per cent compared to the preview year, in which the exports from Romania reached the highest level for the last eight years.

I would like also to congratulate EBG for the tremendous job in releasing yearly the EBG Position Paper which has proved to be an excellent tool in the hands of the foreign companies coming from Europe.

Message from H. E. Mr Žigmund BertókAmbassador of the Slovak Republic to India

I would like to congratulate EBG Federation on the release of its Position Paper for the year 2018.

For Slovakia it is a special year as we are celebrating the 25th Anniversary of the establishment of the independent Slovak Republic.

The relations with India have excellent and friendly qualities. The economic cooperation is nowadays the most important pillar of our bilateral relations, with a great capacity to grow. Here we see a great role of EBG, as Slovakia is promoting itself as a country open to interconnecting its innovative business environment with India.

Let me use this opportunity to also thank the EBG for taking part in our Slovakia Hub initiative during the kick-off event in Mumbai in November 2017. The initiative is focused on interconnecting the innovative environments between Slovakia and India. It is also a part of a bigger European Union (EU) initiative based on the results of EU-India Summit which took place in October 2017. I hope we shall see the presence of EBG also at Slovakia Hub in November 2018.

A positive fact is that Indo-Slovak trade statistics keep growing, but on the other side, in quantitative projection still lag behind their potential. We are very optimistic towards the initiatives of the Indian government including Make in India, Digital India, Smart Cities or Startup India and many other programmes focused on Ease of Doing Business that makes India attractive to our entrepreneurs.

Still we have a long way to go as India is not very known among the Slovak business community. On the other hand I see a rapid growth of interest among Slovak businesses during the last two or three years.

I percieve EBG as a part of the European expert community here in India, and a reliable partner for Slovakia as a member state of the European Union. The Position Paper for the year 2018 is going to be a great source of important information for diplomats and also enterpreneurs.

Thank you.

Message from H.E. Mr José Ramón Barañano Ambassador of Spain to India

It is my honour to congratulate you on the 2018 edition of the EBG Federation Position Paper. I take this opportunity to warmly praise EBG for drafting this unique Position Paper. It will be a useful guide for European companies, for it highlights business opportunities and builds on shared interests. This report itself offers major inputs, crucial to the development of negotiations for sustainable business relations between the European Union (EU) and India.

Over the past few years, India has significantly increased its bilateral relations with the EU economies. It is also to be noted that the Indian government of Prime Minister Narendra Modi has forcefully pressed ahead with several reforms that should result in better business prospects and bring India-Europe’s trade and investment ties to new levels. Both India and the EU have recently expressed their interest and commitment to re-launch negotiations of an ambitious deep and comprehensive Free Trade Agreement. In this context, Spain strongly believes that multilateralism is the best framework for trade and investment and supports the negotiations of this Bilateral Trade and Investment Agreement (BTIA) between the EU and India.

2017 was an excellent year for the relationships between India and Spain. Prime Minister Modi visited Spain, the Spain-India CEOs Forum was inaugurated, and trade and investment flows in both directions kept an upward trend.

In late May 2017 India’s Prime Minister made his first official visit to Spain. During his stay, he met the Spanish Prime Minister, Mariano Rajoy, and King Felipe VI. If the purpose of the visit was to strengthen bilateral relations and promote trade between the two countries, it was mission accomplished. A comprehensive and ambitious joint declaration was signed that is now acting as a useful roadmap for the further development of relations in the political, security, economic, scientific and technological fields.

Trade and investment are, no doubt, one of the chief aspects of the relationship between our two countries. During Prime Minister Modi’s stay in Madrid, a joint-CEOs Forum, organized by the Secretariat of State for Trade, the Chamber of Commerce of Spain and the main chamber of Spanish companies, was also inaugurated. This key initiative will surely contribute to enhancing bilateral relations in the coming years.

India represents a priority in the Spanish internationalization strategy. In 2016 exports from Spain to India reached €1,259 million, imports were €3,463 million. Last year that positive trend gathered momentum. Additionally, Indian exports to Spain are also growing significantly. In 2017, Indian exports to Spain reached €3,600 million. In 2017, exports from Spain to India reached €1,173 million.

Interaction between the countries is appreciated to be particularly intense in the sector of tourism. According to Turespaña, in 2012 Spain received 63,000 Indian tourists. In 2017 they were 141,222, a 33.6 per cent more than in 2016 and way ahead the highest expectation.

India is the 29th biggest foreign investors in Spain. However, there is a huge investment potential for in our country that Indian companies should tap. Conversely, Spain is now the 12th biggest investor in India. The main deals of Spanish investing companies are focused on infrastructure, renewable energies, automotive components, water desalination and retailing.

If the latest economic figures and prospects are any guide, there is ample room for optimism about future economic exchanges between India and Spain.

Message from H.E. Mr Klas MolinAmbassador of Sweden to India

The cooperative relationship between India and Sweden rests on a strong foundation and continues to improve. It is characterized by collaboration globally and by growing investment and trade between our two countries. Moreover, the political engagement of both India and Sweden shows the commitment to maintain, and nurture, the partnership. The joint statement issued by the two prime ministers, Prime Minister Narendra Modi and Prime Minister Stefan Löfven, in 2016 charts an ambitious road ahead. Their meeting has been followed by a number of high-level visits between our two countries and enhanced the India-Sweden cooperation further and resulted in a successful India-Sweden Business Leaders’ Roundtable as well as the 18th Joint Commission meeting in 2017.

The history of Sweden’s investments in India dates back more than a century. Today we count 180 companies in India, directly employing about 185,000 people and more than 1.3 million indirectly. The 2016 Swedish Business Climate Survey showed that the Swedish companies present in India gave an overall positive assessment of the business climate in the country. Initiatives and programmes such as Make in India, Digital India, Smart Cities, Skills India, etc. have generated a positive response from Swedish companies looking to invest, innovate and build quality manufacturing infrastructure in the country. Most Swedish companies are willing to make long-term investments in India, through sustainability and innovation, across all business sectors, both for the domestic market and for exports. There is also an increase in interest from the Swedish small and medium enterprise sector to explore the Indian market, which will help in the quest of making India a global manufacturing hub. The increasing trend can also be seen in the opposite direction as Indian exports to, and investments in, Sweden have surged in recent years. In the information technology (IT) sector, some 20 Indian companies are present in Sweden, and it is estimated that around ten thousand people in India are providing IT-support to Swedish companies.

India is attractive for companies; there are robust levels of domestic consumption, increased public investment in infrastructure, a renewed focus on manufacturing, rapid pace of urbanization and an aspirational young population, who are looking for new lifestyles, goods and services. At the same time, given the scale and complexity of India, the ongoing mega and multi-faceted transition the country is undergoing leads to a number of challenges that the EBG Federation’s Position Paper has accurately captured.

Sweden has always embodied sustainability and environmental caution, which makes the two countries a very good match. Our two countries can achieve substantial results together through Sweden’s developing environmental politics and the Swedish Climate Act coming into force in the beginning of this year in combination with India’s growing commitment to the issue of climate change and advancing green technology. India’s ambition to produce electrical vehicles, and the increase in the usage of clean energy, is an endeavour Sweden supports, and one which Sweden can be a part of. As well as sustainability, Sweden and Swedish companies’ constantly strive towards gender equality by creating equitable opportunities for women to join the workforce in all sectors and enhance their skills. To invest and produce in an equal and sustainable manner is a priority. Given Sweden’s long experience and India’s skills our countries can benefit greatly and learn from each other.

The establishment of Investment Facilitation Mechanisms between India and the European Union (EU), and bilaterally with Sweden, will hopefully create a fair, transparent and rules-based trade and investment environment. There are great prospects for Swedish companies to build strong partnerships in India, and also for Swedish public authorities to collaborate with Indian counterparts. The signing of the memorandum of understanding on cooperation in the field of Intellectual Property last year between our countries also supports a mutual innovation initiative.

I congratulate the EBG Federation and its members for preparing this Position Paper which captures the interests and challenges that face the European companies. I believe the paper can provide valuable insight into how the investment and partnership between the EU and India will develop in the future!

Message from H.E. Mr Klas MolinAmbassador of Sweden to India

AVIATION

BANKING DEFENCE

AGROCHEMICALS

ALCOHOLICBEVERAGES

AUTOMOTIVE

CHEMICALS &PETROCHEMICALS

FINANCIAL SERVICES

FMCGHOMELAND SECURITY

ICT

LOGISTICS

OIL & GAS

PHARMACEUTICALS POWER

RETAIL

TELECOMMUNICATIONS

CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Agrochemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Alcoholic Beverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Automotive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Chemicals & Petrochemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Defence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

FMCG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Homeland Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

ICT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Oil & Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Position Paper 2018 | 1

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INTRODUCTION

1. INDIA: THE FASTEST GROWING ECONOMY IN 2018-19

India has been at the centrestage of the world economy. Not only is it the fastest growing economy in the world, it is also currently the seventh largest with a gross domestic product (GDP) of US$ 2.2 trillion (€1.78 trillion), expected to soon become the sixth largest economy.

If we look at historical data, over the last five years, the economy has showed an upward trajectory growing from 5.5 per cent in financial year (FY) 2012-13 to an expected 7-7.5 per cent in FY 2018-191. Importantly, the Indian growth narrative is driven primarily by domestic resilience. This can be easily seen from the trend during the period 2013-16 when the Indian economy grew while the world economy did not.

In 2018, India is widely expected to grow at a rate of more than 7 per cent, with some

estimates keeping the growth rate at 7.5 per cent. As per the recent data for 3QFY 2017-18, GDP grew by 7.2 per cent, with growth in both consumption as well as investment demand. This could be seen in the trends for growth in non-oil, non-gold (NONG) imports, which are a proxy for domestic demand. These imports have seen healthy growth over the last year. Between April 2017 and February 2018, NONG grew an average of 20.4 per cent as compared to a 1 per cent rise over the previous full fiscal year.2

The cumulative growth rate, across all sectors in the Indian economy, is expected to give a healthy reading of around 6.7 per cent in FY 2017-18.3 Over the last three quarters of FY 2017-18, for which data is available, GDP numbers have grown by an average of 6.4 per cent4. The agriculture and allied sectors are estimated to record a growth of 3.3 per cent while the industry sector is estimated to grow at 5.5 per cent in FY 2017-18. In contrast, the services sector is estimated to record an acceleration to 8 per cent in FY 2017-18 as compared to 7.7 per cent in the previous fiscal5.

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2 | Position Paper 2018

INTRODUCTION

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1.1 Strong Macroeconomic Fundamentals

The Indian growth path has been built on strong macroeconomic fundamentals. Over the last few years, India saw declining inflation levels and price levels fell to multi-year lows during the last fiscal. This came on the back of falling or stable global commodity prices and better management of supply shortages in

the agrarian economy. Consumer price index (CPI) inflation for FY 2017-18, the current year, is likely to come in at an average of around 3.9 per cent for the full fiscal year6, below the long- term target of 4 per cent set by the Reserve Bank of India (RBI). In fact, the latest reading for February 2018 saw larger than expected easing in the retail inflation, as food inflation declined.

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Fig 5. Crude prices average (US$/Barrel)

Source: CEIC, Deloitte

4 | Position Paper 2018

INTRODUCTION

In 2018, the main challenges are likely to come due to potential rise in crude oil prices because of global oil output cuts, increases in minimum support price (MSP) for agricultural products and an expansionary fiscal policy.

1.2 Expanding the Fiscal Space to Create Further Growth Avenues

The Indian government has adopted an expansionary fiscal policy, with the stated objective to provide funds for the various structural reforms and investments in infrastructure. As per the official estimates, the fiscal deficit for FY 2017-18 has been enhanced to 3.5 per cent and 3.3 per cent for FY 2018-197. In the current year, the government is expected to enhance revenue generation both because of gains from the goods and services tax (GST) as well as because of an accelerated disinvestment programme. As India moves to privatize more public sector units (PSUs), it will have multiple benefits of unlocking revenues for welfare and infrastructure spends as well as encouraging private investments.

There is no gainsaying that in order to provide for the multiple needs of a complex and

growing economy, a longer fiscal consolidation is a necessary policy decision. However, more than the absolute quantitative fiscal deficit ratios, what is more important is the quality of the spends by the governments, both at Centre and the state governments.

1.3 India Continues to Attract High Levels of Foreign Direct Investment

The real vote of confidence in India's economy came from the foreign direct investment (FDI) inflows. India’s FDI reflects remarkable strength with the total worth of US$ 36 billion (€29.18 billion) in the first three quarters of FY 2017-18. Foreign flows in India have remained robust not only on account of improving domestic strength, effective policy measures, and FDI liberalization but also on account of global recognition that has ensured India’s place as a strong investment destination.

Growth in FDI was largest in the services sector, which largely includes financial services, banking, insurance, outsourcing, research and development among others rose by 26 per cent in FY 2016-17 while the telecom sector grew

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Fig 6. Fiscal deficit and revenue deficit (per cent of GDP)

Fiscal Deficit (% of GDP)Revenue Deficit (% of GDP)

Source: CEIC, Deloitte

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significantly by 320 per cent from US$ 1.3 billion (€1.05 billion) in FY 2015-16 to US$ 5.6 billion (€4.54 billion) in FY 2016-178.

The remarkable rise in FDI investments reflects a growing optimism in the Indian economy and indicates that the government’s effort to improve Ease of Doing Business and relaxation in FDI norms is yielding results. As per a statement by the World Bank, private investments in India are expected to grow by 8.8 per cent in FY 2018-19 to overtake private consumption growth of 7.4 per cent.

Further, India’s foreign exchange reserves came in at US$ 409 billion (€331.55 billion) at the quarter ended December 2017-18 indicating an import cover of 12 months.9

The critical factor in the external economy math is the fluctuation in the Indian rupee. For India to gain from the current global growth, its REER (real exchange export rate) has to be competitive. This is partly a matter of monetary management and more importantly again would be dependent on the efficacy of implementation of reforms that will lead to smoother supply chains with better productivity.

1.4 Continuing Focus on Ease of Doing Business10

India moved up, an impressive 30 places in the World Bank’s latest Doing Business Report, to reach the 100th position. It was among the 10 economies that improved the most in the areas measured by the report. It is noteworthy that India implemented the highest number of business regulation reforms in FY 2016-17, with eight reforms each that helped the above 30 place jump. Following these reforms, India made significant progress in 6 out of 10 indicators and has moved closer to international best practices.

Among the improvements, the method for obtaining a building permit has been made faster by implementing an online single window system for the approval of building plans. Access to credit has also been improved by amending the rules on priority of secured creditors and adopting a new insolvency and

bankruptcy code. Separately, government’s pro-activeness in undertaking and assessing stakeholder consultations with user needs to match government’s own regulations and procedures has helped in creating a more conducive business environment.

In order to further improve Ease of Doing Business in India, the next set of agenda has to focus on some specific areas. These include inefficient licensing and size restrictions that have led to misallocation of resources and have reduced total factor productivity. Removing licensing restrictions is expected to raise total factor productivity by an estimated 40-60 per cent. The economy also continues to face procedural barriers to starting a business and cumbersome and lengthy tax litigation processes.

1.5 Way Forward Overall, over the past few years, the Indian

economy has made strides in maintaining fiscal consolidation, price stability, easing volatility in currency movement as well as investment inflow. This also helped in maintaining current account deficit (CAD) in a comfortable range. It is expected that in FY 2018-19, Indian economy will grow in the range of 7-7.5 per cent11, on the strength of the several structural reforms that have been initiated over the last few years.

There are headwinds – twin balance sheet problem, rising protectionism in the global economy, possible impact of the US tax reforms. Inflationary pressures are also a risk with increased government spending, and potential rise in crude oil prices and increases in MSP.

But none of the above factors can overwhelm the huge advantage the India enjoys in terms of its large domestic economy, may be even larger than currently estimated with increasing push towards formalization of the informal sector. Therefore, with the prospect of a largely formal and unified market, ultimately whether Indian economy achieves its potential will depend, not so much on global factors, but on efficacy and effectiveness of implementation of reforms and policies for a sustainable growth.

6 | Position Paper 2018

INTRODUCTION

132 132 134

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Fig 7. Ease of Doing Business rankings

Source: CEIC, Deloitte

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2. RECENT POLICY MEASURES

2.1 Goods and Services Tax The GST is one of the biggest tax reforms

introduced in India which envisages to not only consolidate all other indirect tax law (except a few) but also bring a harmonized tax structure and uniform compliance practices both by regulators and businesses. GST is a uniform tax aimed at dismantling all the inter-state barriers with respect to inter-state shipment of commodities. While the introduction of the regime was followed by market uncertainty and widespread non-compliance, lately with amendments to the tax structure, markets have seemingly become less wary of the new system. The cost of compliance remains prohibitive and high for the small scale manufacturers and traders and may affect prices to the upside. However, in the long-term, it is expected that GST would result in an overall lower tax base widening the tax net. The reform is expected to bring a qualitative shift by redistributing the burden of taxation equitably between manufacturing and services. This is expected to be a growth positive for India and will likely contribute to productivity gains and higher revenue collections. As per the US Federal Reserve’s note on India’s GST, the regime is expected to be welfare improving and bring about inclusive growth. In two scenarios, the effect of GST on India’s GDP is expected to be within the 3-4 per cent range12.

2.2 Insolvency and Bankruptcy Code, 2016

The scheme aims to consolidate the existing framework by creating a single law for insolvency and bankruptcy. This is a one-stop solution for resolving insolvencies which at present is a long process and does not offer an economically viable arrangement. Statistics show that the recovery is only 20 per cent in India and in global ranking, the country is ranked in the 136th position with respect to the time taken for resolving disputes. As per RBI, over 4,300 applications under CIRP (corporate

insolvency resolution process) were filed in the various benches of the National Company Law Tribunal as on November 2017. The total outstanding amount for top 50 stressed borrowers, funded by scheduled commercial banks, stood at `3.7 trillion (€46.05 billion) as on September 30, 2017.

2.3 Real Estate (Regulation and Development) Act13

The Act came into effect from May 2017 and aims to bring unprecedented levels of transparency into real estate projects. The act envisions to minimize delays in projects, weed out unscrupulous developers, and provide homebuyers with detailed information on the specifications and the progress of the projects they invest in. Given the central government’s mandate to make Aadhaar linkage compulsory for all property transactions, the move is expected to further help in curbing malpractices and stop the inflow of black money into real estate. So far, about 1,100 projects and realtors have registered in Gujarat and about 223 housing projects have been registered with Tamil Nadu Real Estate Regulatory Authority (RERA). Further, more than 14,000 projects have been registered with Maharashtra RERA. The Real Estate (Regulation and Development) Act mandates that developers can’t ask more than 10 per cent of the property’s cost as an advanced payment booking amount before actually signing a registered sale agreement.

2.4 Bank Recapitalization Plan Marked by a slowdown in the initial half of

2017, there was a growing expectation that the government will bring out some policy measure to mitigate stress in the banking system on account of the bulging non-performing loans (NPAs). Given this concern, the government responded by announcing an economic package that included an aggressive bank recapitalization plan to inject capital worth `2.11 trillion (€26.26 billion), part of which have been stamped in recap bonds while the balance will be transmitted through budgetary

8 | Position Paper 2018

INTRODUCTION

support and market debt. Within the scheme, the government will get shares of banks in exchange of government bonds and the liability in this sense will be restricted to interest payments. This means that the exchange will be cash neutral and as such this is unlikely to have any impact on the fiscal deficit. It has been suggested that these bonds will have a 10-15 year tenure, priced at around 8 per cent and will not be eligible for statutory liquidity ratio (SLR) status, which means that they will not count toward mandatory investment in government bonds by banks. However, servicing of the bonds would reflect in the future liability of the union government and will increase its overall debt. The bank recapitalization plan is further expected to enable public sector banks to build their provisioning coverage ratios as they will be able to allocate much of their operating profits towards loan-loss provisioning without having to worry about the impact on their capital positions. Overall, this appears to be a key step toward strengthening the banking system, however expectations of a rapid turnaround would be ambitious.

2.5 Liberalized FDI Policy14

Over the past years, the government has taken several steps to promote investments in India and has been committed towards introducing investor-friendly policies. In this regard, the government has already opened most sectors to 100 per cent FDI except a small negative list. To further this process, the government at the beginning of 2018 announced certain policy reforms, inter alia, for the single-brand retail trading sector. Within this sector, 100 per cent FDI has been allowed under the automatic route (without any prior approval) for entities engaged in single-brand retail trading activities, significantly easing the process for global retailers to set up businesses. Other amendments to the FDI policy are listed below:

• 100 per cent FDI allowed under automatic route in construction development.

• Foreign airlines have been allowed to invest up to 49 per cent under approval route in Air India.

• Foreign institutional investors (FIIs/FPIs) have been allowed to invest in Power Exchanges through primary market.

• Definition of ‘medical devices’ amended in the FDI policy.

Separately, relaxation has been proposed with regards to the mandatory local sourcing norms. Within this such companies are now permitted to set-off incremental sourcing from India towards global operations against the local sourcing requirements, for the first five years of operations in India.

2.6 Infrastructure Boost With visible deceleration in investments,

particularly in terms of still weak infrastructural development, the government in 2017 approved a plan to develop approximately 83,677 km of roads and highways by March 2022 at an expected cost of around `7 trillion (€87.12 billion)15. This is inclusive of the ambitious BharatMala scheme which envisages construction of 34,800 km of highways and economic corridors across the country. This is likely to be a major commerce booster – an impetus that could help generate jobs and lift the economy. The project involves connectivity to corridor and feeder routes, development of greenfield expressways and links to major commercial hubs and ports. Once operational, it is believed that about 70-80 per cent16 of freight will be managed along the national highway against only 40 per cent currently. This would mean an increased logistical efficiency which may be brought close to international standards, providing boost to commercial linkages.

2.7 National Health Protection Scheme (NHPS)

The scheme to be realized through the ambitious Ayushman Bharat Programme, aims to provide universal health coverage to majority of the poor households and once implemented it would be the world’s largest government-funded health programme. The scheme aims to provide health cover up to `0.5 million

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EBG FEDERATION

(€6,222.98) per family per year for secondary and tertiary care hospitalization and will cover over 100 million poor and vulnerable families (approximately 500 million beneficiaries). As a first step, the aim is to strengthen infrastructure in government hospitals. In this regard, the Centre plans to have one medical college for every three parliamentary constituencies, and about 150,000 new health and wellness centres providing comprehensive healthcare for non-communicable diseases, maternal and child services, free drugs and diagnostics. Given the scope and reach of the programme, the government expects the scheme to cost about `100-120 billion (€1.24-1.49 billion) annually. The scheme is expected to be rolled out over the coming 6-8 quarters and should cost about `1,000-1,200 (€12.44-14.93) per household in insurance premium.

2.8 Affordable Housing Scheme ‘Housing for All by 2022’ is a Government of

India initiative under which Pradhan Mantri Awas Yojana (PMAY) Grameen, and another scheme PMAY Urban, was launched in 2015. Under the PMAY, there are four verticals. First is beneficiary led constructions, second is affordable housing under partnership, third is slum redevelopment and fourth is credit-linked subsidy scheme (CLSS). Under both these schemes a total of 50 million houses were targeted to be built by financial year 2022. The government’s budgetary support for these schemes has risen from `116 billion (€1.44 billion) in FY 2016 to `290 billion (€3.61 billion) in FY 2018. The Union Cabinet recently increased the carpet area of houses under the government’s affordable housing scheme, benefiting both builders and middle-class home buyers.

2.9 Digital India The scheme was launched in July 2015 to

ensure that government services are made available to citizens electronically by improved online infrastructure and by increasing Internet connectivity or by making the country

digitally empowered in the field of technology. The Indian economy is now looking at embracing the second phase of Digital India, having covered over 99 per cent of the adult population of the country through the unique identity Aadhaar. 2017 saw a 27 per cent jump in the investment on electronic manufacturing where the total volume of investment reached `1.6 trillion (€19.91 billion) in 2017 against `1.4 trillion (€17.42 billion) in 2016. Additionally, digital transactions witnessed a growth of over 300 per cent in 201717.

3. INDIA-EU TRADE AND INVESTMENT RELATIONS18

The 14th European Union (EU)-India Summit was held in October 2017 in New Delhi, India in order to review progress made in strengthening the cooperation under the India-EU Strategic Partnership. During the Summit the leaders committed to further deepen and strengthen the India-EU Strategic Partnership. Beyond recognizing the need to broaden trade ties and investment flows, the leaders committed to enhance engagement on regional and international issues including climate change, migration and the refugee crisis. It has been reaffirmed that positive action will be taken to further strengthen their bilateral and multilateral cooperation in these areas.

The roadmap validated during the 13th India-EU Summit for bilateral cooperation – India-EU Agenda for Action 2020 – was announced to be a success given the considerable progress made toward its implementation. Both India and EU committed to work bilaterally and with partners in the G20, the United Nations and other multilateral fora to address emerging challenges to international security, global economic stability and growth. The leaders reaffirmed the importance of global partnerships to achieve the Sustainable Development Goals and poverty alleviation and made commitment to collaborate on common priorities in continuation of the EU-India Development Dialogue.

Leaders from EU commended India’s efforts in

10 | Position Paper 2018

INTRODUCTION

implementing structural reforms and promoting social development. The EU expressed its continued interest in participating in India’s flagship initiatives such as Make in India, Digital India, Skill India, Smart City, Clean India, and Startup India. Prime Minister Narendra Modi appreciated EU’s contribution and participation in these flagship initiatives, calling for a deeper engagement in developmental priorities.

The EU advised for greater participation by Indian business organizations in the Enterprise Europe Network. Both sides further agreed to improve cooperation and apply best practices in the field of intellectual property rights (IPR) and public procurement.

India and EU committed to working closely in order to resolve any issues and potential risk that may disrupt trade. In this sense, both parties recognized the importance of trade in agricultural products, particularly rice. Further, the early institutionalization of cooperation between the European Food Safety Authority (EFSA) and the Food Safety and Standards Authority of India (FSSAI) was given due credit during the Summit aimed at exchange of knowledge and expertise in the area of methodologies for data collection, risk assessment and risk communication.

The establishment of the investment facilitation mechanism (IFM) as a means to improve the business climate through improved EU investments in India was welcomed. The leaders further hoped that the IFM will allow for smooth sharing of best practices and innovative technology from the EU to India. It was also suggested that India’s Make in India initiative may offer investment opportunities for companies based in the EU member states.

India and the EU reaffirmed their commitment to undertake mutual cooperation for reducing the cost of development and deployment of renewable energy projects through technology innovation, knowledge sharing, capacity building, trade and investment, and project establishment.

The leaders highlighted the importance of shifting to a more efficient economic model

aimed at reducing dependence on primary resource consumption, thereby enhancing use of secondary raw materials. In this context, contributions made by the International Resource Panel, the Indian Ministry of Environment, Forests and Climate Change, and National Institution for Transforming India (NITI Aayog) were lauded for making progress toward this transition.

Further dialogue is expected to take place in order to deepen cooperation between India and EU to address environmental challenges, such as water management and air pollution. The leaders acknowledged the progress in implementing the India-EU Water Partnership, including an agreed action programme, the increased cooperation opportunities on research and innovation. Leaders from India and EU showed interest in further strengthening cooperation in the area of pharmaceuticals, including capacity building of the regulatory system. This is expected to come through a specific focus on inspections by creating a more structured and stable training environment.

It was agreed to scale-up collaboration under the renewed India-EU Science and Technology Cooperation Agreement including engagement to address current global challenges in the areas of health, water and clean energy. An agreement has been made to launch a major joint flagship initiative worth €30 million on water-related challenges reflecting the pressing need to cooperate on technological and scientific knowledge and management capacities to cope with increasing stress on water resources. The leaders further joined hands to open the EU Framework Programme for Research and Innovation ‘Horizon 2020’ and Indian programmes, and called for an intensified two-way mobility of researchers.

3.1 India and EU: Trade and Investment Trends19

Both India and EU have taken several measures in order to boost and improve the scope of bilateral trade and investments. India remains a key trade partner for the EU making

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up for roughly around 17.2 per cent of total exports to the country in FY 2016-17 (largest trade partner) while total imports from EU to India made up for about 11.1 per cent (only second to China).

The following chart (EU-India trade) shows total trade between India and EU’s 28 member states marking total exports and imports between them:

EU exports to India in value terms since 2005 grew from €21.3 billion (US$ 26.27 billion) to €41.7 billion (US$ 51.44 billion) in 2017. This marked an average growth of 7.7 per cent

from 2005-2017 with manufactured products, raw materials, chemical and related products, machinery and transport equipment, and other manufactured articles marking considerable strength over the period. Value of EU imports from India also increased from €19.1 billion (US$ 23.56 billion) in 2005 to €44 billion (US$ 54.27 billion) in 2017, recording an average growth of 8.6 per cent from 2005-2017. In terms of commodities imported, food, drink & tobacco, mineral fuels, manufactured products, manufactured goods, machinery and transport equipment, and goods saw significant rise over the period.

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4. CONCLUSION Indo-EU trade and investment relations has

seen significant changes and has been defined by deepening integration over the past decade. The EU and India completed 55

years of diplomatic relations in 2017. Between EU and India, regular and effective political and business dialogue has helped reach a balanced and forward looking relation.

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2013 2014 2015 2016

Fig 12. Outward FDI (to India, € million)

Source: CEIC, Deloitte

European foreign direct investment in India (FDI: stock) rose from €34 billion (US$ 41.94 billion) in 2013 to around €73 billion (US$

90.05 billion) in 2016 with UK, France and Germany accounting for 64 per cent of the total investments.

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INTRODUCTION

Endnotes

1 CEIC Data and Deloitte Analysis

2 CEIC Data and Deloitte Analysis

3 CEIC Data and Deloitte Analysis

4 CEIC Data and Deloitte Analysis

5 CEIC Data and Deloitte Analysis

6 CEIC Data and Deloitte Analysis

7 http://www.indiabudget.gov.in/ub2018-19/bs/bs.pdf

8 CEIC Data and Deloitte Analysis

9 CEIC Data and Deloitte Analysis

10 http://www.doingbusiness.org/data/exploreeconomies/india

11 CEIC Data and Deloitte Analysis

12 https://www.federalreserve.gov/econres/notes/ifdp-notes/effect-of-the-gst-on-indian-growth-20170324.htm

13 http://indianexpress.com/article/what-is/what-is-rera-and-how-will-it-help-homebuyers-4635705/; http://pib.nic.in/newsite/PrintRelease.aspx?relid=161408

14 http://pib.nic.in/PressReleseDetail.aspx?PRID=1516115

15 http://pib.nic.in/PressReleseDetail.aspx?PRID=1513825

16 https://www.indiatvnews.com/business/news-bharatmala-project-all-about-modi-govt-massive-highways-plan-408487

17 http://pib.nic.in/newsite/PrintRelease.aspx?relid=174994

18 http://pib.nic.in/newsite/PrintRelease.aspx?relid=171462

19 CEIC Data and Deloitte Analysis

* Data where not mentioned have been sourced from CEIC and Deloitte Analysis

Position Paper 2018 | 15

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AGROCHEMICALSAcknowledgements: K S Thyagarajan – Chairman, Agrochemicals Sector Committee

Knowledge Partner: Paolo Prisco & Jiwanjot Singh – EY

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ROLE OF AGROCHEMICALS IN THE INDIAN AGRICULTURE SECTOR

EXECUTIVE SUMMARY

Agriculture with its allied sectors is the largest livelihood provider in the Indian economy, providing livelihood to about 58 per cent of India’s population. It contributes 15 per cent to India’s gross domestic product (GDP).1 India is the third-largest agricultural producer by value right behind China and the US and it has the second-largest agricultural land holdings (180 million hectares) in the world.2 In FY 2016, total foodgrain production in India was recorded at 253.2 million tonnes which increased to 275.7 million tonnes in FY 2017.3 The Indian government is targeting a production of 277.5 million tonnes of food grains for FY 2018.4

The Indian government is committed to double the income of farmers by 2022, for which the government has increased the budgetary allocation of the Ministry of Agriculture and Farmers Welfare in the Union Budget 2018-19 to `580 billion (€7.22 billion) from `515 billion (€6.40 billion) in 2017-18.5 Under the seven-point strategy laid down to attain the stated objective, the government has been taking several measures including:

1. Increased focus on irrigation and mechanization;

2. Provision of quality seeds and nutrients customized to soil health of each field;

Agriculture is the backbone of Indian economy as it provides livelihood to more than 50 per cent of India’s population. Today, the agriculture sector faces a number of challenges including decreasing arable land, reducing agricultural workforce and loss of crops due to pest attacks. Further, the increasing population poses a critical challenge to ensuring food and nutritional security for all. These growing challenges indicate that the focus should not only be on raising the agricultural production but also on enhancing the productivity.

A major reason of low productivity is the loss of crops due to pest attacks which destroy close to 40 per cent of crop output. To minimize these losses, and to enhance the yield, it is very important to make adequate use of agrochemicals. Though India is the fourth-largest producer of agrochemicals globally, the consumption of agrochemicals in India is only

3. Investments in warehousing and logistics and technology to prevent post-harvest crop losses;

4. Value addition through food processing;

5. Implementation of national agricultural markets and e-platforms (e-NAM) to eliminate shortcomings across 585 stations especially middlemen;

6. Focus on crop insurance scheme to mitigate risks;

7. Promotion of ancillary activities such as dairy-animal husbandry, poultry, bee-keeping, ‘Medh Par Ped’ (trees on every field boundary), horticulture, and fisheries, to increase non-farm income.

Overall, the focus is not limited to increasing productivity but also reducing the costs of cultivation to increase the net income of farmers.

However, agriculture sector still suffers from the following major challenges impeding its growth:6

1. High dependency on monsoon in India with rainfall being the primary source of water, 60 per cent of land under cultivation is watered only by rainfall,

0.6 kg/ha, which is very low. Further, only 25 per cent of the farmers are aware of the proper usage of agrochemicals. In addition, stringent regulatory policies, low focus on R&D due to high costs, long gestation period for new products and the increasing sales of spurious products are some of the major challenges for the agrochemical industry.

To overcome these hurdles, Government of India and the regulatory bodies need to work in collaboration with agrochemical companies to spread awareness among farmers regarding the proper usage of agrochemicals. In addition, government needs to simplify the regulations, provide incentives for establishing R&D centers in India, provide data protection for the innovators and take strong punitive measures against the manufacturers of spurious products to aid the growth of the industry.

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2. Impact of climate change on crop productivity,

3. Low average seed replacement rate (only 25 per cent of the farmers buy new seeds every year),

4. Low penetration of agrochemicals (only 35 per cent of the area under cultivation is treated with agrochemicals),

5. Low levels of mechanization (40-45 per cent as opposed to levels as high as 95 per cent in the US),

6. Illiteracy amongst farmers and consumers.

Furthermore, post-harvest losses which amount to 35 per cent of produce every year result in reduced overall output. These losses are caused due to the low availability of storage space and an under-developed food processing industry. The Union Budget 2018-19 had a higher focus on rural income and flow to agriculture with significant increase in agriculture credit, crop insurance, and promotion of food processing infrastructure, agro exports, irrigation and credit facilities to related sectors such as animal husbandry, fisheries and aquaculture.7

Recent initiatives by the Indian government to support the agriculture sector8

The Indian government has taken various measures to achieve improvement in farm productivity and protect the small and marginal farmers from the vagaries of the weather. Some major steps include:

1. Soil Health Cards: To be issued to farmers once in every three years to assess soil health and suggest corrective measures.9

2. Kisan Credit Cards: The government proposed Kisan Credit Cards scheme in Union Budget 2018-19, to provide short-term credit support for animal husbandry, fisheries, and aquaculture farmers to help them meet their working capital needs and double their income by 2022.

3. In Budget 2018-19, the government increased the allocation to Pradhan Mantri Krishi Sinchai Yojana (PMKSY) by 28 per cent to `94.3 billion (€1.17 billion) to improve the access of irrigation to farmers.

4. The government plans to set new deadlines for completion of irrigation projects being implemented under the Accelerated Irrigation

Benefit Programme (AIBP) of Ministry of Water Resources. Out of 99, 23 projects are completed and brought in an additional irrigation infrastructure of 1.3 million hectare in 2017.

5. Crop insurance scheme: In the Union Budget 2018-19, the outlay for Pradhan Mantri Fasal Bima Yojana (PMFBY) has been increased to `130 billion (€1.61 billion), up 44 per cent from budgeted `90 billion (€1.12 billion) in 2017-18. The coverage of scheme has been increased from 40 per cent of cropped area in 2017-18 to 50 per cent in 2018-19 and to be further increased to 60 per cent in 2019-20. This is expected to increase the risk appetite of farmers and lead to more spending on agri-inputs and fertilizers, fueling the growth in the agri-inputs sector.

6. Agriculture credit: In the Union Budget 2018-19, the government increased the volume of institutional credit for agriculture sector to `11 trillion (€136.91 billion) from `10 trillion (€124.45 billion) in 2017-18.

7. Minimum support prices (MSP) for all unannounced kharif crops to be hiked to 50 per cent more than production costs, which is currently at 33 per cent more. This will benefit the farmers by 15-18 per cent improvement in average incremental income.

8. Operation Greens: The government has proposed to launch Operation Greens on the lines of Operation Flood. Operation Greens is expected to promote farmer producers organizations (FPOs), agri-logistics, processing facilities and professional management of farmers. The operation aims to aid farmers and help control and limit the erratic fluctuations in the prices of onions, potatoes and tomatoes. The government has allocated a sum of `50 billion (€622.29 million) for this purpose.

9. Agri-Market Infrastructure Fund: The government has announced to set up an Agri-Market Infrastructure Fund with a corpus of €20 billion (€248.91 million) for developing and upgrading agricultural marketing infrastructure in the 22,000 Grameen Agricultural Markets (GrAMs) and 585 Agricultural Produce Market Committees (APMCs).

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10. Direct benefit transfer (DBT) scheme: The government is targeting `100 billion (€1.24 billion) payment under DBT schemes involving cash pay-out in 2018. Two major in-kind subsidies — public distribution system in 34 states and Union Territories and kerosene subsidy, are also being brought under the DBT. The target is to cover 534 schemes, including about 300 cash schemes, over 200 in-kind schemes as well as over a dozen services under DBT, by March 2018.10

11. Food processing: The government has doubled the allocation of Ministry of Food Processing from `7.2 billion (€89.61 million) in 2017-18 to `14 billion (€174.24 million) in 2018-19 and proposed to set up state-of-the-art testing facilities in all the 42 mega food parks.

Digitization in agriculture

The Union government is taking proactive steps to promote digitization in Indian agriculture. Agriculture-focused digital initiatives include:

1. National e-Governance Plan (NeGP) aims to digitalize the government records to provide easy access to farmers over the internet. Services include, touch screen kiosks, agri-clinics, mass media, Kisan Call Centres etc.11

2. M-Kisan is a mobile-based agriculture advisory tool that connects local farmer with subject matter experts via SMS facility in the local language. It also provides regular weather updates, pest and disease alerts, and real-time market price information to its users.12

3. National Agriculture Market (eNAM) is a pan-India electronic trading portal for agriculture commodities. It links the existing APMC mandis to create a unified national market. Its coverage will be expanded to 585 APMCs from the current 479 and eNAMs will be de-linked from APMC regulations in 2018. The government has strengthened eNAM with features such as MIS (management information systems) dashboard for better analysis, BHIM (Bharat interface for money) and other mobile payment facilities, enhanced features on mobile app such as gate entry and payment via mobiles, integration of farmer’s database and e-learning module.13

4. Using artificial intelligence (AI) for digital agriculture: In October 2017, the Government of Karnataka signed a memorandum of understanding (MoU) with Microsoft Corporation India to use AI for digital agriculture. Microsoft will develop a multivariate agricultural commodity price forecasting model considering the following datasets – historical sowing area, production, yield, weather datasets and other related datasets as relevant. Built on the Microsoft Cortana Intelligence Suite including machine learning and power business intelligence (BI), these technology solutions are aimed at promoting digital farming practices in the state.14

Indian agriculture industry has various allied sub-sectors, major ones being seeds, fertilizers and agrochemicals.

Indian seeds market was valued at `180 billion (€2.24 billion) in FY 2016.15 Globally, India is the fifth-largest seeds market measured in value terms. India ranks 26th globally in terms of export with annual seeds export of `9.2 billion (€114.5 million). Vegetable crop seeds are mainly exported to Asia-Pacific (57 per cent), Europe (23 per cent) and North America (8 per cent). About 8 per cent of total vegetable seeds export goes to Africa.16

The Indian fertilizer industry was estimated to produce 41.3 million tonnes in FY 2017.17 To support the fertilizer industry, the Union Cabinet had announced the New Urea Policy 2015 with the objective of maximizing indigenous urea production, promoting energy efficiency in urea units and rationalizing the subsidy burden on the government. In March 2017, the government approved the new amendment under which the ceiling imposed on production beyond re-assessed capacity (RAC) during 2016-17 had been raised so as to enable all urea units to produce additional production which otherwise they were not able to do due to low import parity price.18 In addition, the Department of Fertilizers made it mandatory for all the domestic producers of urea to produce 100 per cent of the plant capacity as ‘neem coated’ urea. This is expected to increase the farmer’s income as the use of neem coated urea will increase the productivity with less usage of urea.19 Make in India campaign is also encouraging the domestic fertilizer industry by reviving sick fertilizer plants.

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1. INTRODUCTION

1.1 Market Description1.1.1. India is the fourth-largest producer of

agrochemicals globally, right behind the US, Japan and China. The Indian agrochemical industry is expected to grow at a compound annual growth rate (CAGR) of 7.5 per cent per annum from US$ 4.4 billion (€3.56 billion) in FY 201520 to reach US$ 6.3 billion (€5.10 billion) by FY 2020.21 The total installed capacity of the agrochemical industry in India was 329,100 tonnes in 2015 and is expected to reach 493,700 tonnes by 2020, growing at a CAGR of

8.5 per cent.22 Globally, India is the thirteenth-largest exporter of pesticides.

1.1.2. The global agrochemical industry is witnessing a wave of consolidation and the trend is towards megadeals. The top six players will be reduced to four major players once the announced deals are completed. Currently, the consolidation process is ongoing. While the primary trigger for the global deals has been cost-efficiency and access to technology, there will be significant implications on the market in all major agri-markets across the world. Indian companies will have to think about the available merger and acquisition (M&A)

Figure 1: Indian agrochemicals market (FY 2015)

60%18%

16%

3% 3%

Insecticides Fungicides Herbicides Bio-pesticides Others

Source: A Report on Indian Agrochemical Industry, FICCI, July 2016

Figure 2: Agrochemicals distribution network in India

Technical grade

More than 125 technical-grade manufacturers in India provide the chemicals in bulk

to formulators

Formulators

Around 500 formulators in the country further process the

mixtures by adding solvents, active agents according to the

requirement

Distributors

More than 10,000 distributors in the country take the task of

forwarding the final formulations to

retailers/wholesalers

Retailer/dealers

Over 180,000 retailers/dealers in the country is where end customers such

as farmers, pest control specialist etc. buy the final

product

End customers

More than 100 million farmers in 600,000 villages in India buy agrochemical products from the retailers/dealers

Source: Agrochemicals Market in India 2016-20, Technavio and HSBC report, November 2, 2015.

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options and grab the right opportunities to be well-positioned for the future.

1.1.3. Over 25 per cent of crop production is lost due to insects, weeds and diseases.23 The total value of crops lost annually due to pest and disease attack in India is estimated at `900 billion (€11.2 billion).24 While the global average consumption of pesticides is 3 kilogramme/ hectare (kg/ha), India’s consumption is only 0.6 kg/ha. Furthermore, area treated with crop protection products is only 35 per cent indicating untapped potential for pesticides usage in the crop cultivation. 25

1.1.4. The Indian agrochemicals market is dominated by insecticides. Fungicides and herbicides are the fastest-growing segments.

1.1.5. The sale of herbicides is seasonal. Rice, wheat, sugarcane and soybean are the major application areas for herbicides. Rising wage rates and reducing labour availability are the growth drivers for herbicides. Fungicides are mostly used for fruits, vegetables and rice. The key growth drivers for fungicides include a shift in agriculture from cash crops to fruits and vegetables and government support for exports of fruits and vegetables. Bio-pesticides offer significant growth opportunities due to increasing concerns of safety and toxicity of pesticide residues, stringent regulations and government support.

1.1.6 It is expected that agrochemicals worth US$ 4.1 billion (€3.32 billion) will go off-patent

by 2020.26 Indian generic agrochemicals manufacturers can capitalize on this opportunity. They should also look to increase the export of these generics to further penetrate the global market. To lay a strong export foundation, Indian agrochemical manufacturers could strengthen their marketing network by partnering with local players in the foreign markets. The Indian Agrochemical manufacturers could also explore collaborations, merger and acquisitions to expand their worldwide reach.

1.2 Recent Developments1.2.1 Make in India initiative

Make in India is an Indian government initiative to encourage companies to manufacture their products in India. The initiative is aimed at enhancing the Ease of Doing Business in India and is expected to attract foreign capital. Government could also consider extending support in terms of incentives/tax benefits to agrochemicals, as given to fertilizers and seeds as all of them facilitate the agriculture sector. While the government’s thrust is rightly on Make in India, keeping in mind the market dynamics of supply and demand and farmers need, the government should allow adequate import of the quality technical grade material too to meet the requirements. Conversion of technical material to formulation also generates considerable employment locally and hence

1.2

1.6

0.40.7

0.2

2016 2017 2018 2019 2020

Figure 3: Agrochemicals going off-patent, 2016-2020 (US$ b)

Source: A Report on Indian Agrochemical Industry, FICCI, July 2016

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should be encouraged as part of the Make in India campaign.

1.2.2 India as a global manufacturing hub

Exports currently constitute almost 50 per cent of the Indian agrochemical industry and are expected to grow at a CAGR of 9 per cent to reach US$ 3.1 billion (€2.51 billion) by FY 2020.27 This shows that there is a huge export potential in the industry. Further, there is a growing trend of labour migration to cities and thereby their availability is declining due to higher wage expectations. In addition, India has a large pool of qualified and skilled chemical engineers which constitute the backbone in this technology-oriented segment. The government has recognized the immense potential and is focusing efforts on research and development (R&D) capabilities, technical skill training, infrastructure reforms, etc. to support the endeavour to create India as a global manufacturing hub for agrochemicals.

1.2.3 Impact of GST implementation

Under the new GST regime, agrochemicals are now taxed at 18 per cent while chemical fertilizers are taxed at 12 per cent. In the pre-GST era, agrochemicals attracted an excise duty of 12.5 per cent and value-added tax (VAT) of 5 per cent for intra-state sales or central sales tax (CST) of 2 per cent for inter-state sales. As a result, there has not been any significant impact on taxes payable. The petroleum sector, the largest source of feedstock for the chemical industry, is out of GST. Hence, the raw material will continue to have the cascading effect of the indirect taxes.28

1.2.4 Foreign collaboration

In 2018, India and Israel are set to jointly develop new crop varieties and share post-harvest technologies following the success of the 10-year-old Indo-Israeli Agriculture Project (IIAP), 2008. There will be increased focus on drip irrigation and how to design better farms by using canopy management and use of improved irrigation and fertigation technologies.29

India and the US have also discussed the sharing of global best practices on agriculture-

extension reforms, to boost productivity, leverage agri-tech for last-mile development and create a conducive ecosystem to fund innovation in agri-business at the sidelines of the World Food India conference 2017.30

The European Union (EU) has also been collaborating with India on extensive EU legislation on pesticides, maximum residue limits (MRLs), etc. in different forums. The German Agribusiness Alliance (GAA) and Agriculture Skill Council of India (ASCI) signed a MoU with the objective of jointly developing the establishment of ‘Indo-German Centres of Excellence in Agriculture’, a platform for practical skill development in agriculture in India.31

The Indian government has signed a MoU with many African nations to boost agricultural trade and technology transfer agreements. Notably on the same lines the Indian government has also proposed an agreement with South Africa.32

In addition, the government has allowed 100 per cent foreign direct investment (FDI) under the automatic route in the agriculture and allied sectors industry.

Some leading European companies in India in the agrochemical sector:

1. BASF

2. Syngenta

3. Rabo Equity Advisors

Further there are few more major agrochemical companies from Europe that are active in the Indian agrochemicals market.

2. KEY ISSUES AND RECOMMENDATIONS

2.1 Issue/Objective: Regulatory Hurdles

Stringent environmental regulations requiring time-consuming registration procedures are increasing the cost of developing new products and simultaneously delaying the introduction of new products in the market. Further, the

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registration of a product in India for the first time u/s 9(3) of the Insecticides Act, 1968 is very tedious, requiring the company to do field trials, lab tests, undertaking product stewardship and risk management for the product. This generally takes 4-5 years of time. On the other hand, the process u/s 9(4), registering the product as ‘Me too’ in India usually takes less than 1-1.5 years as data guidelines have been relaxed. This discourages the research-based companies to introduce new products in the market.33

Recommendations

Process of registration by Central Insecticide Board (CIB), the regulatory body under Ministry of Agriculture, needs to be streamlined in a way that the period for getting a new registration gets minimized while meeting the safety related requirements. The guidelines need to be clearly defined to avoid interpretation challenges, which lead to confusion thereby adding to the complexities for agrochemical companies. Fast-track approvals and clearances should be provided by regulatory bodies to encourage companies to develop new products. The ‘Regulators’ should adopt crop grouping and encourage label extensions with minimal data to prevent misuse of pesticides on crops and thereby facilitate proper product stewardship. India being a signatory of Organization for Economic Co-operation and Development (OECD) should implement its requirements in letter and spirit and encourage data generation under Good Laboratory Practice (GLP). Industry players should form consensus to initiate a dialogue with government over rules and regulations with the support of industry associations.

2.2 Issue/Objective: Focus on Green Chemistry

Green chemistry is the designing of chemical products and processes that reduce or eliminate the use or generation of hazardous substances.

Recommendations

Green chemistry and sustainable agriculture are inherently intertwined. Government should focus on bringing green chemistry to the farms which is safe to the environment and human beings with characteristics of less persistence in soil, water and plants. Minor change in formulations with replacement of safer intermediates, both synthetic and natural should be permitted with ease. Bio-pesticides and safer green chemistry molecules should be given priority for introduction. Companies should invest in R&D activities to develop new green routes of chemical synthesis. Gradually, firms should look to shift from fossil fuels to renewable resources, and adopt low-carbon manufacturing and clean sustainable technologies.

2.3 Issue/Objective: Data protection for Innovators/Pesticides Management Bill, 2017

The key concerns of pesticides segment are time bound grant of licences, grant of registration for new pesticides molecules, accreditation of private laboratories to function as Central Pesticide Laboratories (CPL), elaborate procedure for withdrawal of pesticide samples and making punishments more stringent for misbranded, substandard and spurious pesticides.34

Recommendations

The global agrochemical research-based companies have to wait for 9-10 years and pass more than 100 safety tests to bring a new molecule into the market with a cost of minimum US$ 250 million (€202.65 million).35 In order to safeguard the rights of innovating companies, government needs to bring in data protection as practiced globally so that companies follow certain guidelines or procedures vis-à-vis cost incurred by the original registrant as per the existing global practice. The government has released a new draft Pesticide Management Bill 2017 to replace an almost 50-year old legislation governing the agrochemicals sector.

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The bill introduces right to compensation for farmers if the pesticide fails to provide the expected performance or causes any harm to human or animal health or damage to the environment. However, industry players and experts said it is not a big improvement from a similar draft presented in Parliament in 2008.36

2.4 Issue/Objective: Low Investment in R&D

The industry is facing a serious challenge due to increasing R&D costs. There has been lack of data protection for innovators developing new molecules. This prevents companies from investing in R&D activities and they tend to focus more on the generic products, which require low investments.

Recommendations

Government needs to encourage R&D activities to facilitate new innovations in the Indian market. Additionally, the government must provide conducive business environment for the agrochemical companies to set up R&D labs in India. New innovations or developments should be recognized and the companies should be awarded for the same. Notably, the Indian government has mandated the accreditation of labs by CIB for generating data for registration purpose. This will ensure that the tests meet the CIB requirements and prevent the unfair practices in data generation. This will create level playing field for the agrochemical companies. There has been some recent investments in R&D such as on March 3, 2017, BASF opened its new innovation campus for Asia-Pacific region in Navi Mumbai with an approximate investment of `3.5 billion (€43.56 million). This is BASF’s biggest R&D investment in South Asia and it will serve the growing global and regional research activities including automotive, food and nutrition with a special focus on R&D in crop protection.37

2.5 Issue/Objective: Low Awareness Among Farmers

Only 25-30 per cent of Indian farmers are aware

of agrochemical products and their usage, and there is a lack of reading of labels by farmers.38 Hence product stewardship is of paramount importance. Poor extension services, language barriers and a general reluctance toward adoption of new products on account of possible risks of crop failure add to the woes. The main point of contact between farmers and manufacturers are the retailers who don’t have adequate technical expertise and are therefore, unable to impart proper product understanding to farmers.

Recommendations

Government should collaborate with private companies in spreading awareness and educating the farmers about the appropriate use of pesticides by organizing awareness camps/industry conferences more frequently. To curb the malpractice of selling unwanted farm chemicals to the farmers, the Indian government had issued a notification in November 2015, wherein it was made mandatory for the dealers setting up insecticide/pesticide shop to possess a graduate degree in agriculture science or biochemistry or biotechnology or life science or graduation with either chemistry or botany or zoology. Existing retailers or dealers could employ a qualified person to continue their business or attain the qualification within two years to renew their licence. For selling the fertilizers, the dealer is expected to produce a six-month diploma in fertilizer management. This is a welcome step as the qualified retailers, having thorough knowledge of pesticides and fertilizers, can guide the farmers about their appropriate use. The government should focus on ensuring pragmatic implementation of the same so as to not affect the overall availability of retailers in rural India.39

2.6 Issue/Objective: Presence of Counterfeit/Spurious Products

In India, it is estimated that size of counterfeit pesticide market is around `32 billion (€398.27 million).40 These products are inferior formulations, which are unable to kill the pests. They also leave by-products residues, which may

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significantly harm human, soil and environment. Use of non-genuine products leads to loss of revenue to farmers, agrochemical companies and government.

Recommendations

The government needs to come up with stringent regulations for preventing illegal imports, spurious and spiked products being sold in India. Heavy fine should be imposed on the guilty and licence of such companies should be cancelled after a pre-defined number of defaults. The farmers need to be educated on how to differentiate between genuine and fake products. The companies should invest in technology to help end-users distinguish and validate the authenticity of the original products. The companies should use 3D security system more proactively on product packaging to distinguish their products.

2.7 Issue/Objective: Extension Services

Extension services help the farmers’ and other rural population to gain access to knowledge, information and technologies. These assist them to develop their own technical, organizational and management skills and practices, so as to improve their livelihoods and well-being.

Recommendations

Enhancement of extension activities is required both by the government and private sector to increase awareness among farmers for safe and right use of agrochemicals. Extension services rendered should be incentivized. Under the Union Budget 2017-18, government planned to set up new mini labs in Krishi Vigyan Kendras (KVKs) and 100 per cent coverage of all 648 KVKs in the country. In addition, 1,000 mini labs were also planned to be set up by qualified local entrepreneurs with credit-linked subsidy from the government. Through KVKs, government is aiming to help farmers to shift to proper crop patterns and achieve yield improvement, which is commendable.41

2.8 Issue/Objective: Negative Perception Linked to the Agrochemical Industry

There has been an increase in the cases of breaching of MRLs in India mainly because of indiscriminate use of pesticides by farmers and this has affected exports of rice, fruits and vegetables to many countries in Middle East, EU and the US.

Recommendations

Industry players need to take up the primary onus of enhancing the image of the agrochemical industry by creating the right kind of perceptions through public awareness. Support from the government will also be vital in this regard by showcasing the importance of the industry in various public forums. Adequate awareness regarding the new MRLs should be spread by the Food Safety and Standards Authority of India (FSSAI) to bring down the number of cases of breaching of MRLs. This adherence will boost the export of agricultural commodities. These efforts will also serve well in attracting skilled technical talent to the industry. This is vital for long-term growth as well as in conveying the importance of the industry within the national landscape. A roadmap in this direction needs to be put in place.

2.9 Issue/Objective: Incentivizing the Agrochemical Industry for Enhancing Manufacturing

The government needs to focus on providing more incentives and subsidies for the agrochemical sector to enhance the production level.

Recommendations

The states and central governments should encourage the setting up of domestic agrochemical industries through incentives and tax holidays/exemptions etc. This would garner more investments in the country and will bring employment opportunities. This compliments the Indian government’s Make in

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India initiative. Going forward, the government needs to continue to provide infrastructural support to the industry to develop effective marketing and distribution solutions. The applicable GST too should be reduced.

2.10 Issue/Objective: Health, Safety, Security and Environment (HSSE) Implementation

Recommendations

The government and public bodies must incentivize agrochemicals units to adhere to safety requirements and abide by global standards, especially related to good manufacturing practices. Health, safety, security and safety (HSSE) guidelines framed by the competent authority in the government should be implemented at the earliest.

3. CONCLUSION The Indian agrochemical industry is highly

diversified and regulated. It operates in an environment faced with many complex factors influencing the speed of adoption of new technologies. The industry is expected to gain momentum in the next few years

due to increased investments in agricultural infrastructure. There are significant growth opportunities for agrochemicals due to India’s low-cost manufacturing base, under-penetration of pesticide use in domestic market, key products going-off patent globally, huge export potential and growth in herbicides and fungicides sub-sectors especially. In coming years, agrochemical industry should focus on developing new processes and products with sustainability as the core principle. This requires developing a collaborative platform in which the academia, government and regulatory bodies, farmers associations, manufacturers, industry associations and farmers come together to promote safe and judicious usage of pesticides.

Of the many challenges, which need to be addressed to give a fillip to this sector, the most critical ones are the regulatory reforms to be pursued by the government, infrastructural investments, incentivizing R&D, ensuring data protection to innovators and educating the most important stakeholder — “the farmer” about the proper usage of agrochemicals. The future is bright for Indian agrochemicals industry, as a facilitator of Indian Agriculture and also of Indian economy.

Endnotes

1. A Report on Indian Agrochemical Industry, FICCI, November 2016

2 A Report on Indian Agrochemical Industry, FICCI, November 2015

3 Indian Agriculture Industry Report, Indian Brand Equity Foundation (IBEF), February 2018

4 Indian Agriculture Industry Report, Indian Brand Equity Foundation (IBEF), February 2018

5 Press Release, Ministry of Agriculture & Farmers Welfare, 27 February 2018

6 A report on Indian Agrochemical industry, FICCI, November 2015 and The Hindu, May 12 , 2016

7 Union Budget 2018-19 and Philip Capital, February 1, 2018

8 Union Budget 2018-19 and Philip Capital, February 1, 2018

9 Union Budget 2017-18 and Philip Capital, February 2, 2017

10 Economic Times, May 17, 2017

11 A Report on Indian Agrochemical Industry, FICCI, July 2016

12 A Report on Indian Agrochemical Industry, FICCI, July 2016 and Press Information Bureau, Government of India, December 23, 2015

13 Union Budget 2018-19 and Philip Capital, February 1, 2018

14 Press Release, Microsoft, October 27, 2017

15 Indian Seeds Congress, National Seeds Association of India, February 2017

16 National Seeds Association of India – Vegetable Seed Industry magazine, May 2017; National Seeds Association of India – Seed Export India & World, May 2017

17 Department of Fertilizers and The Hindu, July 15, 2017

18 The Times of India, March 31, 2017

19 Press Information Bureau, Government of India, Ministry of Chemicals and Fertilizers, March 24, 2017

20 Official figure of the Indian agrochemicals market size for FY 2016 is not available as on March 20, 2018

21 A Report on Indian Agrochemical Industry, FICCI, July 2016

26 | Position Paper 2018

AGROCHEMICALS

22 A Report on Indian Agrochemical Industry, FICCI, July 2016

23 Business Standard, July 20, 2016

24 Business Standard, July 20, 2016

25 Care Rating Report, May 2017

26 A Report on Indian Agrochemical Industry, FICCI, July 2016

27 A Report on Indian Agrochemical Industry, FICCI, July 2016

28 Moneycontrol, August 28, 2017

29 Livemint, January 12, 2018

30 The Hindu, November 3, 2017

31 National Skill Development Corporation – Agriculture Skill Council of India (ASCI), October 5, 2015

32 The Hindu, July 5, 2016 and Economic Times, September 23, 2016

33 MoM, 371 RC, held on December 16, 2016

34 Crop Life India, September 18, 2017

35 A Report on Indian Agrochemical Industry, FICCI, November 2015

36 Business Standard, February 2018

37 BASF News release, March 3, 2017

38 A Report on Indian Agrochemical Industry, FICCI, November 2015

39 Press Information Bureau, Government of India, November 2015

40 Livemint, September 23, 2015

41 A report on KVKs impact on agriculture, Indian Council of Agricultural Research, December 2015

Position Paper 2018 | 27

EBG FEDERATION

ALCOHOLICBEVERAGESAcknowledgements: Rajnish Singh (Moet Hennessy) – Chairman, Alcoholic Beverages Sector Committee & its Members

Knowledge Partner: Prashant Mehra – Grant Thornton

28 | Position Paper 2018

ALCOHOLIC BEVERAGES

The Indian liquor industry has been passing through deep crisis in recent times due to multiple factors. High taxes and innumerable regulations governing it are major contributors. The high incidence of import tariff, state-levied excise duties and taxes, low pricing flexibility and the ever increasing taxation have led to low margins and drop in volumes. Although the two largest companies in the country enjoy a majority market share, the price sensitive nature of the industry has ensured a degree of competitiveness. Hence, while several strong brands have come up and the industry has exhibited healthy volume growth over the last decade, its high profile continues to hound the industry.

Similar to the international market, Indian industry has also seen large players with large portfolios gain market leadership positions. However, the regulatory constraints continue to dampen the efforts of companies in expanding their operations across various states. The Indian alcohol industry has been subjected to a high degree of uncertainty despite it being a major revenue contributor to the state governments. Uncertainty in terms of annual excise policy announcements across the states, complex and time consuming label registration process, higher incidence of excise duties and taxes, variable value added tax (VAT) and service tax applicability, amongst others, are major contributors constraining the growth of the industry including attracting foreign investments in the sector. Simplifying and eradication of some of these uncertainties will certainly bring in Ease of Doing Business in India as far as this industry is concerned.

The sudden announcement of the liquor ban in the state of Bihar caused, inter alia, huge losses, exacerbating the uncertainty surrounding the industry. The fact is that for most of the state governments, up to one-fifth of their budget is funded by the alcohol industry. Apart from Bihar (after the Supreme Court stayed the Patna

High Court order), Gujarat, Nagaland, Mizoram and Manipur, where liquor is prohibited, revenue from the alcoholic beverage industry is a major contributor to the state exchequer – with an over `140,000 crore (€17.42 billion) revenue1 mop-up by 10 top revenue earning states. It is estimated that countrywide revenue could exceed `200,000 crore (€24.89 billion) and more than 2.5 million jobs are directly and indirectly accorded by the industry.

The industry made persistent efforts with the central government as well as the states to include alcohol within the ambit of the goods and services tax (GST). Unfortunately, repeated requests and representations were turned a blind eye despite the fact that the central government could have levied central goods and services tax (CGST) in addition to the states levying excise duties and taxes on alcohol sold in respective states. The industry continues to plead for inclusion of alcohol within GST.

Similarly, high incidence of import tariff on imported products has led to restricted imports into India and a prime cause for the exorbitant prices of imported products as the state duties and taxes are calculated and levied on costs including customs duty. This has resulted in an increase in the sale of non-tax paid stocks of international products in the market, thereby depriving the government of taxes. It has also promoted unauthorized inter-state movement of alcoholic beverages and provided an opportunity for the production of illicit and spurious alcoholic beverages that can cause serious health risks.

The alcoholic beverage industry – as a substantial revenue contributor to the state exchequer and a provider of employment to millions – awaits fair treatment to be accorded to the industry by resolving some of the key issues by accepting the recommendations made by the industry.

EXECUTIVE SUMMARY

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EBG FEDERATION

India is one of the key markets for the global alcoholic beverage industry, consistently occupying a spot amongst the leading countries.

The total consumption of wines and spirits (9 litres branded) in India during 20162 were as follows:

i. Imported wines accounted for less than half a million cases out of more than 3.2 million (mn) cases in 2016.

ii. Of the total 324 mn cases spirits market, whiskey accounted for 200 mn cases followed by brandy for nearly 70 mn cases, rum for 43 mn cases, vodka for 7.6 mn cases and gin accounting for 3 mn cases.

iii. Only 4.1 mn cases of spirits (whisky, gin, vodka, rum, brandy, etc.) were imported into India in 2016.

iv. Of the total spirits imported into India in 2016, imported whiskey (BIO and BII) accounted for only 3.5 mn cases accounting for less than 2 per cent of the total whisky market (200 mn cases) in India.

v. Out of the 3.5 mn cases, nearly 40 per cent was bottled in origin (BIO) and 60 per cent was bottled in India (BII) with the help of bulk imports of whisky.

The marginal increase in consumption of spirits and wines in 2016 as compared to 2015 (315 mn cases spirits market) could be attributed to factors such as continued levy of high taxes and duties – both at central and state levels, the states raising taxes, additional levy, etc.

In addition to high incidence of import duty imposed at the central level for imported products, alcoholic beverages are also subject to varying rates of excise duty, VAT or sales tax at the state level. Accordingly, the total incidence of tax (including import duty and local taxes) on products imported into India varies from 300 per cent to 500 per cent.

The challenge for Made in India as well as

imported products gets compounded due to following factors:

i. GST – Alcohol being kept outside the ambit of GST

ii. States’ unwillingness to offer price increases in spite of:

a. increased production costs by as much as 30 per cent

b. increase in excise duties

iii. Levy of VAT and service tax

iv. Swachh Bharat cess

v. Demand by few states to further reduce purchase price and so forth

Furthermore, the producers are forced to bear the brunt as they cannot pass on the increased costs to the consumers leading to shrinking margins, reduced consumption leading to reduced revenue generation to the Centre and states.

The Indian alcohol industry is significantly different from markets in other large countries. The market architecture varies from one state to another in terms of taxation, regulation, legalization, production and promotion. It is like operating in 36 different countries (29 states and 7 Union Territories). The tax structure in two neighbouring states is typically different, resulting in a strong incentive for unauthorized interstate movement of alcoholic beverages.

Distribution and logistics are under developed in most Indian states. Outlets are thin on the ground in most states and development is slow. The model varies from part/fully owned by the state government and part/fully owned by private enterprises. Distribution in the southern states like Tamil Nadu, Telangana, Andhra Pradesh and Kerala is fully owned by the state government.

Any form of advertising of alcoholic beverage products is strictly ‘prohibited’, thereby making brand visibility and/or introduction of new products extremely difficult. This has led to the emergence of brand extensions.

1. INTRODUCTION

30 | Position Paper 2018

ALCOHOLIC BEVERAGES

Star-rated hotels, stand-alone restaurants and duty-free shops (travel retail) have traditionally been the key channels of sale for international alcoholic beverages. Star-rated hotels and stand-alone restaurants can spend only up to 3 per cent (reduced from 10 per cent) of their annual foreign exchange earnings to purchase capital goods and duty-free alcoholic beverages. Travel retail continues to be a channel for international brands sales in India and increase in international travel has boosted such sales. However, the high incidence of customs duty on imported alcoholic beverages limits the potential of increased availability and not least depriving potential consumers with an opportunity to upgrade to choicest wines and spirits.

2. KEY ISSUES AND RECOMMENDATIONS

2.1 Reduction of Basic Customs Duty (BCD) on Alcoholic Beverages

Import of all types of alcoholic beverages (other than beer made from malt at 100 per cent) is subject to a BCD of 150 per cent, before the application of state levies and duties. This is very high by international standards when compared to China (10 per cent), Brazil (20 per cent) and the average G20 countries’ duty of 30 per cent.

According to an analysis, the gradual reduction of China’s tariff from 65 per cent to 10 per cent between 2000 and 2007, while maintaining domestic taxes at relatively low levels by regional standards, led to a massive increase in legal spirits imports (from US$ 30 million or €24.32 million to roughly US$ 500 million or €405.32 million), thereby also vastly increasing revenue collection (from US$ 30 million [€24.32 million] to US$ 265 million [€214.81 million], counting tariff + special consumption tax + VAT). Regarding Cognac imports only, government revenues soared by 785 per cent between 2000 and 2007. The revenues went up by nearly 1,500 per cent as regards wine imports.

In India, the high incidence of customs duty coupled with state duties/taxes acts as a major hindrance for the import of alcoholic beverages. Products becoming expensive beyond the reach of majority of Indian consumers renders them non-saleable. The high level of taxes also leads to promotion of grey market trade resulting in a loss of revenue for both the central and state governments. Moreover, there is also a high influx of counterfeit products in the market, which undermines brand equity, deceives consumers and poses a high health risk for consumers.

The size of the imported alcoholic beverage segment as compared to domestic production is currently negligible. (1 per cent of the total consumption of legitimate commercial alcohol is imported.)

Recommendation

There is a need to rationalize the import tariff in a phased manner from 150 per cent to 75 per cent and ultimately to 30 per cent over a period of 2-3 years. However, to protect interests of the domestic alcoholic beverages industry, a threshold limit of import value (CIF €30/case of 9L) could be adopted.

2.2 State Level Issues2.2.1 State excise cycle and regulatory

requirement under central acts

Labels should be registered with the state excise departments before anyone can commence business in the respective states. It is an annual requirement and varies across states beginning with the financial year and gets over by early July. Labels once approved by the state excise department on payment of fees can only be revised after paying additional fees. The industry also complies with specific labelling requirements mandated by central authorities like the Food Safety and Standards Authority of India (FSSAI) under the Food and Safety Standards Act as well as the Legal Metrology Act (Department of Consumer Affairs).

The requirement under the various state excise

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EBG FEDERATION

and central legislations are almost similar in nature except difference in the size of the alphabets/numerals etc. Frequent changes in the labelling requirement creates disruptions in business and most importantly huge financial implications on businesses.

Recommendation

1. Changes in labelling or other requirement under the Central Acts should follow the excise cycle which begins from 1 April, barring a few states. Compliance would enhance substantially if changes required follows the excise cycle.

2. Labelling requirements under the Central Acts should not lead to repetition and avoid confusion.

2.2.2 Introduction of online registration and renewal of label registrations

Alcoholic beverages companies operating in India have to register their brands/labels with the respective state excise departments before commencing their business. The labels contain the mandatory information prescribed under the state excise laws/FSSAI/Legal Metrology meant for the consumers like net quantity/alcoholic strength/volume/MRP/statutory warnings/name and address of manufacturer or importers/FSSAI licence number, etc.

Renewal of labels is an annual exercise with the state excise departments. One has to register their brands before the beginning of the new financial year with the state governments by submitting their hard copy labels of each stock-keeping unit (SKU) along with host of other documents relating to the company’s business and its directors. This has to be done each year followed by multiple follow-ups and personal visits. It is a time consuming and cumbersome process that leads to enormous delay. At times, half of the year is gone before brands are registered and one has to pay the fee for the full year, not least the lost opportunity in terms of business.

There is an ample scope for simplification and thereby enhance Ease of Doing Business.

Recommendation

1. To introduce Ease of Doing Business the industry suggests introduction of ‘Online Registration of Labels’ in each state.

2. The current annual registration process should be replaced by longer duration approvals, say for 3-5 years, on annual payment of fees.

3. Renewal of labels should be automatic on payment of fees in case there is no change in labels as compared to previous year.

4. Companies shall furnish an undertaking stating no changes in labels and pay the annual fees online and labels should get automatically registered for the next excise cycle/year so that companies can start business from day one.

2.3 Goods and Services Tax (GST) Alcoholic beverages have been kept outside

the ambit of GST. Globally, alcoholic beverages are within GST with state excise duty charged separately than GST. In India too, the alcoholic beverages industry requested the Centre and states to include alcohol within GST with a provision to levy additional excise duty over and above GST – as on tobacco products – to have better control on movement of goods and collection of duties and taxes. However, the industry’s request was ignored and, unlike petroleum, inclusion of alcohol within GST now requires an amendment of the Constitution.

With investment of over US$ 3.2 billion (€2.59 billion), the alcoholic beverages industry contributed over ̀ 140,000 crore (€17.42 billion) in tax revenue in 2016 (to top 10 states in India), which is probably second to the petroleum sector in India. However, exclusion of alcohol from GST has led to non-utilization of input tax credit and analysis shows a substantial increase in tax costs on procurements resulting in compromise on margins of industry players and not least subdued growth witnessed by the industry per se.

Recommendation

1. Industry earnestly requests the Ministry of

32 | Position Paper 2018

ALCOHOLIC BEVERAGES

Finance, Government of India and the states to consider including alcohol within the ambit of GST. The central government shall be able to collect revenue in the form of CGST and the states shall continue to collect revenues in the form of excise duties and taxes. At the same time, industry shall be able to utilize input tax credits resulting in optimizing procurement costs, improved margins, expansion prospects, higher employment opportunities and most importantly enhanced revenue collection by the governments.

2.4 Establishment of a National Alcohol Regulatory Body

There is a need to bring greater transparency in operating environment of the alcohol industry; a greater degree of transparency will curb corrupt practices, which in turn shall lead to plug the leakage of the official revenue that should effectively flow to the country’s exchequer. Studies have revealed that the unrecorded alcohol generates tax equivalent revenue which is almost 50 per cent of the official tax revenue.

The industry is a large consumer of agriculture produce and hence linked to the agriculture sector at the backend. The industry supports tourism in the country. It contributes revenues in excess of `200,000 crore (€24.89 billion) and an estimated 2.5 million jobs directly and indirectly put together.

As per the Constitution of India, alcohol is a state subject; it falls under entry 8 and 51 of List II of 7th Schedule of the Constitution:

• Serial 8: Intoxicating liquors, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors

• Serial 51: Duties of excise on the following goods manufactured or produced in a state and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:

a. alcoholic liquors for human consumption;

b. opium, Indian hemp and other narcotic drugs and narcotics, but not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.

Presently, the state governments control grants of licences to manufacture, regulate prices – both MRPs and ex-distillery prices, distribution of alcohol and in some states even retailing of alcohol, at times by creating state monopolies. Despite stringent controls put forward by state governments, there are challenges in terms of counterfeit, illicit liquor which leads to revenue loss and risk to precious lives.

One of the ways to address the issue is by splitting the entire value chain – separate manufacturing from possession, transportation, purchase and sale of alcohol. The manufacturing of alcohol should be brought under the central domain by including it in GST and other activities like possession, transport, purchase and sale could remain under the domain of respective states.

The central government should set up a National Alcohol Regulatory Body to control and regulate manufacturing of alcohol along lines similar to the Central Electricity Regulatory Commission.

Key benefits arising out of the proposed establishment:

• The central government will benefit from increased revenue through imposition of CGST.

• By enforcing transparent ways of doing business – plugging revenue leaks and curbing/eliminating corrupt practices. It will address revenue leakages by providing documentary audit trail which will increase government tax collection, reduce black money generation and corruption, curb unreported/undeclared sales, reducing illicit and spurious alcohol thereby curbing incidence of deaths from consumption of counterfeit products.

• The state governments will retain its control on the revenue generated from

Position Paper 2018 | 33

EBG FEDERATION

possession, transport, purchase and sale of alcohol through state GST (SGST) and other state excise levies.

Recommendation

A National Alcohol Regulatory Body should be set up by the central government to control and regulate manufacturing of alcohol along with following suggestions on carving primary role of the authority:

• The regulatory body will not interfere with state level taxes and levies but only play an advisory role.

• The regulatory body shall – in consultation with the states – formulate a Model Excise Policy, which can be implemented by all states to maintain uniformity across the country, thereby bringing Ease of Doing Business within this industry.

• The regulatory body shall regulate route to market channels in states to ensure state monopolies or state created monopolies for distribution of alcohol which encourage corrupt practices are obviated.

• The regulatory body shall regulate manufacturing capacity in the country to ensure there is no mismatch between supply and demand for alcohol.

• The regulatory body shall ensure that regulatory environment pertaining to the value chain in the states’ domain are uniform across all states.

• The regulatory body shall, in consultation with the state governments, prescribe prices on advisory basis to ensure healthy competition between the states.

• It will prescribe norms for increased number of retail outlets to ensure supply of sufficient alcoholic beverages thereby eliminating shortfall scenario and thus discouraging supply of spurious / illicit alcohol.

• The regulatory body shall also promote responsible retailing and consumption of alcohol by creating special purpose vehicle to promote responsible retailing and consumption where both government and the industry will contribute resources.

While, the industry operates in a highly regulated and challenging environment where growth will clearly come from volume and not so much from value, the fundamentals are highly favourable for the alcoholic beverages market and India thus offers one of the largest growth markets amongst most developing and developed countries.

Endnotes

1 India Today through State Excise Departments (https://www.indiatoday.in/india/story/booze-revenue-alcohol-e c o n o m y- p r o h i b i t i o n - t a m i l - n a d u - b i h a r- s u p r e m e -court-345588-2016-10-08)

2 IWSR, 2016

34 | Position Paper 2018

Notes

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EBG FEDERATION

AUTOMOTIVEAcknowledgements: Vinod Pandey (BMW India) – Chairman, Automotive Sector Committee & its Members

Knowledge Partner: Rakesh Batra, Rajnish Gupta & Abhinav Chauhan – EY

36 | Position Paper 2018

AUTOMOTIVE

The automobile industry is a key pillar of the Indian economy. It accounts for over 7 per cent of the GDP and has been growing at an impressive rate of around 6 per cent annually over financial year (FY) 2011-17. The industry provides employment to over 30 million people directly and indirectly. The growth in the automobile industry is instrumental in shaping the country’s economy and hence rightfully regarded as a ‘Sunrise Sector’ under Make in India.

Globally, the Indian auto industry is one of the largest, and has a leading position in a number of sub-segments – world’s largest tractor manufacturer, the second largest two-wheeler manufacturer, the fifth largest passenger vehicle manufacturer and the seventh largest commercial vehicle manufacturer. India has also emerged as a passenger vehicles export hub, with exports during April-December 2017 reaching 0.55 million vehicles. Despite its size, the country’s passenger car penetration is low at 20 vehicles per 1,000, indicating significant growth potential.

The Government of India has been supportive of the automotive sector, acting as a critical enabler to driving manufacturing volumes and excellence through a multi-pronged policy framework, ranging from Make in India and incentivizing of local R&D to skill development programmes. The Automotive Mission Plan (AMP) 2016-26 envisions the industry to grow around four times by FY 2026 with vehicle sales volumes growing at a CAGR of approximately 10 per cent.

The EBG Federation recommends a few points for attention and action to truly realize the immense potential of Indian automotive industry:

• Need for a stable and comprehensive automotive policy with clear focus on long-term policy roadmap. Multiple changes in policy stance, especially those directly impacting the investment decision making, lends higher degree of volatility to the ecosystem. Revision of custom duties especially for CKD and auto components, changes in GST compensation cess for large cars, and pull away from comprehensive electric mobility policy are few examples of changes in government’s policies

EXECUTIVE SUMMARY

that impacts business plans and consequently investment planning and confidence.

• Level playing field to foreign automakers that have entered the market at a later point of time and may not have the requisite volumes to push the deeper localization agenda. Therefore, the recent hike in import duty on auto components should be rolled back.

• Taxation in the Indian automotive industry has traditionally favoured smaller cars, which has artificially limited the demand for globally accepted vehicle segments. The penetration of premium cars in India is very low compared to global peers. Premium cars incorporate advanced innovative technologies and meet the highest safety and emission standards. Therefore high tax incidence on premium segment ought to be moderated and rationalized.

• Initial market development is a pre-requisite for faster electric mobility adoption. This initial phase requires significant monetary incentives. European manufacturers are keen to bring their electric vehicles to India, but are not able to do so due to higher import duty on CBUs. EBG proposes reduction of import duty on CBU Electric vehicles for a period of three years. Further, a long term EV policy framework, with focus on incentivizing local manufacture of key EV components, is critical to enable quantifiable penetration. The government could offer both fiscal and non-fiscal incentives in the short to medium term, with a slab-based treatment of technologies, and taper it down as the market becomes self-sustaining.

• Transition to battery electric vehicle will require a strategic approach. Globally, there has been strong focus on plug-in-hybrid vehicles (PHEV), besides BEVs as part of the policy framework. Given the current constraints of non-competitive pricing, limited product choices, lack of charging infrastructure, range anxiety, etc.; there is strong merit in promoting PHEV in the short to medium term. They

Position Paper 2018 | 37

EBG FEDERATION

represent a logical choice with over 40 km of pure electric range enabling urban mobility needs, and inspiring confidence in customers to adopt electric mobility. This will also provide sufficient time to develop the electric mobility eco-system.

• Early conclusion of the broad-based trade and investment agreement between India and the European Union (EU) – one of the largest global automobile markets – will facilitate development of India as an export hub for automobiles.

• Strategic handling of ‘diesel’ due to inherent benefits, especially in the context of India – a) Higher fuel efficiency resulting in less dependence on imported oil (energy security);

b) lower CO2 emission (climate protection) supporting the stringent Intended Nationally Determined Contributions (INDCs) adopted by India. Also with BS VI, the diesel vehicle emissions are almost on par with that of gasoline. Therefore pan-India introduction of BS VI fuel needs to be expedited.

The European OEMs have made significant investments in the country and have established themselves as partners for sustainable growth. They are willing to continue contributing by introducing well-researched automotive technologies, products and systems however would need an enabling framework.

We look forward to early implementation of the recommendations proposed in this position paper.

38 | Position Paper 2018

AUTOMOTIVE

1. INTRODUCTION The automotive industry is a significant

contributor to the national economy comprising over 7.1 per cent of the total gross domestic product (GDP) and approximately 49 per cent of manufacturing GDP during financial year (FY) 2017. The industry provides employment to over 30 million people directly and indirectly. The growth in the automobile industry is instrumental in shaping the country’s economy and hence rightfully regarded as a ‘sunrise sector’ under Make in India.

Driving the next level of growth in the Indian automotive industry will need expansion of the domestic consumption base, high value manufacturing competitiveness and technological capabilities. A stable and a long-sighted regulatory environment would be a key enabler for sustaining and driving the growth of the Indian automotive industry and its transition into a global automotive powerhouse.

1.1 Market Description and Performance

1.1.1 Indian auto industry is one of the world’s largest and fastest growing markets, and has achieved a leading position in several sub-segments – world’s largest tractor manufacturer, the second largest two-wheeler manufacturer, the fifth largest passenger vehicle manufacturer and the seventh largest commercial vehicle manufacturer1.

1.1.2 Despite its large size, the auto industry has significant growth potential owing to the country’s low passenger vehicle penetration (estimated 20 passenger cars per 1,000 people in 2017)2 India’s passenger vehicles on road is expected to grow to more than 40 million vehicles by 20203 clearly establishing a strong upside potential.

1.1.3 The automotive industry witnessed revival of growth momentum across segments during 9MFY 2018, offsetting the uncertainty arising on account of implementation of the goods and services tax (GST) in the first half of FY 2018 – the growth in 3QFY 2018 could also be

partly attributed to demonetization-influenced low base in FY 2017.

1.1.4 Passenger vehicle (PV) sales witnessed 8 per cent growth during the period, as 3Q volumes stayed flat after culmination of a strong festive season in 2Q. The 3Q sales were helped in parts by pre-buying – due to year-end discounts and upcoming vehicle price hikes in January 2018 – coupled with success of new model launches. While utility vehicles sustained high double-digit growth (19 per cent) in the period resulting in an all-time high segment share (27 per cent), passenger car sales also witnessed growth (7 per cent) despite 3Q volume decline in mini segment (6 per cent). The luxury car market also saw a significant growth as consumers advanced their car purchase to benefit from the lower GST cess coupled with a low base effect from last year when sales slowed down due to registration bans in Delhi and demonetization.

1.1.5 Commercial vehicle (CV) sales grew 15.2 per cent during the period April-December 2017. The medium and heavy commercial vehicle (M&HCV) market grew by 9 per cent, as recovery during the second and third quarter of FY 2018 (with 73 per cent growth in December 2017) helped offset the decline in 1Q due to BS IV implementation. The segment growth was driven by anticipated price increases in 2018, demand for tippers (from construction and mining sector), stricter implementation of Central Motor Vehicles Rules (CMVR) regulations and sustained investment in infrastructure. Light commercial vehicles (LCVs) witnessed 19 per cent growth during the period, helped by replacement cycle, rural economy and improvement in financing conditions.4

1.1.6 The auto components industry recorded turnover of `2.92 trillion (€36.34 billion) during FY 2017, up 14.5 per cent from `2.55 trillion (€31.74 billion) in the previous year. According to the latest industry performance review by Automotive Component Manufacturers Association of India, components exports grew 3.1 per cent to `731 billion (€9.09 billion).5

1.1.7 India is also an emerging passenger vehicles export hub, with exports during April-December 2017 reaching 0.55 million vehicles.

Position Paper 2018 | 39

EBG FEDERATION

(Source: SIAM)

(Source: SIAM)

FY 17FY 18

3.3

0.9

20.2

0.6

3.0

0.7

17.6

0.5

Passenger vehicles (PV) Commercial vehicles (CV)

Two wheelers (2W) Three wheelers (3W)

India automotive sales breakup by segments (million units)

Source: SIAM

Passenger vehicles (million units)

3.02.5

0.4

3.12.6

0.5

3.22.7

0.6

3.12.5

0.6

3.22.6

0.6

3.52.8

0.7

3.83.0

0.8

3.32.7

0.6

Production Domestic sales Exports

761 685

74

929 809

92

833 793

80

699 633

77

698 615

87

787 686

103

810 714

108

695 660

770

500

1000

Production Domestic sales Exports

Commercial vehicles (thousand units)

FY11 FY12 FY13 FY14 FY15 FY16 FY17 10mFY18

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AUTOMOTIVE

1.2 European Investments1.2.1 European players have and continue to make

significant investments in India; they are present throughout the value chain, i.e., from manufacture of components to sales and after-sales services.

1.2.2 Leading original equipment manufacturers (OEMs) such as BMW, Daimler, Fiat, Renault, Volvo and VW Group have made substantial investments in the country and have contributed to the industry in terms of research and development (R&D), training and employment and providing greater choices to the Indian consumer.

1.2.3 Leading component suppliers such as Bosch, Continental, Durr, Michelin and Magnetti Marelli have also played a pivotal role in industry development. They have also helped bring in technology and improve product performance in the country.

1.2.4 The share of European vehicles in India is currently at around 7 per cent in the passenger vehicle (PV) segment and about 7 per cent in the commercial vehicle (CV) segment as per the period April-December 2017. It is expected to increase in the coming years owing to increasing consumer preference for sophisticated and high-end products, both in the PV and CV segments.6

1.3 Recent Developments1.3.1 The government’s Automotive Mission Plan

(AMP) 2016-26 envisions the industry to grow around four times by FY26, with sales volumes growing at a compound annual growth rate (CAGR) of approximately 10 per cent. According to the AMP 2016-26, vehicle sales are expected to touch 66 million units by FY26. To achieve the projections, the auto industry will require additional investment of `4.5-5.5 trillion (€56.01-68.45 billion).7

1.3.2 Government of India has announced early introduction of BS VI fuel in Delhi (April 2018) and Delhi NCR from April 2019 and pan-India rollout by April 2020. The early introduction of BS VI fuel in Delhi-NCR inspires confidence

about government meeting the 2020 pan-India timeline.

1.3.3 The Indian government is focused on reducing the level of emissions in India. Towards this, E-mobility has emerged as one of the leading pillars of the government’s strategy, with the government’s latest stand moving towards providing enablers for electric vehicles (EV) penetration instead of a binding policy towards a set target. The Department of Heavy Industries (DHI) has recently released a draft automotive policy and is seeking stakeholder comments. It talks about adopting a composite criterion based on length and CO emissions to classify vehicles for differential taxation purposes. Various state governments are also playing their part, with provision of incentives for investments and sales.8

1.3.4 The Ministry of Heavy Industries, Government of India has shortlisted 11 cities in the country for introduction of EVs in their public transport systems under the FAME [Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles in India] scheme.9

1.3.5 The Indian Ministry of Road Transport and Highways has mandated multiple vehicular standards across segments, besides strengthening the Motor Vehicles Act through uniform driver licensing system, protection of children and vulnerable road users and rationalizing penalties. The Bill also proposes to introduce digitization in the monitoring and enforcement of traffic laws.10

2. NEED FOR A STABLE AUTOMOTIVE POLICY

The government of India has been supportive of automotive sector, acting as a critical enabler to driving manufacturing volumes and excellence through multi-pronged policy framework ranging from Make in India and incentivizing of local R&D to skill development programmes.

While the current focus is on multiple aspects of automotive ecosystem, EBG feels a lack of overarching long-term policy

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roadmap with clear emphasis on stability and consistency. Multiple changes in policy stance, supplemented with unfavourable developments in trade barriers, lends higher degree of volatility to the ecosystem.

Revision of custom duties especially for completely knocked-down (CKD) and auto components, changes in compensation cess, and pull away from comprehensive electric mobility policy are few examples of changes in government’s policies that impacts business plans and consequently investment planning and confidence. The EBG Federation feels that the government should aim to provide a level playing field to foreign automakers that have entered the market at a later point of time and may not have the requisite volumes to push the deeper localization agenda beyond a point.

Additionally, involvement of multiple government departments in defining the targeted objectives and enablers across policy frameworks has resulted in unnecessary ambiguity and uncertainty. EBG recommends a centralized government body to monitor harmonization across the different policies for the industry and also serve as a single window for the OEMs to address their issues.

3. INTERVENTIONS FOR REALIZING POTENTIAL

Realizing the true potential of Indian auto industry and making it truly global will require concerted efforts of all stakeholders. There is a need to focus on specific policy interventions across the three levers of trade, technology and taxation to enable Indian automotive industry to position itself as a global leader.

3.1 Trade • India exported 3.5 million vehicles globally

in FY 2017. Two wheeler is the largest exported segment from India, accounting for 67 per cent of Indian vehicle exports in FY 2017, followed by commercial vehicles (31 per cent) and passenger vehicles (22 per cent).

• Passenger vehicles have continued to witness strong growth in exports, with the overall FY 2017 exports having clocked the highest ever volume of 0.76 million units, helped by increasing focus of global manufacturers in positioning India as an export hub, especially to markets without local manufacturing capabilities.

• The export portfolio has also started to diversify, with the share of small cars shrinking to 65 per cent in FY 2017 as compared to 81 per cent in FY 2013, and mid-size sedan exports exceeding 100,000 units over last three years.11 The EBG Federation looks at this as a positive development, however, emphasizes the need for additional efforts in creating an equitable domestic duty structure in the higher-end segments to enable greater manufacturing competitiveness and help India compete on the global stage.

• The growing competition from Southeast Asia could impact export prospects from India. A two-pronged strategy of ensuring preferred investment destination coupled with enhanced market access for exports can further enhance India’s position as an automotive export hub.

Recommendation

a. EBG recognizes the government’s initiatives in building vehicle logistics infrastructure in the country with investments in road transport, inland waterways and RORO (roll-on/roll-off) services. However, it feels that more needs to be done on the port facilities, especially for the storage of vehicle inventory, to reduce damage related losses.

3.1.1 Boosting investment through bilateral investment treaties (BITs)

India’s decision to let over 50 bilateral treaties expire in 2017, in an attempt to renegotiate them on the basis of its new BIT model has driven skepticism among investors who deem this model to be highly restrictive and providing low protection.12

• India has proposed a model BIT in which

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the most contentious change is insistence that foreign firms can turn to international arbitration — only after exhausting local judicial remedies. Given the fact that there is a global competition to attract international investments, such a condition is unlikely to be acceptable to most trading partners.

• India has also proposed inclusion of investment treaty as part of comprehensive bilateral trade and investment agreement (BTIA). Given the slow pace of negotiations on the India-European Union (India-EU) free trade agreement (FTA), there is a risk of investment treaty getting delayed because of it.

• Furthermore, India has excluded tax-related matters from being disputed, exposing investors to sudden changes in these rules or retrospective claims.

Recommendation

a. EBG recommends India to revisit its stand on BIT model in an attempt to speed up negotiations and signing of treaties.

3.1.2 Trade agreements

India and EU have very deep trade relations.

• The EU is India’s number one trading partner (13.5 per cent of India’s overall trade with the world in FY 2016), well ahead of China (10.8 per cent), USA (9.3 per cent), UAE (7.7 per cent) and Saudi Arabia (4.3 per cent).

• India is the EU’s 9th trading partner in 2016 (2.2 per cent of EU’s overall trade with the world), after South Korea (2.5 per cent) and ahead of Canada (1.9 per cent).

• The value of EU exports to India grew from €24.2 billion in 2006 to €37.8 billion in 2016, with engineering goods, gems and jewellery, other manufactured goods and chemicals ranking at the top.

• The value of EU imports from India also increased from €22.6 billion in 2006 to €39.3 billion in 2016, with at the top textiles and clothing, chemicals and engineering goods.

• Trade in services almost tripled in the past decade, increasing from €10.5billion in 2005 to €28.1 billion in 2015.

• India-EU FTA has been under discussion since 2007. As of this moment there is no clarity as to when the FTA would be signed, however, a successful India-EU FTA can contribute to major expansion of trade and investments between India and EU. While the FTA covers a wide basket of goods and services, EBG believes that an India-EU FTA would be in India’s interest for the following reasons:

o Foreign direct investment and trade are complementary to each other. Deepening of the trade relations would result in higher levels of investment from EU to India.

o Imports and exports also go hand in hand, especially with the globalization of supply chains. Deepening of trade relations could help India become a part of the supply chain of European corporations.

o By signing FTAs with a few countries and not with others, results in trade distortions. India has signed numerous FTAs primarily with countries in Asia e.g. Japan, Korea, ASEAN nations that include auto-components, thereby putting European players at a dis-advantage.

Recommendations

a. EBG strongly recommends inclusion of automotive sector in the FTA and stands for a pragmatic compromise of tariff reductions. Differentiation between premium and volume products is a possible pathway that can address the concern of the Indian government and local OEMs.

b. FTA could include a considerable reduction of tariffs as first step and the introduction of a review clause that would link further tariff reductions to certain criteria India has to reach within a clearly defined period of time. The same can be reviewed after three years of entry into force.

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i. Customs duty rates for EU imports into India on date of entry into force (EIF) for completely built up (CBU) vehicles with engine displacement > 1,500 cc (1.5 L) = 30 per cent (current 60 per cent, 100 per cent).

ii. Other vehicle category (< 1,500 cc): phased reduction of tariff based on pre-agreed milestones to reach zero import duty. Longer transition period acceptable.

iii. CBU green vehicles (electric, plug-in-hybrid electric) = 10 per cent (current 60 per cent, 100 per cent).

c. EBG also sees strong merit in associating with evolving regional trade arrangements, like the sizable Regional Comprehensive Economic Policy (RCEP) to regionally focused agreements such as South Asian Association for Regional Cooperation (SAARC). A favourable tariff regime for automobiles and automotive components can offer excellent opportunity for European players to potentially make India a regional manufacturing hub.

3.2 Technology• Globally, the auto industry is undergoing

a significant technological change on the back of multiple disruptive forces. Besides increasing technological maturity (autonomous, connected) and emergence of sharing economy, the need for environmental protection has been a key driver in the Indian perspective. In this context, the need for reduced vehicular pollution is creating a push for greener mobility that includes fleet electrification, alternative fuels and policy initiative on CO standards.

• India has a dismal record as far as road fatalities are concerned with over 140,000 fatalities. The situation is compounded by ever increasing road congestion, impacting productivity and subsequently driving erosion of economic value creation.

• New advanced technology solutions, if implemented consistently can significantly improve urban mobility.

3.2.1 Clean diesel technology

• Diesel passenger vehicles have been getting a lot of flak for its perceived contribution to the growing pollution in metros despite an IIT study showing contribution to be less than 2 per cent in Delhi NCR.

• EBG shares concern for rising pollution in Indian cities, however, disagrees with the approach of singling out diesel vehicles as the key contributor.

• EURO VI advanced clean diesel technology has emissions almost on par with petrol. European companies have advanced diesel technologies and would be able to introduce it in India subject to pan India availability of requisite diesel fuel (<10 ppm sulphur).

• DHI, in its draft policy, has recommended adopting a long-term roadmap for emission standards beyond BS VI and harmonizing the same with global standards by 2028. EBG recommends harmonization with European standards.

Recommendations

a. Diesel needs to be handled “strategically” and not “stigmatized” given the inherent benefits especially in the context of India- a) Higher fuel efficiency resulting in less dependence on imported oil (Energy Security); b) lower CO emission (Climate Protection) supporting the stringent Intended Nationally Determined Contributions (INDCs) adopted by India.

b. EBG strongly supports the government’s decision of leapfrogging to BS VI emission standard in 2020 and would emphasize on early availability of requisite BS VI fuel. There should not be any change in the timeline and pan-India availability of BS VI fuel before 2020 remains essential to make the transition to BS VI successful.

c. EBG recommends tax benefit on BS VI compliant vehicles. This will incentivize manufacturers to introduce clean diesel technology at the earliest.

d. The government is also mulling a policy on usage of biofuels for transportation, the key to a successful implementation would be ensuring

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the pan-India availability of such fuel before the policy rollout.

3.2.2 Electric mobility

• The future of mobility is electric cars. While there has been a lot of deliberation and action initiated around promoting EVs, it has not translated into impactful penetration for electric vehicles. High price, unavailability of compelling EV models, sparse charging infrastructure and lack of long-term policy on incentives have been some of the reasons for very limited off take of electric vehicles in India.

• The National Electric Mobility Mission Plan 2020 and schemes such as FAME are very positive initiatives and convey the government’s intent to promote EVs. The FAME scheme, due to expire in September 2017, was extended till April 2018. While, this is a welcome move, however, it lacks clarity on the financial support that would be available on long-term basis.

• We also welcome the EESL (Energy Efficiency Services Limited) tender for procurement of 10,000 EVs for the government, such initiatives would help drive the initial adoption of EVs. The EV adoption within public and government transport will trigger demand and also initiate investment in charging infrastructure. Therefore, we recommend more such measures as well as mandatory switch to electric buses for urban public transportation.

• As per the current Import Policy (Section XVII Chapter-87) for import of diesel/petrol vehicles, import of new vehicles having FOB (free on board) value > US$ 40,000 (€32,425) and engine capacity > 3,000 cc for petrol & engine capacity > 2,500 cc for diesel are exempted from the requirement of local homologation in India and are required to furnish Type Approval Certificate of an international accredited agency from the country of origin, for customs clearance. As the electric car does not have an engine, the current policy of local homologation exemption is not extended to CBU of an electric vehicle/battery Operated Vehicle (EV/BOV) with FOB value >US$ 40,000 (€32,425).

Recommendations

a. EBG recommends a long-term EV policy framework that allows for continuity and attracts desired investments required for EV deployment. The focus should be to drive localization of key EV components by incentivizing local manufacturing. The government could offer both fiscal and non-fiscal incentives in the short to medium term and taper it down, once the market and local manufacturing achieve reasonable scale.

b. Initial market creation is a pre-requisite for faster electric mobility adoption. Given BEVs would take a long time to gain a significant penetration primarily because of the non-competitive pricing, lack of charging infrastructure, range anxiety, etc.; the need to focus on PHEVs in the short to medium term is imperative, as they represent a logical choice with over 40 km of pure electric range enabling urban mobility needs, and reducing the range anxiety.

c. The fiscal and non-fiscal incentives should thus be not limited to BEVs and EBG proposes a slab-based treatment of technologies with plug-in hybrid electric vehicles (PHEVs) included in the ambit of policy making. Consequently, the reduced GST benefit (of 18 per cent) should also be passed on to PHEVs to drive EV adoption.

d. Linking incentives to local manufacturing will not be enough. Additionally, investing in local manufacturing of electric vehicles will require sufficient volumes and long-term stability of market demand. EBG recommends restriction free incentive scheme for three years.

e. Charging infrastructure: EBG recommends that India should go the global way, by bringing about a definite set of charging standards and following it up with concrete policies. EBG recommends adoption of the CCS charging standards for DC Fast Charger (>100 volts). Learning from successful EV markets clearly alludes to strong investment from the government in early stage of charging infrastructure development.

f. CBUs of EV/BOV with FOB value >US$ 40,000 (€32,425) be exempted from the requirement

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of homologation in India as is available to the vehicles with engines.

g. There is also a need to make amendments in the current regulations and to introduce new regulations across the ecosystem:

i. Charging infrastructure: Introducing the laws for resale of electricity (to allow private parties to set up charging stations), correct the anomaly around high GST on EV batteries (28 per cent) which deter business models such as battery swapping; facilitate standardization of charging infrastructure, etc.

ii. Data management and IT infrastructure: Framing privacy laws for handling of data and set up data centers to have a central data repository and encourage an ecosystem of interoperable transport data sharing

3.2.3 Connected and autonomous mobility

• The global automotive industry is making significant efforts to focus on connected and autonomous mobility to bring safety and convenience to all mobility consumers.

• Vehicle-to-vehicle and vehicle-to-infrastructure communication are vital to developing intelligent transportation systems. Connected and autonomous vehicles can allow for fundamentally new use cases for vehicles and for more efficient use of infrastructure.

• European vehicle manufacturers can also offer advanced safety features in the products such as driver assistance, anti-collision and lane departure warning, however, they are not able to do so due to lack of requisite frequency licensing.

• Data privacy implications for connected and autonomous vehicles are significant. The data collected by the cars will not only be commercially valuable but also contain extremely sensitive information about individuals.

Recommendations

a. EBG recommends that the Government of India (GoI) work together with the EU on

working out modalities, framework conditions for developing connected mobility ecosystem.

b. Finalize ‘M2M’ (machine-to-machine) policy framework and provide ample flexibility to OEMs to offer mobility services.

c. De-licensing of frequency bands is important to introduce advanced product safety features.

d. Roll out of 5G network with fast and steady network across India to explore full potential of connected mobility and autonomous vehicles.

e. Autonomous driving: Seek an international alignment on laws and regulations. In particular, the Vienna Convention changes must be carried over into national law quickly. Regulatory and certification law must be further developed in harmony with increasing levels of automation.

f. EBG recommends the government to support research on autonomous driving through R&D incentives and testing infrastructure. It can partner with European automotive industry.

g. Data safety, security, and privacy would be the critical factors. Therefore GoI needs to come out with clearly defined regulations for data handling and management in alignment with European laws.

3.3 Taxation A favourable taxation policy can provide a

major fillip to the automotive industry. EBG recommends transparent, consistent and stable tax and regulatory regime as pre-requisite to drive growth. Companies need a level playing field and long-term clarity to plan their strategy and make investment decisions.

3.3.1 Tax administration

Providing an institutional mechanism to address tax disputes is a pre-requisite for improving Ease of Doing Business in India.

Recommendations

a. Indian tax system does not currently have provision of bilateral ‘Advance Pricing Agreements’ with certain European countries, like Germany. Implementation of ‘Advance Pricing Agreements’ could

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reduce tax disputes on account of transfer pricing issues and ensure that automobile companies are not subject to double taxation.

b. Multinational companies operating in India are also struggling with ‘Advertisement Marketing and Sales Promotion (AMP)’ related tax disputes due to lack of requisite provisions on AMP in Indian Income Tax Act. This results in companies putting up substantial efforts to deal with these anomalies having very high tax implications.

3.3.2 Implementation of GST

• EBG welcomes the implementation of unified GST in July 2017. We view this as a transformative tax reform despite the near term disruption and transition challenges.

• However, the true efficiency gains have been limited with multiple tax rates, frequent changes, roll backs and revisions in classification, have impacted the industry by creating uncertainty. The cess hike (announced in September 2017) for large passenger vehicles barely two months after introduction of GST, is a concern.

• EBG expected GST regime to not only simplify the indirect tax structure but also address the existing tax rate anomaly existing between small and premium vehicles. Since, GST rates are on ad valorem basis therefore the customer will anyway pay higher taxes on ex-showroom price of premium vehicles which is higher than that for small cars.

Recommendations

a. We strongly recommend single rate for the automotive industry, ideally capped at 28 per cent. The taxation structure needs to be clearly delinked from the length of the car and should solely be meant to incentivize safer and greener cars.

b. Therefore EBG is disappointed with additional cess on large/premium cars. Premium car manufacturers bring in products with latest innovative technology, highest safety and emission standards, contribute to high skill development, and provide employment

opportunities. Therefore “demerit” categorization of these products is akin to penalizing “innovation”. This clearly carries forward the past tax distortions and not provide an enabling environment for the premium segment to grow. This will also provide an excellent opportunity to export such premium products to the global markets in future.

c. GST regime does not offer any attractive incentive to electrified vehicles. EBG believes that for India to move forward in electric mobility, it needs to carefully visualize and manage the transition. Advanced PHEV, with pure electric range of over 40 km, have an important role to play in this transition, as India develops its charging infrastructure and provides greater confidence to the Indian consumers. The high tax rate differential between PHEVs and electric vehicles is detrimental in its rapid penetration.

d. EBG acknowledges government’s concern on revenue collection however suggest rationalization of rates to ensure sustainable growth of auto industry:

i. Difference between GST rate for small cars (length <4 m) and large/premium cars (length> 4 m) should be 8 per cent i.e. compensation cess value at 8 per cent.

ii. Review the proposed structure after three years to evaluate the possibility of converging to a single rate.

iii. Leverage the GST regime to incentivize electric cars by offering merit rate of 5 per cent on battery electric vehicles; and 18 per cent on PHEV.

iv. Currently the GST rate of 18 per cent has been administered on a select few auto components which comprise merely 30 per cent of the overall auto component production, while others are taxed at much higher 28 per cent. We believe a standard 18 per cent rate for auto components is critical, especially when the auto component industry is expected to undergo large transitions due to the government’s push on e-mobility.

e. EBG expects a continuous improvement in

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GST operational procedures to make them user friendly to further improve Ease of Doing Business

f. We urge the government to ensure stabilization in existing tax regime and clarity on implementation, incentives/exemptions provided by different states to the manufacturers/dealers

3.3.3 Import/customs duty

The premium and luxury passenger vehicle penetration remains very low in India. As mentioned previously, premium manufacturers bring in products with latest innovative technology, highest safety and emission standards. Though there has been a shift in consumer preference to more sophisticated, durable and reliable vehicles, higher tax incidence still remains a major deterrent.

• High duty on import of fully built passenger cars into India: Most CBUs of new cars are charged at 100 per cent for cars with FOB value > US$ 40,000 (€32,425) or engine capacity > 3.0L for petrol engines or > 2.5L for diesel engines.13

• Recent hike in import duty on auto components CKD for motor cars and 2-wheelers from the current 7.5 per cent/10 per cent to 15 per cent/20 per cent.

• Introduction of “social welfare surcharge” @ 10 per cent of basic customs duty.

Recommendations

a. While EBG recognizes the intent of government in promoting local manufacturing, we believe it will not serve the intended purpose as localization process requires sufficient lead time.

b. European manufacturers are constrained by economies of scale and quality considerations and hence not able to develop the supplier ecosystem to expand localization beyond a point.

c. We view the current action to be counter-productive to the Indian automotive context, especially at a time when transition towards e-mobility, adoption of safety features, and

cleaner vehicle requirements demand greater innovations and technology flow. European component manufacturers could played a key role however, a level playing field and right incentives would be critical.

d. As import duty in India on imported vehicles is among the highest globally, EBG strongly recommends a significant reduction. Reduced import duties will provide impetus to new model introduction leading to growth of domestic market. This will facilitate expansion of manufacturing activity in the mid to long term.

e. EBG recommends offsetting a fixed percentage of total vehicles manufactured in India to be imported under the reduced duty structure thus promoting local manufacturing,

f. Number of CBU vehicles for import at a concessional rate to be capped at 20 per cent of the volumes produced locally in the financial year.

g. Applicable concessional basic customs duty: 10 per cent.

h. Volume cap: 5,000 units in a financial year.

i. Provide strong incentives to promote adoption of green technology by introducing substantive reduction in basic customs duty to facilitate initial market creation for few years with sunset clause. We propose:

i. Basic customs duty of 10 per cent on battery electric cars

ii. Plug-in hybrid electric cars @ 20 per cent

iii. Duration: 3 years

iv. Volumes: 2,500 units/year/OEM

j. Define CKD/SKD (semi-knocked down) for EV manufacturing

4. FOCUSED POLICY INITIATIVES

Policy support can have significant impact on issues concerning pollution and road safety.

4.1 End of Life Vehicles• Undertake a fleet modernization program to

ensure old polluting and unsafe vehicles are

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safely disposed and are replaced by new modern vehicles. A successful execution of the programme will need a robust dismantling infrastructure.

Recommendations

a. EBG recommends a ‘Fleet Modernization’/ ‘Scrapping’ programme by providing liberal one time incentive for vehicles more than fifteen years old.

i. Financial incentive of 50 per cent reduction in applicable taxes (including road tax) for buying new vehicles.

ii. Higher incentive to promote green mobility. The incentive can be increased to 75 per cent reduction in applicable taxes for buying battery electric vehicles.

b. The financial incentives needs to be tradable against a certificate of destruction.

c. The government should encourage independent private recycling centers to come up thereby encouraging entrepreneurship and employment through new businesses.

d. EBG recommends that OEMs and their dealers should not be mandated for collection and scrappage of vehicles. They can support technical guidance to independent private recycling centres. For example, in Germany, vehicle scrappage is handled through certified and independent dismantling centres throughout the country that handle scrap vehicles.

4.2 Road Safety We welcome the GoI’s focus on making

Indian roads safer via a mix of mandatory vehicular features, setting up of crash testing standards and strengthening motor vehicle act. A comprehensive systemic approach can substantially reduce accidents and fatalities.

Recommendations

a. EBG believes that more needs to be done especially in infrastructure standards through stronger implementation of traffic signage, lane markings and speed limits, bifurcation of vulnerable road users and enforcement of regulations. This will drive the next wave of vehicular technology driven road safety with possibilities in greater penetration of active safety systems.

b. Roll out focused information campaigns that stress on the importance of safety as a purchasing criterion, as well as allow car buyers to make informed decisions about safety technologies; the ‘Choose ESC’ (electronic stability control, another word for ESP) campaign by the European Commission is one such example.

c. Emphasize the use of technology to radialize the truck/bus segment in India; while radialization of car tires in India is almost 100 per cent, for the truck/bus segment, it is around 32-33 per cent.

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Endnotes

1 “Automotive sector achievements report,” Department of Industrial Policy and Promotion, November 2016; https://www.ibef.org/download/Automobiles-January-2018.pdf

2 SIAM

3 LMC automotive 4Q16

4 SIAM, EY analysis

5 https://www.ibef.org/industry/autocomponents-india.aspx

6 SIAM Flash Report 9MFY17

7 AMP 2016–26, SIAM

8 https://www.ibef.org/industry/autocomponents-india.aspx

9 https://www.ibef.org/industry/autocomponents-india.aspx

10 “Making our roads safe,” The Hindu, http://www.thehindu.com/opinion/op-ed/making-our-roads-safe/article22500313.ece, accessed 30 January 2018

11 “India takes centrestage as vehicle exports grow,” Business Line, http://www.thehindubusinessline.com/specials/auto-focus/india-takes-centrestage-as-vehicle-exports-grow/article9669143.ece, accessed 31 January 2018

12 “India’s proposed investment treaty terms leave foreign partners cold,” Reuters, https://www.reuters.com/article/india-investment-treaty/indias-proposed-investment-treaty-terms-leave-foreign-partners-cold-idUSL4N1P72N1, accessed 31 January 2018

13 SIAM, “Taxes”

5. CONCLUSION India with its continuously growing local

market and expanding exports, offers ample promise to be a global manufacturing hub. The need of the hour is to address multiple issues impacting sustainable growth. As the global mobility landscape continues to evolve and transform, the Indian government will have

to facilitate and enable a vibrant automotive ecosystem through policy interventions and infrastructure support. European companies could contribute by introducing advanced sustainable technologies, products and systems. The companies will benefit from the rapid growth of the Indian economy, thereby creating a winning and successful partnership.

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Notes

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AVIATIONKnowledge Partner: Amber Dubey & Captain Vinod Narasimhamurthy – KPMG in India

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EXECUTIVE SUMMARY

India is now the third largest domestic aviation market in the world, recording over 117 million domestic passengers during the year 2017, nearly double of the 60 million domestic passengers six years back. It is expected to overtake Japan to become the third largest aviation market in the world in 2018.

The key drivers of this stupendous growth include a growing economy, relatively stable crude oil prices and a pro-active policy environment. The government launched the reform-oriented National Civil Aviation Policy (NCAP 2016), with the objective of enhancing India’s global and regional connectivity and enhancing affordability of flying. It has boldly decided to privatize India’s national carrier Air India, something unthinkable till a few years back. Indian carriers have one of the largest aircraft order books which, as at June 2017, stands at 1,080 aircraft.

India is building new airports and expanding existing ones to meet the growing demand. These include the new airports in Mumbai, Goa, Kannur, Jewar (near Delhi) and Bhogapuram (near Vizag). Better marketing of ‘Incredible India’, launch of e-visa facility to over 140 countries, facilitating cleanliness of tourist places, introduction of tourist police, etc. are some of the measures being undertaken to boost tourist inflows.

The government should look at bringing aviation turbine fuel (ATF) under the ambit of the goods and services tax (GST) with a flat rate of 12 or 5 per cent. The GST on flight tickets can be made a uniform 12 per cent to offset the losses. Air Navigation Services (ANS) are expanding capacity in terms of equipment and manpower. The shift to satellite based navigation system, called GAGAN, in January 2019 will lead to better traffic flow management, shorter flights and lower fuel consumption.

The present market size of the maintenance, repair and overhaul (MRO) industry in India is estimated to be above US$ 1 billion (€810.63 million) of which 90 per cent is spent outside India primarily due to the regressive tax structure in India. Other challenges include lack of adequate infrastructure, investments and technical capabilities. This needs to change.

The general aviation (GA) market in India is one of the most untapped areas of civil aviation in the country. At most leading airports there are strict curfew hours around peak times which defeats the very premise of GA, that is, timing flexibility and personal comfort. All major Indian cities will need small airfields for GA. The huge import duty on private aircraft should be rationalized.

India has just around 260 helicopters. Over 70 per cent of their flying hours, according to industry sources, are accounted for by just around 40 helicopters deployed in the offshore oil-rigs. Rooftop helipads need to be built over metros stations, railway stations, stadia, key buildings and near highways for rapid evacuation in case of an emergency. The Ministry of Civil Aviation (MoCA) should work with the ministries of railways and highways; insurance companies, helicopter operators and hospitals to evolve a cashless system for medical evacuation.

The air cargo market in India is undergoing a transformation similar to that in the passenger market. Introduction of RFID, e-freight and development of dry ports across the country has resulted in a stable growth for cargo market in India. Last mile road connectivity, multi-modal transport hubs, digital cargo processing and trans-shipment opportunities are areas that need to be worked on.

For a growing industry, training and skilling is critical. The government is setting the Rajiv Gandhi National Aviation University (RGNAU), which aims to provide high-quality aviation education and research. The Aerospace and Aviation Sector Skill Council (AASSC) is facilitating supply of skilled workforce for the industry.

Indian aviation is currently in a sweet spot. As one of India’s largest bilateral trading partners, European countries can play a significant role in India’s civil aviation and aerospace market. If the proposed improvements in infrastructure, skilling and regulatory mechanism are implemented in letter and spirit, the Indian aviation industry is well set to achieve its vision of becoming the number one market by 2030.

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1. INTRODUCTION The civil aviation industry in India has emerged

as one of the fastest growing industries in the country, particularly in the last three years. India is now the third largest domestic aviation market in the world, recording over 117 million domestic passengers during the year 2017, nearly double of the 60 million domestic passengers in 2011. It is likely to overtake Japan to become the third largest aviation market in the world by 2018.

The key drivers of this stupendous growth include a steadily growing economy, relatively stable crude oil prices, growth in tourist traffic and a pro-active policy environment. The government of India has been proactive in easing regulatory restrictions, focusing on infrastructure expansion and bringing in greater efficiencies.

The government launched the reform-oriented National Civil Aviation Policy (NCAP) 2016, with the objective of enhancing India’s global and regional connectivity and enhancing affordability of flying. This has given a big boost to transparency, Ease of Doing Business and the investment climate in the aviation sector.

2. IMPORTANT DEVELOPMENTS

2.1 Regional Connectivity Scheme – A Potential Gamechanger

Under NCAP 2016, the regional connectivity scheme (RCS), also known as UDAN (‘Ude Desh ka Aam Naagrik’ or ‘May the common citizen fly’) has attempted to enhance connectivity to unserved and under-served airports. RCS has received significant interest from leading domestic carriers and startup airlines due to the various fiscal and monetary incentives therein and the three-year exclusive right to operate on the allotted RCS routes.

The selection of the RCS operator on a particular route is through a transparent electronic bidding process. Under RCS-1 in April 2017, five airlines won the licences to operate on 128 routes connecting over 31

new and 12 under-served airports under the regional connectivity scheme.

The second round of RCS bidding saw significant improvement over the first one, including doubling of the number of RCS flights for priority routes (Northeast, Jammu and Kashmir, Andaman and Nicobar and Lakshadweep islands) and participation by market leader IndiGo and helicopter companies. Under RCS-2 in January 2018, the aviation ministry awarded a whopping 325 routes to 15 airlines and helicopter operators. These routes included 25 new airports and 31 new helipads.

2.2 Taxes on Aviation Turbine Fuel Continue to Hurt

The high growth being witnessed in India is despite the fact that domestic ATF prices in India continue to remain 50-60 per cent higher than at other aviation hubs such as Singapore, Dubai and Hong Kong.

ATF continues to remain outside the ambit of the goods and services tax (GST) which is an anomaly. The ATF price per litre in Delhi in March 2018 is around `61.7 (€0.768), a 14 per cent increase over `54.3 (€0.676) in March 2017.

According to the International Air Transport Association (IATA), the average global ex-refinery price of ATF in March 2018 has risen by 22 per cent to US$ 79.1 (€64.12) per barrel over the March 2017 price. The ATF price shock in India is cushioned since it is not directly linked to the international price movements. The government has the ability to soften the crude oil price shocks by adjusting the high taxes imposed on ATF at the central and state level.

2.3 Infrastructure Needs to Catch Up India is building new airports and expanding

existing ones to meet the growing demand. The bidding process for the second airports in Mumbai and Goa has been completed. Expansion projects in metro airports are

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underway. The new airport at Kannur in North Kerala is expected to be commissioned soon.

The hybrid till system of tariff determination in NCAP 2016 has brought back private sector interest in the airports sector though we have a long way to go. The Airports Authority of India (AAI) is trying to operationalize low-cost, no-frills airports under the government’s ambitious RCS.

The government has further initiated steps with respect to improving airport infrastructure, granting approvals for expanding existing and allowing new greenfield airports to be set up under the public-private partnership (PPP) model. These include airports at Jewar (near Delhi), Bhogapuram (near Vizag), and Dholera (Gujarat).

While the government has shortlisted over 400 aerodromes and airstrips across the country for RCS, the operationalization of such airports would have to be done in a phased manner given budgetary constraints and the fact that there is limited capacity at leading airports, especially at Delhi and Mumbai, to accommodate RCS flights.

2.4 Air Navigation Services are Gearing Up

Airports Authority of India (AAI) is upgrading the air navigation services (ANS) infrastructure. India is one of the only four countries to have an operational satellite-based augmentation system (SBAS), known as GPS-Aided Geo-Augmented Navigation (GAGAN). The government has mandated GAGAN-enabled equipage on all Indian-registered aircraft post January 1, 2019 and retrofitting of all existing aircraft by 2024. Having an SBAS would greatly enhance India’s ability to accommodate more aircraft; reduce flying time, fuel consumption and delays; and ensure safer aircraft operations.

Non-scheduled aircraft operations continue to remain the secondary form of air transport in the country, seeing minimal progress on ground. As of February 2018, there are 111 non-scheduled operator permit (NSOP)

holders in the country, having a mixed fleet of helicopters and fixed wing aircraft. They suffer from policy apathy, high taxation, high airport charges, high operational costs and infrastructure challenges.

2.5 Maintenance, Repair and Overhaul Needs Massive Support

Despite a rising fleet, the MRO industry continues to struggle for relevance. Bad taxation policies and lack of government support continue to inhibit their growth. This is despite the widespread belief that India needs to build its MRO capability especially under the government’s Make in India slogan.

NCAP 2016 aimed at easing the hurdles faced by the MRO industry, such that the Indian MRO market reaches US$ 1.5 billion (€1.22 billion) by 2020 and US$ 2.5 billion (€2.03 billion) by 2025. Structural reforms, growing demand for air travel, expanding aircraft fleet and diffusion of air transport services into the hinterlands of India provide the ideal platform for the Indian MRO industry to transform from being mere line or base maintenance providers to value providers.

2.6 Focus on Tourism is Increasing During calendar year 2017, India saw a total

of 10.2 million foreign tourist arrivals into the country. With the government introducing various religious, cultural and natural tourism circuits, the government aims to double its current foreign tourist arrivals by 2020, to 20 million foreign tourist arrivals. Tourism, aviation and infrastructure sectors have a symbiotic relationship. All three industries bring in investments, economic growth and jobs, especially for the semi-literate.

NCAP 2016 allows open skies to all countries beyond a 5,000 km radius from India. Air India and other Indian carriers are expanding their global network through organic growth and alliances. Infrastructure, cleanliness and safety of tourists is being improved upon and one hopes this is done on a greater priority.

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2.7 Aerospace Manufacturing Needs to Catch Up

The government is taking a slew of initiatives to promote aerospace manufacturing in the country. In February 2018, the Government of Maharashtra signed a memorandum of understanding (MoU) worth `35,000 crore (€4.36 billion) with Capt. Amol Yadav of Thrust Aircraft Private Limited, to facilitate manufacturing of India’s first privately designed aircraft. The venture is expected to generate over 10,000 direct and indirect jobs.

The safety regulator Directorate General of Civil Aviation (DGCA) has issued certification for the civilian variant of the Dornier Do-228 aircraft manufactured by Hindustan Aeronautics Limited (HAL). HAL has been the primary manufacturer of Dornier aircraft in India since the 1980s. It is a 19-seater aircraft with short take-off and landing capabilities and is used widely by India’s defence forces. It is quite suitable for India’s RCS airports with semi-paved or unpaved runways.

The government-run HAL has offered transfer of technology to private companies for manufacturing Dhruv advanced light helicopters (ALH). This is a significant step forward. There existed a significant trust deficit between India’s public and private sector companies, especially in aerospace technologies.

2.8 Seaplanes – A New Bird in Town India has over 7,500 km of coastline and

1,200 islands. In addition there are hundreds of navigable waterbodies – rivers, canals, lakes and dams. All these are grossly under-utilized from a tourism, manufacturing and transportation perspective. Countries in India’s neighbourhood have leveraged their much smaller coastline and islands in a far superior way to generate jobs, economic growth and government revenue.

Seaplanes offer an inexpensive alternative wherein one doesn’t need costly airport infrastructure. Seaplanes have been tried in the past in India but suffered due to lack of

government support, low public awareness and opposition from local communities. All this is likely to change now.

Seaplanes have a prominent mention in NCAP 2016. SpiceJet has already done demonstration flights with seaplanes and has hinted that it may order around 100 aircraft. One hopes that the seaplane regulations are framed quickly and we see seaplane flights at 10-15 locations in the next 12 months. There is a chance that the Japanese company Setouchi Holding may manufacture its Quest 100 seaplanes in India, subject to order size.

3. KEY ISSUES AND RECOMMENDATIONS

3.1 Airlines As mentioned earlier, the airline industry in

India is passing through a high growth phase. Currently, there are 13 airlines in India, namely; Air India, Air India Express, Alliance Air, Jet Airways, Vistara, Air Asia India, IndiGo, GoAir, TruJet, Air Deccan, Zoom Air, SpiceJet and Blue Dart. Among these, TruJet and Air Deccan are primarily focused on RCS. Air Odisha received the air operator’s permit in February 2018, commencing its first RCS flight shortly thereafter.

The domestic air traffic grew by 17.3 per cent during January-December 2017 on a year-on-year basis, with IndiGo as the dominant carrier with 39.6 per cent passenger share. This was followed by Jet Airways with 15.4 per cent and Air India and SpiceJet at 13.3 per cent and 13.2 per cent respectively.

The government has boldly decided to privatize India’s national carrier Air India, something unthinkable till a few years back. It may be sold in four separate parts. Air India, Air India Express and AISATS (wherein Air India has 50 per cent equity stake) are likely to be offered as one package. Other subsidiaries like the ground handling arm – Air India Air Transport Services Limited (AIATSL), MRO arm – Air India Engineering Services Limited

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(AIESL) and regional carrier Alliance Air are to be sold off as separate entities.

As of March 2017, the flag carrier has a total debt of about `48,877 crore (€6.08 billion), aircraft loans worth `17,360 (€2.16 billion) and `31,517 crore (€3.92 billion) of working capital loans. In order to make the deal attractive to bidders, the government has shown an inclination to absorb much of Air India’s non-core debts on to its own balance sheet, while borrowings linked to direct operations are to be retained with the entity on offer.

Indian carriers have one of the largest aircraft order books which, as of June 2017, stands at 1,080 aircraft. As of 2017, India has 2.2 aircraft on order for every aircraft in service, which is one of the highest in the world.

Among the aircraft orders, the low cost carriers account for more than 85 per cent of India’s order book of over 900 aircraft, closely followed by full service carriers. These orders comprise largely narrow-body aircraft, as Indian carriers aim to expand on the short-haul and regional routes both in domestic and international sectors.

Some carriers have placed orders and options for wide-body aircraft too. Some of the wide bodies may be deployed for the low cost long haul (LCLH) flights to the European Union (EU), US, Australia etc. which has a high potential in a price sensitive market like India.

Well-structured lease agreements allow India’s carriers to utilize maximum benefits from newer, fuel efficient aircraft, thereby lowering operating costs and enhancing profitability. Some of these new generation engines have been facing teething troubles leading to grounding of several aircraft by the European Aviation Safety Agency (EASA) and DGCA. These technical problems are expected to be sorted out soon.

Despite recording an average growth of over 17-20 per cent in the last five years, the Indian airline market is susceptible to concerns, driven by extraneous factors. One major area of concern is the rising ATF cost.

As fuel prices remain an extraneous factor beyond the limitations of Indian carriers, the government should look at bringing ATF under the ambit of GST with a flat rate of 12, 5 or 1 per cent. The GST on flight tickets can be made a uniform 12 per cent to offset the losses. Currently the GST on tickets is 5 and 12 per cent on economy and business class respectively. Business class seats form a very small fraction of the seats in domestic flights. This approach will simplify processes and lower ticket fares. The government may end up earning higher taxes thanks to higher demand growth.

3.2 Airports The airport sector in India is set for a rapid

growth. While large cities will see capacity expansion at existing airports and development of second airports in the city, the interiors are seeing old airports being revived under RCS. By 2030, Indian airports are expected to see an investment of over US$ 50 billion (€40.53 billion).

Delhi, with 63.5 million passengers in 2017 is now the seventh largest airport in Asia. This achievement comes along with the major capacity constraints at the airport. Delhi airport handled a record 82 flights per hour in 2017. It will see significant growth when its fourth runway and fourth terminal get commissioned in 3-4 years.

In July 2017, the government gave site clearance for the development of the second airport in the National Capital Region at Jewar. The airport is expected to cost around `20,000 crore (€2.49 billion) over four phases and may see an annual passenger throughput of over 30-50 million within 10-15 years of commissioning.

The foundation stone of the upcoming Navi Mumbai and Mopa airports were laid by India’s Prime Minister Narendra Modi, highlighting the importance being accorded to these projects. Mumbai suffers due to its small landlocked airport being unable to expand. Tourist traffic at Goa is severely constrained due to its existing

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airport at Dabolim being a small naval airport. Both cities will witness their next big phase of growth in the next 3-4 years when the new airports get commissioned.

In February 2018, a Dornier Do-228 aircraft of the Indian Air Force touched down on the runway of Pakyong airport, which is the first airport to be established in the state of Sikkim. This is expected to benefit the state’s tourism-oriented economy, which is heavily dependent on the Bagdogra airport and Siliguri railway station for tourist arrivals.

In addition to the above, around 30 top Indian airports are likely to touch their full capacity over the next 5-10 years. The government should come up with a detailed roadmap for national airport capacity augmentation in consultation with state governments, airlines, travel trade, hospitality industry, funding institutions and other stakeholders. It should be widely shared so that state governments and industry stakeholders can plan their investments, staffing and business activities well in advance.

There is a need for political consensus to amend India’s Land Acquisition, Rehabilitation and Resettlement (LARR) Act 2013 that has made land acquisition extremely cumbersome, especially for economic growth drivers like aviation and tourism. Setting up new airports far away from population centres will raise time, cost and inconvenience of the passengers.

Foreign firms are generally interested in brownfield airports since their cash flows are relatively more predictable and less risky. India permits 100 per cent foreign direct investment (FDI) in brownfield airports. Yet there has been hardly any foreign investors coming in, other than at Bengaluru Airport. In the greenfield airport bids at Navi Mumbai, Mopa and Bhogapuram, there were no bids by global airport companies with the sole exception of Incheon Airport bidding for Mopa.

The hybrid till system of tariff determination in NCAP 2016 has brought back private sector interest in the airports sector though we have a long way to go to attract foreign airport companies. Funding of airports projects

through equity and debt is gradually becoming easier. The NCAP 2016 provisions on open skies and removal of the arbitrary 5/20 rule will show its impact from mid-2018 onwards, when some of the startup airlines start their international operations.

Most brownfield airports, 125 in all, are owned by the AAI, one of the largest airport companies in the world. Globally, large airports are generally owned by private sector, provincial government or city authorities. AAI and the country would gain immensely if AAI leases out 20 of its top airports to private operators. It will free its bandwidth to focus on smaller airports in the hinterland where no private capital is likely to come in the initial phase.

To make PPP in airports succeed, the onerous airport concession agreements have to be redrafted and the tariff approach completely rehashed. The concept of revenue share by airport operator along with tariff uncertainty has hurt Indian aviation. One possible option is for the regulator Airports Economic Regulatory Authority (AERA) to freeze the aeronautical tariffs at a reasonable level and then go for revenue share as a bid parameter. This would make Indian airport charges competitive and predictable. It would also prevent the acrimonious legal disputes between AERA and the industry being witnessed ever since the formation of AERA.

Important hubs around the world such as Beijing, Guangzhou, Hong Kong and Atlanta obtain a significant part of their revenues from the towns and cities situated in their catchment areas. Being large airports, they are complemented by world-class multi-modal transport infrastructure with tremendous ease of access for passengers and cargo from their catchment areas. New airports in the India need to be designed keeping these best practices in mind.

Airlines are introducing wide body aircraft in the domestic sector to address rising demand and constrained slots. Airports are developing rapid exit taxiways to enable lower runway occupancy time and hence higher number of

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flight movements per hour. These need to be done on a war footing.

The ANS need to expand capacity in terms of equipment and manpower. The shift to satellite based navigation system, called GAGAN, in January 2019 will lead to better traffic flow management, shorter flights and lower fuel consumption.

There is a need to introduce biometrics based verification, so that passengers can have a paperless movement from move from cab to aircraft. This will enhance speed of processing and better monitoring of suspicious passengers. The enhanced passenger experience may lead to higher consumer spends at the airport resulting in more jobs, lower airport tariffs and higher tax revenues for the government.

Passenger transfers from domestic to international terminals and vice versa at most Indian airports is done through cumbersome city traffic or on airside coaches. This increases the connecting time and passenger stress levels; and also compromises safety. The government and airport operators need to look at tried and tested models such as those found in Hong Kong and Singapore, where terminal transfers are done through high speed rail connections.

India’s immigration processes need significant analysis, global benchmarking and reforms. The government has done well by doing away with the archaic immigration forms. Intelligence agencies have access to data on all passengers in advance and can run data analytics tools to identify suspicious individuals. Immigration should shift to automatic e-gates like in many developed countries wherein most people who have no reason to be questioned simply walk through.

3.3 Linkage with Tourism India has been late to acknowledge the

importance of tourism as a major source of forex earnings for the country. Despite a rich and vibrant heritage, combined with a long and well-established history, India has failed to be among the top 10 visited destinations of the

world. Despite recording over 9 per cent year-on-year growth seen in forex earnings from tourism, as of December 2017, India only saw over 10 million tourist arrivals, compared to over 60 million tourist arrivals seen in China and earning over US$ 680 billion (€551.23 billion) in foreign exchange. US remains the top country in terms of forex earnings from tourism, at US$ 1.3 trillion (€1.05 trillion) in 2017.

In the last three years, the government has launched several key projects to boost the travel and tourism sector. The government has undertaken significant measures in identifying critical ‘circuits’ of tourism, classified as religious, heritage or cultural tourism sites.

Better marketing of ‘Incredible India’, launch of e-visa facility to over 140 countries, facilitating cleanliness of tourist places, introduction of tourist police, etc. are some of the measures being undertaken to boost tourist inflows.

The government has undertaken a study in identifying iconic locations from each state and giving it a rank as a part of its initiative to identify tourism products. However, it needs to focus on developing last-mile surface connectivity which remains troublesome and downright impossible to access in many parts of the country. Popular tourism destinations such as Himachal Pradesh, Jammu and Kashmir, Sikkim, Uttarakhand and Arunachal Pradesh continue to largely remain inaccessible due to limited multi-modal connectivity.

There is an apparent lack of connection between India’s aviation and tourism policies. Despite the introduction of NCAP 2016, there is little evidence to show any linkage between the two and they remain under the purview of different ministries. The tourism ministries at the Centre and state levels should develop incentive packages around key religious locations in close coordination with the regional connectivity scheme of the aviation ministry to make a greater impact.

3.4 Maintenance, Repair and Overhaul

As highlighted earlier, India’s MRO industry has

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been completely left behind when compared to the scale of growth that the aviation market is experiencing.

The present market size of MRO in India is estimated to be above US$ 1 billion (€810.63 million) of which 90 per cent is spent outside India. Indian carriers prefer to get their fleet serviced in places like Colombo, Singapore, Malaysia, UAE etc due to the regressive tax structure in India. Other challenges include lack of adequate infrastructure, investments and technical capabilities.

A basic requirement for MRO is the presence of aircraft spare parts warehousing and trading companies. Without these, large inventory costs and frequent movement of parts from outside India will hurt airlines’ profitability. India lags in the indigenization of critical engine maintenance capabilities and performing complicated C and D checks. The ‘end-of-lease’ checks are also done outside India.

The introduction of GST in India has nearly sounded the death knell for the struggling sector. MRO comes under the 18 per cent tax slab. Earlier, the MRO industry had customs duty exemption on spares. It also had value-added tax (VAT) exemption on spares in Maharashtra, which houses 80 per cent of the MRO units in India. A GST rate of 18 per cent is now imposed on the entire invoice including cost of spares and labour. In contrast MRO at competing locations in Singapore, Sri Lanka, Nepal, China and Dubai etc levy no tax on MRO, for the simple logic that the object being taxed can easily fly to a more tax-efficient country.

Though GST paid for MRO can be claimed as input tax credits by airlines, the cash implication of 18 per cent GST makes them uninterested in domestic MROs. Their comfort level with reliable, well-reputed MROs in India’s neighbouring countries worsens the matter.

The stagnation of the domestic MRO industry has prevented creation of a robust MRO training infrastructure, which has now become a vicious cycle. MRO is one area where the policy regime has been detrimental to India’s

long-term interests. The jinx has to be broken at the earliest.

The government should reduce the GST incidence on MRO to zero per cent with immediate effect. Mathematically, the government would lose no revenue since zero GST rate means zero tax credits claimed by the airlines. In turn for every new MRO job created in the industry, nearly 40 per cent of the salary will come to the government in the form of taxes on individual income and consumption. The multiplier effect of a highly skilled MRO industry would be the added advantage.

Lack of a robust MRO industry in India would be detrimental to the long-term interests of the Indian aviation industry and the country as a whole.

3.5 General Aviation The general aviation (GA) market in India is one

of the most untapped areas of civil aviation in the country. Despite having one of the largest fleet of business aircraft in entire Asia at nearly 260, India continues to lag behind late entrants such as China and advanced economies such as US, EU and Japan, which have a far more robust GA industry.

While the government is keen on promoting regional connectivity through RCS scheme, it needs to be acknowledged that worldwide, it is GA aircraft that first activate an airport in a remote area that may have potential from a mining, manufacturing, tourism, political or social perspective. GA is then followed by government-subsidized air services followed by market-driven flights by large carriers. If handled well, GA can play a big role in bringing unconnected parts of the India into the aviation grid.

Though the government has allowed participation of non-scheduled and charter operators to bid for UDAN routes, GA continues to remain out of the reach for the masses. The key issues faced by the GA industry include infrastructural challenges, rigid government policies and lack of regulations specific to GA. There is lack of hangar space in metro and

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non-metro airports along with the high charges imposed on them.

At most leading airports there are strict curfew hours around peak times which defeats the very premise of GA, that is, timing flexibility and personal comfort. MoCA should consider releasing at least 5 slots per hour for GA during peak periods at a reasonable premium for those who are willing to pay.

Whether it is filing of an advanced flight plan by a charter operator or obtaining clearance for a training flight at a commercial airport, the general apathy towards GA leads to inefficiencies, delays, customer irritation and financial losses for the GA operator. Hence most of them have remained small in scale, with barely 1-3 aircraft in their fleet.

All major Indian cities will need small airfields for GA. For instance we have Teterboro in New York, Le Bourget in Paris and Seletar in Singapore. MoCA and the states need to plan for the same, given the huge challenges in land acquisition.

MoCA should upgrade airside and landside infrastructure at ten top airports in Tier 2/3 cities that have high GA potential, independent of the UDAN scheme. This should include night-landing facilities, enhancement of passenger amenities and state support in statutory services, like security, utilities, connectivity etc. Within a few years, the said airports may attract RCS and non-RCS air traffic.

GA facilities at metro airports need an upgrade in terms of a dedicated terminal, apron and parking space along with fair tariffs which are monitored by the regulator AERA. MoCA must establish a digital database to monitor the number of air-strips and helipads operational in India.

The huge import duty on private aircraft should be rationalized. This only forces individuals to bring in aircraft through other categories to avoid paying the taxes. No one gains.

DGCA should have a separate cell for GA as per NCAP 2016. DGCA should develop GA regulations in consultation with the industry, like in developed nations. In some cases,

industry sources reveal, the DGCA regulations are far more onerous and restrictive than the US's Federal Aviation Administration (FAA) and EASA. Routine approvals at DGCA should be made online at the earliest, to prevent needless delays and harassment of industry stakeholders.

The helicopter industry has failed to grow. Globally helicopters find significant applications in urban mobility, medical evacuation, law and order, search and rescue, tourism and entertainment etc. Most of these are unheard of in India.

India has just around 260 helicopters. Over 70 per cent of their flying hours, according to industry sources, are accounted for by just around 40 helicopters deployed in the offshore oil-rigs, which indicates that the rest are either under repairs or are severely under-utilized. In comparison, the city of Sao Paulo in Brazil has over 700 registered helicopters and over 500 helipads. USA is far ahead with over 14,000 helicopters.

Helicopter operators complain of maltreatment and high charges at metro airports since these are not regulated by the tariff regulator, AERA. NCAP 2016 stipulated that airport charges for helicopter operations will be suitably rationalized. The same needs to be implemented on priority.

Religious tourism in India draws millions of people across different income strata. Since many of the religious locations involve difficult terrain and a strenuous trek, heli-taxis have a huge potential, especially for senior citizens, children and the differently abled. The success of heli-taxis at the Vaishno Devi shrine is an eye-opener. It needs to be replicated all across the country.

Pawan Hans has set up India’s first heli-port at Rohini in North Delhi. The plan is to use it to provide urban mobility between different parts of the National Capital Region and North India. Bengaluru Airport has recently commenced a heli-service between the airport and the city. Rohini and Bengaluru are harbinger of good things to come.

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The government has taken a bold step of privatizing the state owned Pawan Hans Limited by offloading its 51 per cent equity stake in the company. The first round of bidding has not yielded expected results, which highlight the need to reform and support the helicopter sector further. Hopefully the second round of bidding may lead to a good player taking over Pawan Hans.

With the expanding civil helicopter industry the demand for pilots is ever increasing. A vast majority of helicopter pilots come from the armed forces. There is a need to develop training facilities for civilian pilots. GA training in India is largely dominated by small flight training institutes, operating single or dual engine propeller aircraft for training cadet pilots. This needs to change.

Rooftop helipads need to be built over metros stations, railway stations, stadia, key buildings and near highways for rapid evacuation in case of an emergency. MoCA should work with ministries of railways and highways; insurance companies, helicopter operators and hospitals to evolve a cashless system for medical evacuation.

NCAP 2016 allows helicopters to fly without prior ATC clearance as long as it stays below 5000 feet and does not enter restricted areas. However the defence ministry still insists on an Air Defence Clearance, which defeats the utility and quick response time of the helicopter. The Air Defence Clearance for non-restricted areas should be done away with. For the rest it should be available expeditiously through a phone-based app.

Amphibious aircraft should be brought under UDAN, the regional connectivity scheme. UDAN currently doesn’t allow single engine aircraft. This may need to be amended since most seaplanes operate with a single engine. Since amphibious aircraft operate from jetties, the same shall need to be added to the list of eligible airfields under UDAN.

3.6 Air Cargo The air cargo market in India is undergoing a

transformation similar to that in the passenger market. Introduction of RFID, e-freight and development of dry ports across the country has resulted in a stable growth for cargo market in India, despite a global slowdown in this industry.

India recorded a 17.6 and 8.4 per cent growth in international and domestic air cargo respectively during the ten month period Apr 2017 to Jan 2018. While textiles, commodities and perishables remain traditional air cargo products, the growth of e-commerce and consumer electronics has emerged as a key driver of growth in India.

The Government of India plans to reduce the high cost of logistics in the country from around 14-15 per cent of GDP currently to less than 9 per cent. It also plans to improve India’s Logistics Performance Ranking from 35 to 15 by 2020, which will be extremely challenging through not impossible.

MoCA has undertaken many initiatives to better understand the requirements of the air cargo market. It has conducted a study on dwell-times at Indian airports vis-à-vis other international hubs such as Singapore and Hong Kong. The findings are helping MoCA, other statutory government agencies and industry stakeholders in identifying specific bottlenecks and fixing them.

The dwell time for air cargo has gradually been reduced to less than 48 hours from over 72 hours earlier. The government has facilitated 24x7 Customs operations at over 13 airports. It has also introduced a single-window clearance system for air cargo at many airports.

Much of the air cargo segment relies on last-mile connectivity which is still a significant challenge in tier-2 and tier-3 cities. Last mile road connectivity, presence of multi-modal transport connectivity and digital cargo processing are areas that need to be worked on in a mission mode.

India has a unique opportunity to become a trans-shipment hub especially for countries in South Asia. This requires seamless coordination between industry stakeholders,

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customs and security. Rules related to ramp to ramp transfers and cargo inspection need to be eased up at the earliest.

An Air Freight Station (AFS) allows shippers and other stakeholders to complete their documentation and palletization without crowding the cargo facility at the airport. Given the capacity constraints at major airports such as Mumbai and Delhi, implementation of private AFS across major cities remains the need of the hour.

The imposition of 18 per cent GST on export related services is hurting competitiveness. The government should consider abolishing GST on export related services or allocate the 5 per cent GST slab for the sector.

3.7 Skill Development For sustainable long-term growth of the

aviation sector, development of skilled manpower is critical. There are a host of challenges to be addressed on this front.

The government is taking various initiatives, including the setting up of a dedicated university called the Rajiv Gandhi National Aviation University (RGNAU), which aims to provide high-quality aviation education and research. The university is working with the industry to develop curriculum and pedagogy that is linked closely to industry’s current and future requirements.

The Aerospace and Aviation Sector Skill Council (AASSC) has been set up by the government to ensure adequate supply of highly skilled workforce for the industry. Various skill development programs, both governmental and corporate, are being rolled out by AASSC through its training partners.

India’s safety regulator DGCA has introduced new CAR 66 and Part 147 standards, which would enable Indian aircraft maintenance trainees to be at par with the standards laid down by the

EASA. Establishing such equivalence would allow the regulator to better monitor the training standards of the Aircraft Maintenance Engineer (AME) training institutes and provide an option for students keen on overseas employment.

Pilot training remains a complicated process, with loopholes in quality monitoring standards for both instructors as well as institutions. Given the growing requirement of pilots in the coming decades, DGCA should reconsider the compulsory requirement of physics, chemistry and mathematics to undertake pilot training, along the lines of FAA.

Similarly, licences for additional courses such as Flight Radio Telephone Operators’ Licence (FRTOL) should be brought under the ambit of the DGCA to ensure maintenance of aviation standards and minimal inter-ministerial confusion.

The government must also consider complete digitization of licence application procedures. Each phase of evaluation after completion of the mandatory pilot training course should have a definite response time.

Training of Air Navigation Services staff continues to be under the ambit of the government. While the Civil Aviation Training Centre (CATC) at Allahabad has signed cooperation agreements for training with the ATC facilities at Gondia and National Institute of Aviation Training and Management (NIATAM) in Hyderabad, manpower shortage continues to linger as a major hurdle in India.

It would be prudent for the government to consider allowing private players to set up ANS training facilities under the watchful eyes of the AAI and DGCA experts. These institutions may be developed on private-public partnership model between AAI and private entities and gradually transferred completely to the private entities once they establish due maturity.

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4. CONCLUSION Indian aviation is currently in a sweet spot.

The economy is on a growth path, crude oil prices are relatively stable, propensity to spend on air travel is growing and the overall policy environment is highly supportive of the aviation industry. Large aircraft orders have been placed by Indian carriers. New airports capacity is being built on a war footing and will come on-stream in the next 3-5 years. State governments that have traditionally been apathetic to aviation are now actively wooing airlines and airport companies to invest in their states.

If the proposed improvements in infrastructure, skilling and regulatory mechanism are implemented in letter and spirit, the next decade

belongs to Indian aviation. Close collaboration between MoCA, other overlapping ministries, regulators and industry stakeholders is key.

Europe has been a significant part of Indian aviation’s growth story, supplying fixed wing aircraft, helicopters, private jets; equipment for airports and ANS; IT, training, maintenance and other services. As one of India’s largest bilateral trading partners, European countries can play a significant role in the development and evolution of India’s civil aviation and aerospace market.

EBG Federation is confident that with the support of a reform-oriented government and favourable global tailwinds, the Indian aviation industry is well set to achieve its vision of becoming the number one market by 2030.

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Notes

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BANKING Acknowledgements: Radha Dhir (Deutsche Bank) – Chairperson, Banking Sector Committee & its Members

Knowledge Partner: Jairaj Purandare – JMP Advisors

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EXECUTIVE SUMMARY

tenure external commercial borrowings (ECBs) can be raised by infrastructure companies, particularly where there is a natural hedge available.

3. Dealing with the issue of expiring international investment agreements that India has executed with European countries.

4. Acknowledging the role of custodians in facilitating foreign portfolio investments, the rights, duties and obligations cast on such custodian and freeing them from the risk or exposure of tax attributable to the foreign portfolio investors, recognizing that regulations should capture the risk of loss of revenue rather than placing it on the custodian who is only a facilitator.

5. Dealing with issues relating to Masala bonds.

Key Tax Considerations

The tax issues are summarized in detail in the paper. Some of these issues have been a challenge for foreign banks in India for a few years now and EBG would urge a speedy resolution to these if found suitable in the context of the overall policy framework of the government.

The banking sector in India has witnessed phenomenal changes since liberalization of the economy and over the years, some of the largest banks in the world have set up presence in India. The European banks operating in India supplement the strong economic partnership between India and Europe and support the business interests of Europe in India.

While acknowledging the efforts of the government to bring in reforms for the banking sector, the EBG Federation would request that efforts may be directed towards certain issues which still remain unresolved. In order to facilitate the government’s efforts in addressing the issues faced by European banks in India, EBG has set out key regulatory and tax concerns as enumerated below.

Regulatory/Commercial Considerations

In 2018, EBG proposes to identity and focus on:

1. Reworking the priority sector norms to align them with the overall status granted to foreign bank branches operating in India regardless of the number of branches and scale of operations.

2. Expanding the situations in which shorter

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1. INTRODUCTION Based on the recent announcements made by

the Indian Finance Minister in Budget 2018-19, EBG believes that this government attaches much importance to the banking and financial services sector in India. While several reforms have been announced for banks in the past few years, EBG believes that it is necessary to continually refine the policies to improve the banking business. To achieve this goal, EBG is pleased to present this paper which discusses the key regulatory and tax issues which could act as a roadblock for the European banks operating in India.

2. GENERIC INDUSTRY ISSUES

2.1 Key Regulatory Issues• Priority sector lending requirements

• Issue in relation to expiry of guarantees

• Guidelines on ECBs

• International investment treaties

• Issue relating to foreign portfolio investors

• Masala bonds

2.2 Key Tax Issues• Tax issue relating to foreign portfolio

investors

• Interest paid by Indian branch of a foreign bank to its head office/overseas group offices

• Tax regime for India-based fund managers

• Tax treatment of interest income earned by non-banking financial companies on non-performing assets

• Deduction for provision for non-performing assets

• Income Computation and Disclosure Standards

• Tax issues in connection with conversion of Indian branches of foreign banks into subsidiaries

• Thin capitalization norms

3. KEY ISSUES AND RECOMMENDATIONS

3.1 Key Regulatory Issues

3.1.1 Priority sector lending requirements

Background

The Reserve Bank of India (RBI) revised the Priority Sector Lending (PSL) norms applicable to commercial banks operating in India in July 2012. The revised PSL norms place foreign banks with 20 or more branches in India at par with Indian banks. Such foreign banks were granted the flexibility to achieve these norms within a five-year period to end on March 31, 2018. Foreign banks with less than 20 branches were permitted to retain their original PSL obligations, with no sub-limits within the overall PSL norms.

The PSL guidelines were further modified on April 23, 2015 by RBI (‘final PSL guidelines’). (For the changing scenario of PSL norms for foreign banks in India over the recent past, see table on Pg. 66.)

Recommendations

EBG seeks to address the issue from three perspectives:

• In terms of the capabilities and global experience of EBG constituents in areas where we believe we add value to the Indian economy.

• Areas in which we lack both global and domestic expertise which we believe we should be exempted from.

• Areas which require minor regulatory changes to increase the flow of credit to needy segments of the economy.

EBG makes the following recommendations:

(i) EBG recognizes the need for the approach adopted by the RBI and agrees that banks present in India should all in one way or another participate in reaching RBI’s objectives. However, different banks have different expertise and capabilities.

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Accordingly, while all banks should be required to fulfil PSL targets, EBG recommends that the choice of achieving priority sector should be left to the banks discretion, with such discretion being exercised within a wider range of RBI approved PSL target segments.

(ii) Widen the definition of priority sector eligible categories

EBG recommends that the components of priority sector for the purpose of achieving PSL targets should be widened to include:

a. Export finance (for foreign banks with 20 or more branches): Need to reinstate ‘export’ as a PSL eligible asset. Promoting exports is a major priority for the Indian government’s Make in India campaign and foreign banks can play a significant part in this. Removing export finance and

replacing it with sectors that foreign banks are unable to cover could risk harming an important source of finance for Indian exports. This would also tie in well with the global network strengths of international banks in terms of cross border trade flows.

b. Infrastructure sector lending: As per the PSL guidelines, bank loans up to a limit of `15 crore (€1.87 million) to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification are considered as PSL. Given the importance of the renewable energy sector and the fact that it is not viable to run a project in this sector with `15 crore (€1.87 million), EBG

PSL Targets PSL norms before July 2012

Revised PSL norms issued in July 1012 (banks with 20 or more branches)

Revised PSL norms issued in July 2012 (banks with less than 20 branches)

Revised PSL norms issued in April 2015 (banks with 20 or more branches)

Revised PSL norms issued in April 2015 (banks with less than 20 branches)

Overall PSL targets

32% 40% 32% 40% 40%

Agricultural lending

Nil 18%1 Nil 18% (8% sub-target for small and marginal farmers2 to be decided in 2017)

Nil

Micro and small enterprises (MSE)

10% Nil3 Nil Nil (7.5% sub-target for lending to micro enterprises to be decided in 2017)

Nil

Export credit 12% Nil Nil Nil Nil

Weaker sections of society

Nil 10% Nil 10% Nil

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recommends an increase in the limits from `15 crore (€1.87 million) to `150 crore (€18.67 million).

Also, the scope of PSL activities should be expanded to cover higher exposure to sectors such as service, warehousing, energy and higher education which are already existing PSL areas.

c. Indirect lending to the agricultural sector, MSE advances, lending to weaker sections of the society without any specific sub-targets (for foreign banks with 20 + branches), and finally,

d. Lending to non-banking financial companies (NBFCs) and other eligible institutions for onward lending to priority sectors.

(iii) Allowing the services of non-deposit taking NBFCs (NBFCs-ND) as ‘business correspondents’ for PSL assets.

(iv) The ‘business correspondent’ (BC) norms and distance criteria were relaxed for domestic banks vide RBI circular (RBI/2013-14/653 DBOD.No.BAPD.BC.122/22.01.009/2013-14) dated June 24, 2014, this circular however was not applicable to branches of foreign banks in India. The current PSL guidelines applicable to foreign banks with 20 or more 20 branches are in line with domestic bank’s requirements; hence extending the scope of the guidelines on BC norms and relaxed distance criterion to foreign banks with 20 or more branches would greatly help us in achieving priority sector lending targets. We would therefore like to reiterate the request to extend the following relaxations to foreign banks with 20 or more 20 branches in line with domestic banks. It would enhance the ability of the banks to originate PSL assets organically.

(v) The framework for priority sector lending certificates (PSLCs) be widened to include RBI regulated NBFCs and microfinance institutions. These would lead to a

deepening of the market place and true price discovery.

(vi) A new PSLC category

PSLC exports should be introduced to assist smaller banks with less than 20 branches meet the 40 per cent criteria. This allows larger banks to continue to originate export credit despite the reduced emphasis and allows foreign banks with less than 20 branches access to a market trading platform for meeting their obligations under ‘exports’.

(vii) Proposed sub-target in small and marginal farmers lending targets

The revised priority sector lending (PSL) guidelines indicate the possibility of implementation of sub-target of 8 per cent of adjusted net bank credit (ANBC) for lending to small and marginal farmers after a review by RBI in 2017. Foreign banks, including those with 20 or more branches, should be exempt from this sub-target of lending to small and marginal farmers. Agriculture is a new target segment and given the lack of expertise, geographic reach and credit experience, it has been extremely difficult for foreign banks to direct 18 per cent of their entire lending to this sector. The numbers sought to be achieved over the next two to four years constitute an inherent systemic risk. Foreign banks have no experience either in India or globally in lending directly to small and marginal farmers. We recommend that foreign banks including those with 20 or more branches be exempted from this mandatory lending to small and marginal farmers.

(viii) Micro, small and medium enterprises (MSMEs)

a. MSMEs typically operate in industrial clusters. Such clusters are usually at non-metro centres. Accessing these centres is difficult for foreign banks. Hence, we recommend the proposed sub-target for lending to micro enterprises should not be imposed

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on foreign banks, including foreign banks with 20 plus branches. This can be considered or evaluated five years post-stabilization of PSL certificate scheme.

b. The service sector toady is the largest contributor to the Gross Domestic Product (GDP). With increasing urbanization this will only increase. Whilst rebalancing the economy towards manufacturing is an important goal, continuing growth of the services sector is equally critical. Hence the cap on credit limits to services sector of `100 million (€1.24 million) should be removed.

(ix) Market structures: On-lending, securitization and assignments

Over a period of time, RBI has deemed on-lending to NBFCs involved in lending to the priority sector segments as being ineligible for PSL purposes. EBG believes that reintroduction of credit enhancement in assignment transactions can significantly boost flow of credit. A control mechanism to check PSL contribution and KYC (know your customer) policy adherence could be defined for this purpose. Separately, it is EBG’s view that the interest rate cap should be delinked from the base rate of the investing/purchasing bank to provide a level playing field for all banks. It is EBG’s recommendation that the interest rate cap regulation should be withdrawn and free market risk-based pricing should be permitted.

(x) Based on the data published by RBI4 overall weaker section achievement at banking system level has never crossed 10 per cent since 1991. Data for March 2015 indicates that only PSU banks achieve their weaker section targets (marginally above the target of 10 per cent). Private sector banks, which also use business correspondents extensively, have averaged at around 6 per cent on weaker section achievement. Average achievement for foreign banks with 20 or more branches for weaker section is at 0.9 per cent of ANBC. Further, most of weaker section asset book at the banking industry level is done by lending to small and marginal farmers which requires deep rural penetration and such network is not accessible to foreign banks.

Hence to achieve weaker section numbers foreign banks with 20 or more branches are required to buy small and marginal farmers (SF/MF)PSLCs, resulting in indirect loading of SF/MF targets as well. Since the banking system at an aggregate level does not have surplus in weaker section category, the availability of these PSLCs is currently less (with high cost) and there is no certainty of their continued availability.

In view of the above factors, achieving weaker section through self origination or PSLCs is unlikely to be sustainable for foreign banks having 20 or more branches.

(xi) Quality activities undertaken by banks for CSR activities

Specific to certain areas such as financial literacy and promoting financial inclusion

PSL Category Targets as % of ANBC

Remarks

Agriculture 8% Other foreign banks with less than 20 branches do not have agricultural targets.

General exports 10% Exports sub-target to be a cap. This is low compared to other foreign banks with less than 20 branches which can go up to 32% in exports.

Overall PSL target 40%

Of which weaker section

2% Other foreign banks with less than 20 branches do not have weaker section targets.

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as PSL, or alternately permit a set-off against the ANBC numbers which define the overall OSL targets.

(xii) Adapt the inter-bank participation certificate (IBPC) scheme to permit full participation benefits for both originator and investor.

(xiii) Reduction in sub-targets

EBG recommends the following changes in PSL guidelines for foreign banks having 20 or more branches) to ensure a level playing field with other foreign banks and also to support export credit growth:

a. Re-introduction of sub-target for general exports (as per norms for other foreign banks) up to 10 per cent of ANBC which should be carved out of agricultural targets i.e. commensurate reduction in agricultural targets.

b. Foreign banks do not have requisite presence to originate loans to small and marginal farmers. Hence RBI has appropriately given them exemption from targets for SF/MF. This segment constitutes vast majority of weaker section achievement at banking system level. We request RBI to reduce weaker section targets to 2 per cent in line with non-SF/MF weaker section percentage for rest of the banking system.

In addition, we also request continuation of the existing dispensations:

a. To continue with exemptions on targets for micro enterprises and SF/MF.

b. Foreign banks to be allowed to maintain agricultural PSL numbers on year end basis as against the quarterly average requirement.

The aforesaid changes, if approved, will result in PSL targets for foreign banks having 20 or more branches) as under:

(xiv) Formulate regulations to allow banks to coinvest/co-originate along with regional/local financial institutions; any loans originated under such partnerships should be counted as meeting the applicable PSL

target. Guidelines on co-origination of such loans with such institutions to support banks with limited branch network should be provided.

3.1.2 Expiry of guarantees

Background

Section 28 of the Indian Contract Act, 1872 was amended in January 2013. Pursuant to this, a minimum claim period of one year is required to be made available to the beneficiary of a guarantee issued by a bank even if this is not required by the underlying contract between the beneficiary and applicant.

Issues

In the absence of a claim period, a strict legal interpretation suggests that the law of limitation would apply and the issuing bank could remain liable for a period of three years after expiry for private beneficiaries and for 30 years for government beneficiaries. If this is reflected in risk measurement, the tenors, risk weighted assets and capital requirements will all increase resulting in additional costs to the applicant and the bank.

This amendment appears to go beyond the commercial intent and is open to multiple interpretations. Banks are awaiting a decision of the Supreme Court in a case pending on a similar matter before implementing the amendment in the Indian Contract Act, 1872. While the outcome of this ongoing case may not necessarily clarify the interpretation of the recent amendment, it could provide some useful guidance.

3.1.3 Guidelines on ECBs

Background

EBG understands that the RBI has issued a revised framework for ECB vide A.P. (DIR Series) Circular No. 32 dated November 30, 2015 (Revised Guidelines), which was further amended vide Circular No. 56 dated March 30 , 2016 (Prevalent Guidelines). The hedging requirements have been clarified vide A.P. (DIR

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Series) Circular No. 15 dated November 7, 2016.

Issues

With respect to ECBs in favour of companies in the infrastructure sector, EBG acknowledges certain accommodation of RBI vide the Prevalent Guidelines vis-á-vis the Revised Guidelines allowing now shorter tenured ECBs as permissible under Track I towards companies in the infrastructure sector as long as these exposures are fully hedged. This is of special relevance as:

(a) ECBs for all capital equipment and services would seem unavailable under Track II given average maturities of 10 years and more challenging, given the vast infrastructure financing needs.

(b) The economic useful life of the financed equipment required by the Infrastructure Company may be shorter than the stipulated minimum average tenor of ECBs.

(c) ECBs may be for expansions, modernization or for regular operational expenses not involving any or a longer gestation period and hence longer tenors.

(d) Companies in the infrastructure sector may have foreign currency inflows or rupee denominated foreign currency inflows which allow them to naturally hedge ECBs denominated in other currencies than Indian rupees. Natural hedge, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows / revenues in matching currency, net of all other projected outflows. Revenues in Indian rupees indexed to foreign currency are explicitly not to be considered as natural hedge.

(e) Adherence to the Revised Guidelines is in certain cases not in line with the arrangement developed by the Organization for Economic Cooperation and Development (OECD) on officially supported export credit (OECD Consensus). Under the OECD Consensus, governments provide officially supported export credits through Export

Credit Agencies (ECAs). Such support can take the form of either official financing support or pure cover support. This leads, from the perspective of companies in the infrastructure sector and projects in India, to enhanced credit terms, e.g. extended tenors as well as interest costs or opens access to subsidized long-term fixed interest rates.

Recommendations

In light of the vast financing requirements of the infrastructure sector in India, EBG is of the view that changes made as under the Prevalent Guidelines address the aforementioned aspects adequately with respect to the shorter permissible tenors, especially as shorter tenors also in line with the OECD Consensus are being allowed.

However, EBG sees the need for further adjustment regarding the provisions of the hedging requirement as ECBs towards the infrastructure sector are clearly being hampered. EBG therefore and in consideration of the reasons RBI might have had for publishing the Revised Guidelines as well as the Prevalent Guidelines, makes the submission that (a) revenues in Indian rupees indexed to foreign currency should be allowed for as natural hedge and (b) given the character of official financing support and its benefit for the infrastructure development in India, ECAs covered transactions towards the infrastructure sector, should be exempted from the hedging requirement fully.

3.1.4. International investment treaties

Background

International investment agreements (IIAs) ensure investors compliance with internationally agreed standards of protection. From the point of view of the countries of origin of the investors such IIAs are important corner stones to support the internationalization of their industries. Therefore, EBG member countries have linked certain support schemes linked to foreign direct investments to the existence

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of such IIAs. Likewise, the country that receives these investments generally benefits economically, socially as well as politically from such foreign investments making them aspirational for all signatories of an IIA.

Issues

Bilateral IIAs between India and certain EBG member states have either ended or are about to end in due course. With this EBG foresees a hampering of the investment appetite of European investors into India. Likewise, certain promotional schemes for foreign direct investors linked to the existence of IIAs will not be available to investors, making investments into India less attractive.

Recommendation

To ensure that banks can continue supporting financing foreign direct investments into India, EBG recommends extension of the IIAs.

3.1.5. Issue relating to foreign portfolio investors (FPIs)

Background

Foreign banks operating in India facilitate foreign investment by FPIs by acting as custodians (cash and securities) for the FPIs invest into India. Prior to introduction of the Securities and Exchange Board of India (SEBI) FPI Regulations, 2014, the role of the custodian entailed provision of custodial services (such as maintaining accounts of securities, undertaking activities as a domestic depository, collecting the benefits or rights accruing to the client in respect of securities, keeping the client informed of the actions taken, maintaining and reconciling records etc.) With the introduction of FPI regulations, custodians are now notified designated depository participants (DDP) with even more responsibilities (such as granting registration to FPIs surrender of registration, monitoring/clubbing of investment limits and other related responsibilities).

Issue

While on one hand, they are treated as

extensions of SEBI and expected to administer the registration process for FPIs, on the other hand, their operations as a custodian expose them to tax challenges.

Given that the FPIs are taxpayers in India directly, there is complete KYC as per Indian regulations to be applied to such FPIs as per Indian regulations to be applied to such FPIs and the larger role of a DDP, it is important to release the custodians of the tax risks associated with discharging the custody function. This is also important given that the income that a DDP earns form activity of an FPI is very small relative to the potential tax exposure of the FPI that can devolve onto the DDP.

Recommendation

EBG recommends that a separate carve out be made for DDPs in respect of their FPIs from treatment as ‘agents/representative assessees’.

3.1.6. Masala bonds

Background

Masala bonds are “bonds denominated in INR and settled in any foreign currency”, issued offshore. The issuer of Masala bonds is guarded from currency fluctuations as they are issued in the local currency of the issuer. The investor on the other hand, bears the risk of currency fluctuations.

Masala bonds can be issued by:

• Any corporate (entity registered as a company under the Companies Act, 1956/ 2013)

• Body corporate (entity specially created out of a specific act of Parliament)

• Real estate investment trusts (REITs)

• Infrastructure investment trusts (InvITs) coming under the regulatory jurisdiction of the SEBI

RBI has also allowed Indian banks to issue tier 1 and tier 2 bonds and bonds for lending to the infrastructure sector through the Masala bond route in November 2016. Other resident entities like limited liability partnerships and

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partnership firms, etc. are not eligible to issue these bonds. Any proposal of borrowing by eligible Indian entities by issuance of Masala bonds would be examined by the Foreign Exchange Department, RBI.

The bonds can assume any form so long as they remain non-convertible and in vanilla form. They can either benefit from a fixed or floating coupon rate. They always need to be denominated in rupees and settled in a freely convertible foreign currency. Further, they can be issued publically or placed privately. Listing of these bonds is not mandatory.

Issue

As Masala bonds have a minimum maturity period, it would affect the ability of subscribers to demand and include, standard international “change of control put clause” or typical “tax call option clause” which gives the issuer the right to redeem the bonds should there be an adverse change in the tax laws.

Further, ceiling limit regarding corporate bonds and Masala bonds for foreign investors are

preventing Indian corporates from raising further debt from foreign investors, which places the burden of lending on Indian banks and financial institutions compared to the interest income. This could have an adverse impact on appetite of foreign investors for further investments in India.

Masala bond restrictions on parent-subsidiary debt finance prevent multinational corporations (MNCs) to fund their subsidiaries and joint ventures, which reduces the cost-effectiveness of Make in India ventures by such MNCs.

Recommendation

EBG recommends that material enhancement of corporate bond limits for foreign investors should be considered given India’s need for diversifying asset stress from banks to debt capital markets, coinciding with robust foreign investor appetite which is currently capped. The same may be considered as a US dollar denominated limit pegged to the GDP, to address similar issues in future and provide continuing support to a fast growing economy.

Particulars Issue involved

Amount of borrowing With effect from October 3, 2017, Masala bonds will no longer form a part of the limit for FPI investments in corporate bonds. They will form a part of the ECBs and will be monitored accordingly.

Minimum maturity The minimum maturity period for Masala bonds raised up to US$ 50 million (€40.53 million) equivalent in ` per financial year should be 3 years and for bonds raised above US$ 50 million equivalent in ` per financial year should be 5 years. In case the subscription to the bonds/redemption of the bonds is in tranches, minimum average maturity period should be 3/5 years, as mentioned above.

All-in-Cost The all-in-cost ceiling for such bonds will be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity.

Exchange Rate Conversion Market rate on the date of settlement

Leverage Ratio As prescribed by the regulator

Others Offer document should enable the borrower to obtain the list of the primary bond holders and provide the same to regulatory authorities in India, as and when required. Offer document should also state that the bonds can only be sold /transferred/offered as security overseas subject to compliance with IOSCO/FATF jurisdictional requirements.

Other issues

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It is further recommended that MNCs providing debt funding to their majority owned subsidiaries either via corporate bond route or masala route should be permitted, to support the Make in India campaign for such MNCs. The same may be extended to investments by group companies of such MNCs since international investments are usually made via financial centers and holding company entities.

3.2 Key Tax Issues

3.2.1 Tax issues relating to FPIs

Background

Foreign banks play a very important role in facilitating Indian portfolio investments by FPIs by providing custody and banking services to such investors. Further, a number of international securities broking service providers have established business in India and such entities provide broking services to FPIs transacting in Indian securities.

Issues

There could be several material tax considerations for foreign banks and on Indian subsidiaries of international broking businesses which transact extensively with FPIs:

(i) There is an exposure under the Indian tax law that such entities could be held to be representative assesses of their non-resident clients [which will include their foreign institutional investor (FII) clients]. As representative assessees, such entities could be held to be responsible for discharging any shortfall in tax payments due by their clients. Such entities are merely service providers and the fees that they may earn from providing services to their non-resident clients have no linkage with the possible tax exposure of their clients. Hence, if these entities are required to discharge the tax liability of their clients, it could result in a substantial tax burden;

(ii) Further, an amendment to the Indian tax laws was made in FY 2012-13 by virtue of

which, the period for issue of notices for reopening tax scrutiny cases issued to representative assesses of non-resident taxpayers has been extended from two years to six years. This further enhances the exposure for such entities in relation to matters which the entities do not regard as justly being their responsibility.

Recommendation

Banking and broking services providers should not be held to be responsible for the tax liability of their non-resident clients. Such entities have no ability to determine the possible tax liability of their clients, and as such are in no position to exercise any diligence in this regard beyond placing reliance on undertakings provided by their clients and/or advice received from tax consultants. Under the circumstances, it is EBG’s recommendation that a specific clarification should be provided so that banking and broking service providers are not held as representative assessees of their clients.

3.2.2 Interest paid by Indian branch of a foreign bank to its head office/overseas group offices

Background

The Finance Act, 2015 amended the provisions of the Indian tax law to tax the interest that is paid by the Indian branch of a foreign bank to its head office/overseas group office, by treating the Indian bank branch (on the one hand) and its head office/overseas group office (on the other hand) as separate and independent entities.

Issue

If the interest payments by an Indian branch of a foreign bank to its head office/overseas branch offices are taxed, it is likely to have an adverse impact on foreign banks in India. Foreign banks may end up paying tax in India at a rate as high as 40 per cent (plus surcharge and education cess) on the interest that they earn form their Indian branch office, unless they try to seek relief under their respective tax treaties.

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Recommendation

It is recommended that this amendment is withdrawn with retrospective effect.

3.2.3 Tax regime for India based fund managers

Background

In certain cases, the presence of fund managers in India may be considered as constituting a permanent establishment (‘PE’) for the offshore funds managed by such fund managers. This may create an additional exposure for the offshore fund and may increase its tax liability in India. Thus, to encourage fund managers to shift their base to India and to alleviate their concerns regarding additional tax consequences as result of this shift, the Finance Act, 2015 had clarified that management of an eligible offshore fund by an eligible fund manager in India shall not create a business connection for the eligible offshore fund in India, subject to certain conditions. Though some of the conditions were relaxed by the Finance Act, 2016, this was not sufficient impetus for the fund managers to move their base to India. Budget 2017 also addresses only one of the many concerns of the fund managers.

Issue

Of the conditions notified in order to be outside the purview of creating a business connection, several are impractical and onerous to comply with. For instance, 5 per cent limit on direct or indirect participation of non-residents in the corpus of the fund, requirement of members of the fund not being connected persons, limit on direct or indirect participation interest of the members in the fund, etc.

Recommendation

It is recommended that the conditions notified, in order to be outside the scope of creating a business connection should be simplified. Further, the India based fund managers should not be viewed as having a business connection or constituting a PE of the offshore fund in India as long as the offshore fund conducts all its activities in accordance with the applicable regulations of the home country and if the offshore fund

adequately compensates the India-based fund manager on an arm’s length basis.

3.2.5 Tax treatment of interest income earned by NBFCs on non-performing assets (NPAs)

Background

As per RBI directions, banks as well as NBFCs are required to recognize income from NPAs when such incomes are actually realized. Accordingly, under the Indian tax law, various specified banks, financial institutions and state financial corporations are permitted to offer to tax the interest income on NPAs on cash basis rather than accrual basis.

Issue

In accordance with the directions issued by RBI, NBFCs also follow prudential norms and like the aforementioned institutions, NBFCs are mandatorily required to defer income recognition in respect of their NPAs. However, under the Indian tax law, there is no provision which permits NBFCs to offer to tax the income from NPAs on cash basis. Therefore, even NBFCs registered with RBI should be allowed to recognize interest income on NPAs on cash basis, at par with banks.

Recommendation

The Indian government should allow NBFCs to offer to tax the interest income that they earn on NPAs on a cash basis rather than on accrual basis.

3.2.6 Deduction for provision for NPAs in the books of foreign banks

Background

The Indian tax law provides for deduction of provision for bad and doubtful debts of an amount not exceeding 8.5 per cent of total income (computed before claiming deduction under Chapter VIA of the IT Act) in the case of Indian banks.

Issue

In case of foreign banks, the deduction for

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provision for bad and doubtful debts is available only up to 5 per cent of the total income. The argument put forth for differential rates is that Indian banks are subject to PSL norms (such as lending to the agriculture and education sectors). However, it may be pointed out that foreign banks having 20 or more branches in India are subject to similar PSL norms as Indian banks. Further, foreign banks are already subject to a higher tax rate. Therefore, this is a case of discrimination against foreign banks.

Recommendation

It is suggested that foreign banks be brought at par with Indian banks and allowed a deduction of provision for NPAs at 8.5 per cent instead of the existing 5 per cent.

3.2.7 Non-applicability of withholding tax provisions on interest payments made to foreign banks

Background

Currently, a person responsible for making interest payments to an Indian bank is not required to withhold tax on such payments.

Issue

No such exemption is available with respect to interest payments made to foreign banks. Therefore, foreign banks are required to apply to the Revenue authorities for a NIL withholding tax certificate on an annual basis, which increases their administrative burden.

Recommendation

It is recommended that an exemption from tax withholding be provided on interest payments made to foreign banks in order to provide a level playing field.

3.2.8 Income Computation and Disclosure Standards

Background

The Indian tax law provides that the taxable income of a taxpayer falling under the heads ‘Profits and gains of business or profession’ or

‘Income from other sources’ shall be computed in accordance with either cash or mercantile system of accounting which is regularly employed by the taxpayer. It further provides that the government may notify, from time to time, Income Computation and Disclosure Standards (ICDS) to be followed by any class of taxpayers or in respect of any class of income.

The government notified 10 ICDS on March 31, 2015 effective from April 1, 2015 for compliance by all taxpayers following mercantile system of accounting for the purpose of computation of business income and income from other sources.

Recently, the Delhi High Court has disposed the writ petition challenging the constitutional validity of ICDS, where it has upheld the constitutional validity of ICDS. However, the High Court has struck down certain provisions of ICDS, which are contrary to the provisions of the existing tax law and which fall within the domain of legislative amendment.

Issue

There are several ambiguities and gaps in the ICDS which will create hardship for taxpayers and result in a whole new gamut of litigation. With the advent of Companies Act, 2013, goods and services tax (GST), Indian Accounting Standards followed by International Financial Reporting Standards, imposing compliance with ICDS will further complicate the overall administrative framework for the taxpayers.

Recommendation

While the introduction of ICDS will certainly increase the compliance burden on taxpayers, it does not achieve any significant outcome other than timing issues by advancing the taxable event. Hence, it is recommended that the ICDS framework is rolled back.

3.2.9. Tax issues in connection with conversion of Indian branches of foreign banks into wholly owned subsidiaries

Background

Pursuant to the RBI providing authorization

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for conversion of Indian branches of foreign banks into wholly owned subsidiaries (WoS), the Finance Act, 2012 has introduced an exemption from tax for capital gains arising on the conversion of a branch of a foreign bank into a WoS, provided the conversion is in accordance with the scheme framed by RBI in this regard. Further, the provisions relating to treatment of unabsorbed depreciation, set-off or carry forward of tax losses, tax credits in respect of tax paid, deemed income relating to certain companies and the computation of income in the name of the foreign company and the Indian WoS shall apply with such exceptions, modifications and adaptations as may be specified in the government’s notification.

In this regard, a draft notification has been issued in November 2017 for public comments, setting out the conditions subject to which the conversion of branch of a foreign bank into WOS would be exempt from tax. Further, this notification also provides much needed clarity on issues connected with conversion such as eligibility for set off of carry forward losses, treatment of unabsorbed depreciation, tax credits of the branch, etc. This is a welcome clarification and the banking sector awaits the final notification in this regard.

Issue

Two issues linked with the conversion of a branch into a WoS are still required to be clarified. Firstly, foreign banks would incur considerable costs on conversion of a branch into a WoS. Currently, there is no clarity as to whether these banks would be eligible to claim a deduction for such conversion costs.

Secondly, a conversion of branch into WoS may potentially attract GST. On the basis that a conversion from a branch to a WoS should be entirely tax neutral, a clarification is required to be issued to ensure that no GST is on such conversion.

Recommendation

EBG recommends that there should be:

(i) Certainty that GST will not be levied on the

conversion of an Indian branch of a foreign bank to a WoS;

(ii) Specific deduction for all conversion related expenditures that may be incurred by the foreign bank.

3.2.10. Thin capitalization norms

Background

In consonance with the OECD’s base erosion and profit shifting (BEPS) recommendations and in order to prevent MNCs from shifting profits to offshore group entities through excessive interest payments, thin capitalization provisions were introduced in the domestic tax law with effect from April 1 2017. The said provisions are applicable to interest expenditure incurred in excess of `1 crore (€124,459) incurred by an Indian company or the Indian PE of a foreign company, on funds borrowed from a non-resident associated enterprise (AE) or on funds borrowed from third parties and guaranteed by an AE. Accordingly, interest on such borrowings, in excess of 30 per cent of earnings before interest, taxes, depreciation and amortization would not be deductible in computing the taxable profits of the borrower.

In respect of funds borrowed from AEs, it is specifically stated that the restriction on deductibility of interest applies only in case of non-resident AEs. However, while referring to the funds borrowed from third parties and guaranteed by an AE, the law does not make any reference to the residential status either of the third parties or of the AE. Therefore, one may interpret that in case of interest on debt guaranteed by an AE, the restrictions on deduction for interest would apply even if the funds are borrowed from a resident.

As per the Explanatory Memorandum to the Finance Bill, 2017 wherein the thin capitalization provisions were introduced, the basic intention of bringing in these provisions was to prevent MNEs from shifting their profits overseas through excessive interest payments, and thus to protect India’s tax base.

In consonance with the aforesaid intention,

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these provisions are applicable only to funds borrowed from overseas and no restrictions should be imposed on funds borrowed from residents, since there is no erosion of the tax base in such cases.

However, the literal interpretation of the existing provisions of the law leads to an ambiguous result, whereby the funds borrowed from the Indian branches of foreign banks and guaranteed by an AE will be covered under the ambit of thin capitalization norms, since the Indian branches of foreign banks are non-resident in India. However, funds borrowed from resident banks and guaranteed by an AE will not be covered in this section. The said interpretation puts the Indian branches of foreign banks in an adverse position. Accordingly, in order to bring parity amongst Indian banks and the Indian branches of foreign banks and in line with the BEPS recommendations, these provisions should also not be made applicable to the funds borrowed from Indian branches of foreign banks (subjected to maximum tax rate in India) since there is no erosion of India’s tax base in such cases.

Recommendation

In view of the above, EBG recommends that an amendment may be made in the law to exclude from the purview of thin capitalization provisions, debt guaranteed by AEs, which is provided by non-resident lenders having a PE in India. Alternatively, a new definition of lenders should be introduced to include only non-resident lenders (not having a PE in India through which the loan is given).

3.2.11 Clarification on services rendered by head office/branches in India to establishments outside India

Background

Under the erstwhile service tax regime, services provided by the head office of a bank or branch of a foreign bank in India to its overseas head office or branch (which are neither intermediary service nor services to accounts holders) were exempt from payment of tax. This exemption was on account of the location of the recipient

of services and the place of provision of services being outside India.

An issue arises on the taxability of services provided by the head office or branches of banks situated in India to its establishments (that is, branches or head office) outside India under the GST regime. In view of the definition of ‘export of services’ under the Integrated Goods and Services Tax Act, 2017 (IGST Act), it may be inferred that such exemption as prevalent under the erstwhile service tax regime may not be available and the services to head office or branches outside India would be subject to IGST.

Relevant provisions of the GST law:

(i) IGST would be payable on all inter-state supplies of goods or services or both.

(ii) When the supplier of goods/services is located in India and the place of supply is outside India, the supply of such goods or services shall be treated to be a supply of goods or services or both in the course of inter-state trade or commerce.

(iii) Export of goods or services shall qualify as zero rated supplies.

(iv) ‘Export of services’ is defined to mean supply of service when:

a. the supplier of service is located in India;

b. the recipient of service is located outside India;

c. the place of supply of service is outside India;

d. the payment for such service has been received by the supplier of service in convertible foreign exchange; and

e. the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8.

In the case where the services are provided by an Indian head office or branch to its offshore branch or head office, the place of supply of such services and the service recipients are

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outside India. Although such services have all the ingredients of exports, they are specifically excluded from the meaning of ‘export of services’ as these are establishments of a distinct person.

Issue

If cross border transactions between head office or branches are subject to tax, it would result in the following consequences:

IGST liability on such transactions is an additional burden for the head office or branch in India. In many jurisdictions, the foreign branch or head office has to pay value-added tax (VAT) or GST on services received from the Indian head office or branches under reverse charge mechanism. This would result in double taxation. The levy of IGST deprives head office or branches in India of a level playing field, in comparison with transactions with wholly owned subsidiaries where the benefit of export of services will be available. The additional IGST cost will make the services provided from India more expensive and will necessitate increase in the cost of cross-border transactions.

The general principle of GST is that it is a “destination based consumption tax”. As mentioned above, the IGST Act will be applicable to the whole of India. Therefore, only those services which are consumed in India should be subject to tax. In case where the place of supply is outside India, the said supply should not be subject to IGST as it is outside the jurisdiction of IGST Act. This will be in sync with taxing principles under IGST law as well as aligned with the principles that hitherto applied under service tax law.

Levy of tax on supply of services to branches or head office outside India would appear to assuming territorial jurisdiction beyond the shores of India, which as stated above, results in taxing supplies where the place of supply falls outside India and results in double taxation.

Further, in case where services are provided by a branch or head office outside India to its head office or branch in India (i.e. importation of services) the said supply is subject to IGST,

hence the corollary should also be true.

It is the longstanding policy of the Government of India to permit export of services and goods without levying taxes and duties. Taxing services provided by the head office or branch in India would be inconsistent with objective of the Government to export services without exporting taxes.

Moreover, tax on services provided by head office of a bank or branch of a foreign bank in India to its overseas head office or branch would have to be borne by the head office or branch in India, thus adding to the cost of business.

Recommendation

It is suggested that a notification be issued under provisions of Section 6 of the IGST Act, 2017 granting exemption from IGST for services provided by head office of a bank or branch of a foreign bank in India to its overseas head office or branch (which are neither intermediary service nor services to accounts holders). Alternatively, a clarification may be issued to exclude the payments by the Indian branch to the head office from the definition of export of services and thereby exclude such payments from the purview of IGST.

4. KEY TAX PROPOSALS OF FINANCE BUDGET 2018-19

All eyes were set on the Indian Finance Minister on 1 February 2018 as he unveiled Budget 2018-19, since it was the last full budget of this government prior to the general elections due in 2019 and the first budget post the implementation of the landmark GST regime.

Budget 2018-19 focuses on the less privileged sectors of society and is centred around the rural, agriculture, health and infrastructure sectors, quality of education and employment generation. The government has gone one step further from Ease of Doing Business and introduced various reforms to improve ‘ease of living’.

A big ticket announcement is the proposal to tax long-term capital gains (LTCG) exceeding

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`100,000 (€1244.60) on listed equities and equity mutual funds for all taxpayers, including FIIs. The levy of securities transaction tax (STT), however, remains unchanged. While high net worth individuals would be disappointed with the levy of tax on LTCG, they would be relieved that Inheritance tax has not been introduced. Another key proposal is the amendment to the definition of ‘business connection’ in line with the OECD BEPS recommendations.

On the indirect taxes front, GST had stolen the thunder earlier this year and no major amendments were proposed in the other indirect taxes. The FM incentivized domestic manufacturing in certain sectors and consequently, proposed increases in customs duties on several goods to promote Make in India.

The budget, in summary, seems to have achieved a fine balance between populist measures and maintaining fiscal discipline. The key highlights of the Budget, as relevant to the banking and financial services sector are discussed below:

4.1 Measures to Promote International Financial Service Centres (IFSCs)

i. In order to develop an international financial services hub in India and to encourage investment in IFSC, it is proposed to exempt the transfer of the following capital assets by a non-resident, from the scope of capital gains, if these are undertaken on a recognized stock exchange located in any IFSC and if the consideration for such transactions is paid/payable in convertible foreign currency:

a. Bonds or global depository receipts (GDR)

b. Rupee denominated bonds of an Indian company

c. Derivatives

ii. Corporate entities which have units in an IFSC are subject to a reduced rate of minimum alternate tax (MAT) at 9 per cent instead of 18.5 per cent. This benefit is proposed to be extended to the alternative minimum tax (AMT)

in respect of non-corporate entities located in an IFSC.

iii. It is also proposed that a unified authority will be established for regulating all financial services in IFSCs in India.

4.2 Bank Recapitalization i. The bank recapitalization programme has been

launched wherein bonds of `800 billion (€9.96 billion) have been issued. This will pave the way for public sector banks to lend additional credit estimated at `5,000 billion (€62.22 billion).

4.3 Corporate Insolvency Resolution Process (CIRP)

i. With a view to facilitate the companies seeking insolvency resolution, it is proposed to reduce the aggregate of unabsorbed depreciation and book loss brought forward for computing book profit in case of a company whose application for CIRP has been admitted by the adjudicating authority.

ii. In order to ease the restructuring and rehabilitation of companies seeking insolvency resolution, a company taking over the business of the rehabilitating company will be allowed to carry forward and set off loss of the rehabilitated company irrespective of the fact that there is a change in shareholding exceeding 49 per cent during the year pursuant to the resolution plan under CIRP. This benefit is applicable to companies whose resolution plan has been approved under the Insolvency and Bankruptcy Code, 2016.

iii. The proposed amendment will be effective from April 1, 2017.

iv. Unaddressed CIRP issues

The Finance Bill, 2018 has not addressed the following key issues relating to the insolvency process:

a. Taxability of difference between the fair market value (FMV) and the chart of accounts (CoA) of the assets of the rehabilitated company in the hands of the company taking over the business of the rehabilitated company.

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Endnotes

1 Within this, not more than 25 per cent should relate to indirect lending.

2 Farmers with landholding of up to 1 hectare (ha) are considered as ‘marginal farmers’. Farmers with a landholding of more than 1 ha but less than 2 ha are considered as ‘small farmers’.

3 While there are no specific sub limits prescribed for advances to micro and small enterprises (MSEs)/small enterprises, any loans to this segment will be counted towards the overall PSL

target. However, 60 per cent of the total MSE advances should be to micro-manufacturing enterprises and micro service enterprises. The rationale for introducing the 60 per cent limit when no specific targets are prescribed for MSE advances is unclear.

4 'Report of the Internal Working Group to Revisit the Existing Priority Sector Lending Guidelines' (March 2, 2015); and 'Database on Indian Economy' – https://dbie.rbi.org.in

b. Taxability of the amount of liability waived under the CIRP for the rehabilitated company.

4.4 Other Amendmentsi. It is proposed to review the refinancing policy

and eligibility criteria set by Micro Units Development and Refinance Agency Bank (MUDRA Bank), for better refinancing of NBFCs.

ii. Venture capital funds and angel investors need special attention for development and growth. Government has committed that more measures will be taken in this regard apart from the tax framework and Start-up India initiative.

iii. A separate policy will be introduced for hybrid instruments to attract foreign investments, especially for startups and venture capital firms.

iv. To give a push to the bond market, the SEBI will consider mandating corporates (beginning with large corporates) to meet about 25 per cent of their financing needs from the bond market. Further, necessary actions will be taken to permit corporate bonds with an A grade rating as eligible for investment, instead of AA grade rating.

EBG comments

The above measures proposed by the Finance Minister are progressive measures and EBG welcomes these proposals.

5. CONCLUSION EBG believes that the Indian economy is on

the growth trajectory in the years to come. Banks and financial institutions will certainly have a key role in facilitating growth of the economy. EBG looks forward to contributing actively in this process and is of the view that its recommendations as set out above, if implemented, will act as a catalyst in deepening the range of financial products and services available to customers in India, improving access to cost effective financial services thereby enhancing the competitiveness of Indian businesses, and in furthering the objectives of the government and the RBI of extending the reach of financial services across the economy.

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CHEMICALS &PETROCHEMICALSAcknowledgements: Abhinay Desai (BASF) – Chairman, Chemical & Petrochemicals Sector Committee & its Members

Knowledge Partner: Karishma R Phatarphekar – Deloitte Touche Tohmatsu India LLP

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Global chemicals market is estimated at US$ 4.5 trillion (€3.65 trillion) in 2017. The Indian chemicals market is estimated at US$ 224 billion (€181.58 billion) in 2017, the industry is expected to grow at a compound annual growth rate (CAGR) of 10 per cent reaching US$ 403 billion (€326.69 billion) by 2025.

The industry comprises of fine and speciality chemicals, bulk chemicals, petrochemicals and agrochemicals. Bulk chemicals market is expected to have subdued growth over the next five years. Petrochemicals and agrochemicals market are estimated to grow at 9 per cent and 7.5 per cent per annum respectively. Speciality chemicals market is expected to grow at 13 per cent CAGR over the next five years.

GST was implemented in India in July 2017, a duty of 18 per cent was levied on chemicals and polymers which is not higher than the prevalent 12.5 per cent excise and 6 per cent value-added tax (CAT). The implementation of goods and services tax (GST) is expected to bring down logistics costs by 10-15 per cent for the chemicals industry.

The government needs better implementation and

delivery as he Draft National Chemical Policy is still in the offing. Petroleum, chemicals and petrochemicals investment regions have not met their objective due to implementation issues and lack of anchor units.

Trend towards green chemistry, renewable feedstock continues to be strong. Government should encourage eco-friendly practices and promote products developed on the concept of green chemistry. Considering India’s limitation on availability of fossil fuel based feedstock India should focus on plant-sourced/bio-based renewable feedstock which is amply available.

The chemicals and petrochemicals industry continues to face generic challenges like feedstock, infrastructure, uncompetitive domestic demand, R&D, skill development and health and safety norms. The government’s policies should focus on ensuring availability of competitive feedstock, it should allow and promote use of waterways for easier and cheaper transportation. Focus should be on ease of business, adequate investments in R&D, human resource development and health, safety and environment.

EXECUTIVE SUMMARY

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1. INTRODUCTION

1.1 Market Description1

1.1.1 Petrochemicals play a vital role in shouldering the growth of the Indian economy as it is the backbone to crucial industries including agriculture, infrastructure, healthcare, textiles and consumer durables. India is the seventh largest producer of chemicals worldwide and the third largest producer in Asia (after China and Japan) in terms of output.2 The industry contributes about 2.11 per cent of India’s gross domestic product (GDP).3

1.1.2 The global chemicals market is estimated at US$ 4.5 trillion (€3.65 trillion) in 2017. The Indian chemicals market accounts for nearly 5 per cent of the global chemicals industry in 2017 with a market size of US$ 224 billion (€181.58 billion). The industry has the potential to reach US$ 403 billion (€326.68 billion) by 2025 growing at a compound annual growth rate (CAGR) of about 8 per cent.4

1.1.3 The industry produces a wide range of chemical products. The key segments of the Indian chemicals and petrochemicals industry can be grouped into the following:

• Fine and speciality chemicals: This downstream segment comprises technology intensive chemical plants that use basic chemicals as feedstock and are characterized by high value and low volume products. These operations require highly trained skill sets and heavy orientation to research and development (R&D) targeting specific consumer end user industries.

• Bulk chemicals: This is the conventional, mature and commoditized segment with differentiation on the basis of economies of scale, access to cheap feedstock volumes and to markets. Such chemicals are manufactured on a large scale and act as inputs to the downstream industries. Bulk chemicals include basic organic and inorganic chemicals.

• Petrochemicals: These are chemicals derived from petroleum and natural gas.

Petrochemicals play a vital role in the economy by facilitating growth of various end user sectors including agriculture, infrastructure, healthcare, textiles and consumer durables. The major segments of petrochemicals are basic petrochemicals and end-product petrochemicals.

• Agrochemicals: These are chemicals meant for protecting agricultural crops against insects and pests, and include insecticides, fungicides and herbicides. India is the fourth largest producer of agrochemicals after the United States, Japan and China.5

• Future outlook6: The bulk chemicals market has seen a subdued growth due to challenges in feedstock availability and is expected to grow at nearly 5 per cent per annum over the next five years. Petrochemicals market is expected to grow at a rate of around 9 per cent to reach US$ 44 billion (€35.67 billion) by FY 2020, on the back of increased polymer demand. The speciality chemicals market is expected to continue growing at around 13 per cent per annum to reach a market size of US$ 52 billion (€42.15 billion) by FY 2020. The agrochemicals market is expected to grow at 7.5 per cent per annum in next five years to reach US$ 6.3 billion (€5.11 billion) by FY 2020, the growth being primarily driven by increased planned expenditure and government focus on raising agricultural productivity.

1.1.4 Export potential and investment regime for Indian chemical products: The industry is well recognized globally for high quality products on a low manufacturing cost base. Globally, India ranks 14th in exports and 8th in imports of chemicals (excluding pharmaceuticals products).7 While India remains a net importer of chemicals and petrochemicals, the share of these exports has increased to 10.6 per cent of the total national exports during FY 2016.8 Further, exports during the first six months of FY 2017 (i.e. April to September 2016) increased by 2.86 per cent, compared to exports during the same period in FY 2016.9

India is a predominant exporter of agrochemicals to the US, Europe and Africa. Indian dyestuffs

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are also well received internationally, accounting for about 16 per cent of the world production of dyestuff and dye intermediaries, particularly reactive acid and direct dyes.9

1.1.5 The manufacture of most chemical products is de-licensed (with only certain items being covered under the compulsory licensing list because of their hazardous nature) and entrepreneurs need to submit only the Industrial Entrepreneurs Memorandum to the Department of Industrial Policy & Promotion (DIPP) to start chemical manufacturing. There are no quantitative or other restrictions on the import of chemicals except on a few chemicals which are covered under the obligations of international conventions.

1.1.6 In the chemicals and petrochemicals industry, 100 per cent foreign direct investment (FDI) is permissible under the automatic route, subject to certain exceptions. FDI in the sector witnessed inflows amounting to US$ 2.2 billion (€1.78 billion) during the two year period from April 2014 to March 2016, as compared to US$ 1.08 billion (€875.48 million) during the period April 2012 to March 2014 (an increase in FDI inflows by around 107 per cent). The sector attracted inflows amounting to US$ 532.48 million (€431.65 million) during April to September 2016.9

1.1.7 Increasing urbanization (at CAGR of nearly 2.1 per cent10), government focus on affordable housing and rising per capita disposable income (estimated at around US$ 1,768 or €1,433.20 during FY 2017 – an increase of 9.9 per cent from FY 201611) is expected to fuel consumption and result in a strong growth outlook for several key end user industries such as construction, automotive, electronics, etc. This will positively impact growth in the industry, which is expected to surge at 9-11 per cent over the next five years.12

1.2 Recent Developments1.2.1 Goods and services tax

Chemicals businesses in India have long suffered the wrath of added taxations on

their production capacity as well as their consumption demands. The existing taxations have impelled the rise in the production costs of manufacturing vital chemicals, which has resulted in the price-hike of the end products and made such goods unaffordable for gross consumption.

GST was implemented in India in July 2017. An 18 per cent GST rate was applied to chemicals and polymers by the Indian government. The new GST tax @ 18 per cent is not higher than their current taxes at 12.5 per cent excise tax and a 6 per cent value-added tax (VAT).

The GST is expected to reduce logistics costs by 10-15 per cent for the chemicals industry, thus directly adding to its bottomline.13 However, certain petrochemicals may be kept outside the purview of GST, which would affect the seamless flow of input credits and result in increased tax burden for the industry.

1.2.2 Draft National Chemical Policy

The erstwhile Planning Commission had in March 2011 constituted a working group on chemicals and petrochemicals that recommended formulating a ‘National Chemical Policy’. The draft policy (which was first released in 2014) is being finalized based on inputs from various stakeholders. The policy focuses on providing an impetus to growth of the chemicals sector in India and identifying action points especially related to feedstock availability, health, safety, security and environment (HSSE) and focus on R&D. However, the final national chemical policy is yet to be released, although 3 years have elapsed from issue of the draft policy.

1.2.3 Petroleum, Chemicals and Petrochemical Investment Regions (PCPIRs)

A PCPIR is a designated investment region catering to domestic as well as export requirements by providing ‘state of the art’ infrastructure and common facilities. PCPIRs were initially approved in the four coastal states of Gujarat, Andhra Pradesh, Odisha and Tamil Nadu. The anchor project in Odisha (Indian Oil’s Paradip refinery)

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and polypropylene unit at Dahej have been commissioned.14 ONGC Petro Additions Limited (OPAL) has inaugurated a grassroot integrated petrochemical complex located in the Gujarat PCPIR with an investment of `30,000 crore (€3.73 billion)15. The Andhra Pradesh PCPIR and Tamil Nadu PCPIR are in different stages of planning and implementation.16

As on September 30, 2016, investments worth `172,000 crore (€21.40 billion) have been made in direct and indirect activities related to PCPIRs.15 The state governments of Kerala, Karnataka and Maharashtra have also submitted their proposal to set up a PCPIR.17

The government is also planning to set up petrochemical complexes in all 16 refineries of the country, and create downstream and processing industries to further add value to such petrochemical complexes.18 In December 2016, a memorandum of understanding was signed between the major national oil companies in India (Indian Oil, Bharat Petroleum and Hindustan Petroleum) intending to set up the biggest oil refinery cum petrochemical complex in the state of Maharashtra.19

As per the recent update, PCPIPR’s have not met the objective due to implementation issues and lack of anchor unit, the government needs to revisit the model and make improvements where necessary.

1.2.4 Plastic parks

In 2013, the government proposed to support the setting up of plastic parks for the promotion of downstream plastic processing industries. A scheme for setting up plastic parks, with requisite state-of-the-art infrastructure and enabling common facilities was formulated by the Department of Chemicals and Petrochemicals in order to synergize and consolidate capacities through cluster development. The objectives of the scheme, inter-alia, are to increase competitiveness through R&D led measures, increase investments in the sector and achieve environmentally sustainable growth through innovative methods of waste management, recycling, etc.

The Scheme Steering Committee (SSC) had granted approval for setting up of plastic parks in Assam, Odisha, Madhya Pradesh and Tamil Nadu. The government also approved setting up of 6 additional plastic parks in December 2014 at an estimated cost of ̀ 405 crore (€50.40 million). In September 2015, ‘in-principle’ approval was also granted for establishment of 8 new plastic parks.20

The funding of need based plastic parks received the government’s approval in March 2015. The government has agreed to grant funding of up to 50 per cent of the project cost, subject to a ceiling of `40 crore (€4.98 million) per project while the remaining project cost would be financed by the concerned state government and its agencies.

1.2.5 India as a global speciality chemicals manufacturing hub

The speciality chemicals segment accounts for nearly 20 per cent of the Indian chemical industry and is estimated at US$ 28 billion (€22.70 billion) in FY 2015. The industry is expected to grow at a CAGR of 13 per cent to reach the market size of US$ 52 billion (€42.15 billion) by FY 2020.21

The fine and speciality chemicals segment can leverage from the growing demand from end user industries, strong governmental support for the establishment of common infrastructure clusters, existing production of base chemicals as raw materials and the focus on developing specialized intermediate producers to enable India to become a global manufacturing hub. There are several other factors facilitating this development:

(i) Availability of qualified and skilled chemical engineers which constitute the backbone of this technology oriented segment.

(ii) Robust domestic demand driven by high growth rates in key consumer industries (like automotive, construction, pharma, textiles, paints, etc.) as well as emerging demand across consumer industries for products with higher quality /increased performance (viz. home and personal care).

(iii) Export based growth potential in select

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segments such as agrochemicals and dyestuffs.

(iv) Changes in customs & excise duty rates on certain inputs /raw materials to reduce costs and improve competitiveness of domestic industry

(v) Stagnation of Chinese chemical industry due to tightening pollution control, increasing labour costs and impact of currency fluctuation.

The government has recognized the immense potential and is focusing efforts on developing R&D capabilities, technical skill training, infrastructure upgradation, etc. to support the endeavour to create a global manufacturing hub.

1.2.6 Focus on green chemistry

Green chemistry is an area of high focus and priority for some of the largest global players with tremendous effort and progress being made to establish green leadership and facilitate a reduction in the carbon footprint. There is increasing emphasis across the world, from governments to consumers and activists, to adopt environment friendly practices and products. Given that the output from the chemicals and petrochemicals sector pervades all kinds of products and uses, there is huge potential for the industry to contribute to green technologies and products supporting green practices and objectives.

It is imperative for the agrochemicals industry to adopt green chemistry processes, develop new green products, and increase focus on educating the farmers for increased productivity, in order to achieve sustainable growth. However, the limited availability of green technologies in India and lack of intellectual property rights (IPR) protection act as a barrier to implementation of green chemistry.

There is a need for the government to incentivize R&D and address various issues faced by the industry, in order to develop its strengths in this area. The Central Insecticides Board & Registration Committee, under the Ministry of Agriculture & Farmers Welfare, responsible for registration of pesticides, should encourage eco-friendly practices by

giving priority to registration of pesticides developed on the concept of green chemistry.

1.2.7 Emphasis on renewable feedstock

Availability of feedstock at competitive prices has been a key challenge faced by the Indian chemical industry. While globally a major portion of the olefins are utilized by the downstream industry, the olefins in India are primarily used to manufacture polyolefins. This increases the dependence of Indian chemicals industry on imported feedstock, especially the small and medium enterprises.

Considering India’s limitation on availability of fossil fuel based feedstock, India may focus on replacing the same with plant sourced /bio-based alternatives, which are abundantly available in India. Use of renewable feedstock would make the industry competitive and present local as well international market opportunities. Further, backward integration opportunities can help domestic players to access supply of feedstock at stable prices.

1.2.8 Incentivizing compostable plastic

The government should focus on promoting compostable plastics which undergo degradation by biological processes and do not leave visible toxic residues. Usage of compostable plastics in place of existing conventional plastics for manufacturing carry bags and garbage bags will benefit the environment and enable circular economy. BASF, a leading speciality chemicals maker, has been promoting compostable waste bags made from bioplastic to manage organic waste in India.

In the recent Plastic Waste Management Rules notified in March 2016, the importance of compostable plastics have been emphasized for tackling the country’s rampant plastic litter problem while improving consumer behaviour for better waste management.

Compostable polymers can play an important role in linking wet food waste back to agriculture through composting. It provides social, environmental and technical benefits as it can be processed using existing infrastructure and doesn’t require any additional investments. A customs duty exemption on compostable

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polymers can help reduce cost and promote usage of such products by brand owners and general public.

1.2.9 Large and specific demand from the domestic Indian user industries

India is being developed as a cost efficient manufacturing hub across several industrial segments such as automotive and electronics. As a result, there is increasing demand from these industries for development of unique local products and solutions which can cater to both the domestic as well as international markets. In the automotive sector, demand is now being created for products and materials that will support the industry’s objectives to be a low cost small car hub. Similarly, the growth in industries like construction (affordable housing projects, green buildings, setting up of smart cities), packaging (driven by the retail boom) and the renewable energy sector is also expected to create a demand for chemical companies. The country currently imports a large portion of its chemical requirements. Catering to the domestic demand in terms of import substitution and supplying new value added chemicals (speciality and knowledge) presents a huge opportunity for the sector.

1.3 European Investment in India European chemical players are looking at Asian

markets as the next growth phase due to the high consumption base. Some of the European chemical companies present in India are:

1. BASF

2. Solvay – Rhodia

3. Syngenta

In addition to the above, about nine other European companies are active in this sector and are doing business in India.

2. GENERIC INDUSTRY CHALLENGES

2.1 Feedstock Continuous availability of reliable and

competitive feedstock is a key challenge to the growth of the Indian chemical industry. The primary building blocks such as ethylene, propylene and butenes (relevant for speciality chemicals products) are mostly consumed captively for commodity products (such as polyethylene, polypropylene, etc.) and hence are not accessible in the merchant market. In the absence of domestic feedstock, India remains heavily reliant on import of feedstock, which is not a sustainable growth model.

Also, the rising global crude oil prices has adversely affected the availability of feedstock at competitive prices. Crude oil is a major cost driver in the petrochemical industry, as many of the key chemical building blocks (for example, aromatics, ethylene, and propylene) used for industry’s products are directly produced from oil or its derivatives (for instance, naphtha and liquefied petroleum gas). Thus, volatility in oil prices has a direct impact on prices of feedstock, and consequently on the manufacturing cost of chemicals.

2.2 Infrastructure Lack of adequate infrastructure facilities

including transportation facilities (such as roads, ports, railway, pipeline networks, etc.) pose a challenge for domestic manufacturers in procuring raw materials at a cost competitive price. This leads to a rise in the manufacturing cost and, creates bottlenecks in growth and continuity of operations. Intermittent power supply also has an adverse effect on the energy intensive chemical industry.

2.3 Duties Inverted duty tax structures affect the

competitiveness of the industry. The government has attempted to rectify this through several proposals in the Finance Bill 2017 by reducing customs duty on o-xylene, 2-Ethyl Anthraquinone, Medium Quality Terephthalic Acid (MTA), Qualified Terephthalic Acid (QTA), Vinyl Polyethylene Glycol for use in manufacture of Poly Carboxylate Ether and

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Clay 2 Powder (Alumax) for use in ceramic substrate for catalytic convertors.

2.4 Uncompetitive Domestic Market India has signed free trade agreements

(FTAs) with various countries agreeing to levy negligible import duty on various chemicals. Further, certain chemicals are placed in the Open General Licence of imports. These have resulted in increased imports of various chemicals, intermediaries and end products from low cost manufacturing hubs like China. Consequently, the domestic industry is rendered uncompetitive, especially the small and medium players, lacking economies of scale and cost efficiency.

2.5 Fragmented Capacities Typically, fragmented and dispersed units are

not in a position to enjoy economies of scale and face capital constraints due to sub optimal capacities, which impedes their growth options and further impacts the competitiveness across the value chain.

2.6 Investment in R&D More resources and finances need to be

invested on the R&D front. The lack of incentives for R&D has hampered the much needed investments in the segment.

2.7 Skill Development There has been a dearth of talented manpower

in the industry. Individuals entering the industry and institutions providing the training /degrees lack orientation to practical skill sets. The industry has an additional human resource requirement of 1.72 million by 2022 from the existing employment base of 1.86 million in 2013.22 Together with the government, the industry needs to take measures to attract, recruit and retain the right talent.

2.8 Health and Safety Norms Players in the chemicals and petrochemicals

industry have often been lax in adopting established and proven health, safety, security and environment norms. This further impacts public perception linked to the sector and works negatively in terms of attracting requisite talent to work in the industry and results in higher risk of industrial accidents.

3. KEY ISSUES & RECOMMENDATIONS

Issue/Objective: Developing India as a global hub in speciality chemicals and fulfilling the domestic demand.

3.1 Issue: Feedstock Availability

Recommendations

The government policies should focus on ensuring availability of competitive feedstock with relevant brownfield infrastructure to the industry. This is critical for domestic and international companies to invest in India. Some of these concerns are sought to be addressed in the draft National Chemical Policy. However, the delay in finalization of the same has impacted the industry.

The government should consider implementing the following recommendations:

1. Investments should be encouraged in areas where sustained feedstock supply is available.

2. Cluster approach should be followed to rationalize efforts in feedstock allocation with anchor units setup at PCPIRs.

3. Government to government contracts should be encouraged for locking in international feedstock supply.

4. Setting up of global scale plants for manufacture of base chemicals.

5. Grant of incentives to manufacturers for using bio-based /non-fossil fuel based raw materials.

The industry should also explore alternate feedstock options such as olefins, coal based feedstock, pet coke, shale gas etc. Shale

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gas is an untapped resource in India and exploration of domestic shale gas can help in meeting India’s growing energy demand. The chemical companies may also consider setting up gas cracker plants, or investing in upcoming plants and securing off-take agreements in resource rich nations to secure cheap feedstock.

3.2 Issue: Inadequate Infrastructure

Recommendations

Domestic manufacturers face difficulties in procurement of raw materials at cost competitive prices due to poor infrastructure facilities at ports, railway depots and poor pipeline connectivity. Further, intermittent power supply adversely affects the energy intensive chemical industry.

While there has been an increased focus towards infrastructure development, given the significant inadequacies, it will require time to overcome the shortfalls. Focused infrastructure development for the industry has been attempted through the setting up of clusters such as PCPIRs and in capacity building of existing identified chemical clusters across India (largely Gujarat and Maharashtra). It is imperative that enabling frameworks are developed for effective infrastructure creation in the PCPIRs and chemical clusters by providing specialized infrastructure required for the industry to facilitate co-location of players across the value chain i.e. – feedstock suppliers and downstream players. This could be done by creating a network of specialized and high pressure pipelines and cryogenic storage containers etc. Similarly, centralized effluent treatment units and air separation units in such clusters would help small players.

The supporting logistics infrastructure for the industry, namely construction of quality logistics and transportation facilities such as roads, railways, ports and terminals handling chemicals and petrochemicals along with the requisite port based logistics infrastructure,

will be critical to ensure overall development. It costs more to transport from West to South India by road as compared to getting the material from Southeast Asia. India has good ports along its coastline (Hazira, Kandla, Nhava Sheva, Vishakhapatnam, Chennai, Cochin, Paradip etc.). Government should allow and promote use of waterways for easier and cheaper transportation.

Concerted efforts should be continued by the government and private industry to close out the infrastructure gaps. The government may consider the public-private partnership (PPP) model for building necessary infrastructure, especially roads and ports.

India & Iran inaugurated the Chabahar port in Iran in December 2017. The Chabahar port will boost India’s access to Iran, the key gateway to the International North-South Transport Corridor (INSTC) that has sea, rail and road routes between India, Russia, Iran, Europe and Central Asia. This would provide an impetus to the supply of feedstock as well as access to international markets.23

3.3 Issue: Alignment of Taxes and Duties

Recommendations

Rationalization of taxes is of paramount importance in this sector. Inverted duty structures should be suitably rectified to bring players at par with global players and enhance competitiveness of output from India. India has entered into FTAs with various countries for reducing customs duty on import of chemical products. The government should follow a balanced approach while entering into FTAs and review them regularly, so that industry players from signatory countries are mutually benefited.

The European Union (EU) has also expressed its will to move forward in the negotiations for having a FTA, or Bilateral Trade and Investment Agreement (BTIA) with India at the earliest. The government should endeavour to favourably conclude dialogue on such agreements.24

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3.4 Issue: Dispersed and Uneconomical Capacities

Recommendations

The primary objective should be to set up state-of-the-art units with economies of scale so that they are competitive. Units with smaller capacities should be consolidated or ideally upgraded. The consolidation and relocation, if any, should take place in a manner that will shift downstream capacities closer to the anchor plants so that logistics become cost efficient and units are located in proximity to supporting infrastructure. The government could consider incentives to encourage such consolidation.

3.5 Issue: Ease of Doing Business

Recommendations

In a welcome initiative, the government introduced SWIFT (single window interface for facilitating trade), enabling importers /exporters to file a common integrated declaration in place of various forms filed across agencies. Various other customs related compliances were eased out to promote Ease of Doing Business.

Typically, environmental impact Assessment (EIA) takes 8-9 months before consent is granted. The process is time consuming as compared to other countries and is not conducive for Make in India. Recommendation is to allow organizations to use the EIA done by other companies in the same area or give some concession for the companies with proven environment record. The governmental go ahead can be based on 3rd party certification for environmental practices for example, the Indian Chemical Council (ICC) has a responsible care certification programme.

The government should further expedite the simplification of procedural and compliance matters by consolidating/streamlining the myriad acts and rules pertaining to the chemicals and petrochemicals industry. The central government should also regularly interact and engage with the state governments for effective implementation of the initiatives.

3.6 Issue: Investments in R&D

Recommendations

It is imperative that R&D spend be increased so that new materials, products and technologies are developed in line with the objectives to position India as a global speciality chemicals hub. The government should also incentivize R&D spend by way of tax breaks, soft loans, subsidies, etc. The R&D spend by Indian companies has been limited and needs to be increased to 3-5 per cent of revenues. International collaborations with multinational chemical giants can provide an impetus in these efforts. The government can also facilitate indigenous R&D under a PPP model.

The draft National Chemical Policy proposes to set up a National Chemical Development Centre to promote R&D.25 The National Chemical Laboratory (NCL), a constituent laboratory of the Council of Scientific and Industrial Research (CSIR), had earlier set up a NCL Innovation Park to support growth and expansion plans of research and knowledge based business entities. Further, BASF has setup an innovation campus in Navi Mumbai, India in March 2017 with an investment of approximately €50 million and would employ up to 300 scientists. This will research and innovate on a wide range of speciality chemicals covering areas such as personal and home care, process development, crop protection, etc.26 BASF has also inaugurated a new innovation campus in Mumbai, India on March 3, 2017. This is BASF’s biggest R&D investment in India.27

Effective implementation of the IPR framework to protect innovators and facilitate monetization of new materials and discoveries is also needed. In this regard, the government had released the national IPR policy in May 2016, with an objective to sustain entrepreneurship, stimulate innovation and provide further impetus to the Make in India initiative. However, the policy has received mixed reactions from the industry and experts on its ability to meet the stated objectives. The industry’s concerns regarding lack of data protection remain unaddressed,

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impacting the development of the chemicals industry (agrochemicals in particular). The Pesticides Management Bill, 2008, introduced in Parliament in 2008 proposes to provide data protection for registration of pesticides. However, the same has not yet received the approval of the Parliament.

3.7 Issue: Human Resource Development

Recommendations

India has a large manpower pool. In order to create the pool of skill sets required by the industry, investments should be made in technical training infrastructure. It is also critical to attract talent into the chemicals and petrochemicals industry. The training agenda can be developed jointly as a public-private collaboration. The government is also focused on setting up skill development councils or centres as a medium to execute training plans. As an illustration, under the draft national chemical policy, the government has plans to set up chemical engineering education centres within leading universities and institutes.

The Ministry of Skill Development & Entrepreneurship had entered into three MoUs with the Ministry of Chemicals and Fertilizers to collaborate and collectively address the human resource requirement.28 The government had also sanctioned additional 10 centres under the Central Institute of Plastics Engineering and Technology (CIPET) in different parts of the country. However, during FY 2016, only 5 new centres were set-up. In April 2016, the government has approved setting up of 11 new CIPETs including an Advanced Polymer Design and Development Research Laboratory of CIPET. 29

3.8 Issue: Health, Safety, Security and Environment (HSSE)

Recommendations

Safety management is one of the critical requirements within the sector to prevent

disruption of operations and endangering of human lives, There have been initiatives to improve safety through setting up of systems and processes such as the Chemical Plant Safety and Security Rating System which aims to encourage the attainment of zero accidents and to incentivize the units to achieve best safety operational measures. Chemicals and petrochemicals industry players must specifically invest and maintain best practices on HSSE. The government and public bodies must also incentivize units to adhere to safety requirements and abide by global standards. The government plans to setup a National Chemical Safety Centre and the National Bureau of Corrosion Control in the proposed national chemical policy to regulate and prevent corrosion. 30

3.9 Issue: Negative Perceptions of the Chemicals and Petrochemicals Industry

Recommendations

The chemicals and petrochemicals sector needs to enhance its public image by creating positive perception through public awareness. Support from the government is needed for this by showcasing the importance of the industry at various public forums. These efforts will also serve well in attracting skilled technical talent to the industry. This is vital for long-term growth as well as in conveying the importance of the industry within the national commercial landscape. A roadmap in this direction needs to be put in place.

4. CONCLUSION The Indian chemicals and petrochemicals

industry holds huge potential as the strong growth outlook of end user industries is expected to fuel the demand for chemical products. The industry offers several opportunities for both domestic and international chemical players

The government should focus on addressing industry concerns regarding infrastructure, feedstock supply, transfer of technology and

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competitiveness of the domestic market on priority. A collaborative effort by the government and stakeholders to expand capacities and reduce dependency on imports is required to unlock the potential of the Indian chemicals

industry. The European chemical players can consider fresh collaborations, investment/merger and acquisition opportunities to advantage from the strong industry outlook.

Endnotes

1 Year 2017 should be read as calendar year 2017, whereas FY 2017 should be read as financial year 2016-17

2 Chemicals & Petrochemicals sector – Achievements Report dated January 18, 2017, Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry

3 Chemicals – India Brand Equity Foundation – May 2017

4 Chemicals – India Brand Equity Foundation – May 2017

5 Chemicals and Petrochemicals Statistics at a glance 2016, Ministry of Chemicals & Fertilizers

6 Handbook on Indian Chemical Industry – September 2016, FICCI

7 Handbook on Indian Chemical Industry – September 2016, FICCI

8 Chemicals and Petrochemicals Statistics at a glance 2016, Ministry of Chemicals & Fertilizers

9 Chemicals & Petrochemicals Sector – Achievements Report dated January 18, 2017, Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry

10 Article in The Hindu dated February 26, 2016 (http://www.thehindu.com/features/homes-and-gardens/indias-challenge-of-disordered-urbanisation/article8285145.ece)

11 Advance Estimates of National Income, 2016-17, Ministry of Statistics & Programme Implementation

12 Handbook on Indian Chemical Industry – September 2016, FICCI

13 Handbook on Indian Chemical Industry – September 2016, FICCI

14 Chemicals & Petrochemicals sector – Achievements Report dated January 18, 2017, Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry

15 Article in the Business Standard dated March 8, 2017 (http://www.business-standard.com/content/b2b-chemicals/pm-narendra-modi- inaugurates-opal-s-rs-30-000-cr-petrochemical-complex-117030800342_1.html)

16 Annual Report 2015-16, Department of Chemicals and Petrochemicals, Ministry of Chemicals & Fertilizers

17 Chemicals – India Brand Equity Foundation – January 2017

18 Speech of the Union Minister of Chemicals and Fertilizers, Mr Ananth Kumar, at ‘Indian Chemical Industry: Challenges

& Opportunities’; organized by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) on December 4, 2015

19 Press release by Ministry of Petroleum & Natural Gas dated December 7, 2016

20 Annual Report 2015-16, Department of Chemicals and Petrochemicals, Ministry of Chemicals & Fertilizers

21 Handbook on Indian Chemical Industry – September 2016, FICCI

22 Press release dated March 9, 2016 by the Ministry of Skill Development and Entrepreneurship

23 Article in Hellenic Shipping News dated February 20, 2018 (http://www.hellenicshippingnews.com/chabahar-port-will-be-game-changer-for-india-trade-could-rival-chinas-obor-initiative/)

24 Article in the Businessline – The Hindu dated February 20, 2017 (http://www.thehindubusinessline.com/economy/policy/as-fta-hangs-fire-eu-wants-india-to-extend-investment-pacts/article9552228.ece)

25 Speech of the Union Minister of Chemicals and Fertilizers, Mr Ananth Kumar, at ‘Indian Chemical Industry: Challenges & Opportunities’; organized by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) on December 4, 2015

26 BASF News Release dated March 3, 2017 (https://www.basf.com/en/company/news-and-media/news-releases/2017/03/p-17-149.html)

27 BASF News Release dated March 2, 2017 (https://www.basf.com/en/company/news-and-media/news-releases/2017/03/p-17-149.html)

28 Press release by Ministry of Skill Development & Entrepreneurship dated July 9, 2015

29 Chemicals & Petrochemicals sector – Achievements Report dated January 18, 2017, Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry

30 Speech of the Union Minister of Chemicals and Fertilizers, Mr Ananth Kumar, at ‘Indian Chemical Industry: Challenges & Opportunities’; organized by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) on December 4, 2015

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DEFENCEAcknowledgements: Manod Jinnuri (SAAB India) – Chairman, Defence Sector Committee & its Members

Knowledge Partner: Dhiraj Mathur, Cdr Gautam Nanda, Nipun Aggarwal & Ruchika Verma – PwC

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EXECUTIVE SUMMARY

India has the third largest military in the world and is the sixth biggest defence spender. India is also one of the largest importers of conventional defence equipment and spends around 30 per cent of its total defence budget on capital acquisitions. In order to achieve the goal of self-reliance in defence production, the government, under the umbrella of Make in India campaign, is promoting indigenization, technology upgradation and achieving economies of scale, including the development of capabilities for exports in the defence sector. The opening up of the defence sector to private sector participation will help foreign original equipment manufacturers (OEMs) to enter into strategic partnerships with Indian companies and leverage opportunities in the domestic market as well as global markets. This coupled with the country’s extensive modernisation plans with an increased focus on homeland security make her an attractive market.

GoI has recently announced the draft Defence Production Policy (DProP) 2018 to promote domestic production by public sector, private sector and the micro, medium and small industries for comments and suggestions from experts and stakeholders and they intend to finalize it by the end of April 2018. The government has demonstrated its intent to develop and nurture intrinsic defence production capabilities and promote indigenous defence manufacturing. The policy is a comprehensive wish-list to begin with, however, the implementation of the policy would be define the outcomes since it is yet to be seen how the policy will be transitioned into guidelines and regulations.

While many issues in the sector have already been addressed, to varying degrees, through the various policy initiatives, there are some outstanding issues which need resolution by the Indian government. Key recommendations are:

• The government should recognize the time value of money and strictly enforce timelines for procurement milestones to shorten the tedious and lengthy process and minimise cost over runs. Accountability should be fixed for exceptional delays;

• The tax regime is complicated. While finalizing bids, OEMs need to consider multiple taxes likely to be applicable through the supply chain such as custom duty, service tax, excise duty, state value added tax (VAT) and entry tax. Thus, a progressive and stable tax regime should be brought in that encourage domestic value addition;

• The government should bring more flexibility in the offset policy by allowing group companies or subsidiaries of foreign OEMs to discharge offset obligations on the behalf of OEMs. The offset policy requires further simplification in the implementation stage as the documents to be submitted to MoD are voluminous, without any scope of e-filing;

• The government should allow a minimum of 74 per cent FDI in the defence sector without any riders to linkages with ‘state-of-the-art-technology’ and criteria for approvals for FDI above 74 per cent should be made more quantitative and measurable;

• The government should address the implementation issues that may come up in relation to DPP 2016 provisions such as IDDM and strategic partnerships. Timing to meet the increased 40-60 per cent indigenous content in IDDM should be flexible and definition of indigenous content should include both the cost of raw-material and value addition;

The Indian defence industry today is clearly an effective interplay of six key stakeholders – the users, the government, DPSUs, DRDO, foreign OEMs and private Indian industry, each having a defined role and a clear set of aspirations and expectations. Of the many challenges which shall need to be addressed to give a fillip to this sector, the most critical are the tax reforms and procurement delays. Besides, targeted fiscal incentives shall go a long way in encouraging private investments, both from domestic and foreign industry.

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1. INTRODUCTION

1.1 Indian Defence Overview India’s current defence requirements are met

largely by imports. The opening up of the defence sector to private sector participation will help foreign original equipment manufacturers (OEMs) to enter into strategic partnerships with Indian companies and leverage domestic markets. The present contractual offset obligations are worth approximately US $4.53 billion (€3.67 billion) in the next five to six years under the offset policy introduced in the capital purchase agreements with foreign defence players. Favourable government policies are promoting self-reliance, indigenization, technology upgradation and achieving economies of scale, including the development of capabilities for exports in the defence sector.

India is a growing economic geopolitical and military power with overt and covert threats from state and non-state actors. It has a land frontier of 15,106.7 km, a coastline of 7,516.6

km including island territories, airspace, exclusive economic zones (EEZs) and vital offshore installations to defend. The country’s extensive modernization plans to address these challenges with an increased focus on homeland security make her an attractive market.

1.1.1 Defence budget analysis

The defence budget for 2018-19 has seen a marginal increase of 5.8 per cent in nominal terms over the last year and currently accounts for 10.74 per cent of the total allocation. Further, the growth in allocation and the share of capital expenditure exceeds that of revenue. Moreover, this has reversed the five-year trend of decreasing capital budgets, and the announcement of a new defence production policy and two defence industrial production corridors is expected to bolster the defence manufacturing sector.

15.0 13.3 14.6 14.8 12.9 12.8 14.0

21.2 21.4

22.0 23.7 24.2 26.0

28.0

0

5

10

15

20

25

30

35

40

45

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Defence budget allocation (billion US$)

Capital Revenue

Source: Controller General of Defence Accounts

Note: Budget amount in INR (`) has been converted to US$ figures at the average currency exchange rate in the respective years

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1.1.2 Budget as a percentage of GDP

For 2017-18, defence spending accounted for 1.56 per cent and in 2018-19, it accounted for 1.58 per cent of the GDP. Over the last nine

years – that is, from 2009-10 onwards – the defence expenditure has steadily declined from 2.19 per cent to 1.6 per cent of gross domestic product (GDP).

54.7%

14.3%

22.8%

0.5%6.3%

1.3%

Allocation of 2018-19 defence budget (%)

Army Navy Air Force DGOF R&D Miscellaneous

Source: Union Budget 2018–19

DGOF – Directorate General of Ordnance Factories; R&D – Research and Development

2629 31

3537 39

26 2831

33 3437100%

94%

100%

95%

91%

95%

86%

88%

90%

92%

94%

96%

98%

100%

102%

05

1015202530354045

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Defence Budget Actual Expenditure (AE) vs Budgeted Expenditure (BE) (billion US$)

BE AE AE (% of BE)

Source: PwC analysis; Union Budget

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1.1.3 Key budget highlights

• In nominal terms, the capital expenditure has seen a compound annual growth rate (CAGR) of 0.2 per cent over the last five years and an increase of about 8.7 per cent over last year’s revised estimates.

• Allocation of `9,734 crore (€1.21 billion) towards R&D, which is an increase of 29 per cent from last year, is expected to boost indigenous defence manufacturing.

• There is continued focus on modernization and enhancement of the operational capabilities of the Indian Armed Forces by developing intrinsic defence production capabilities and promoting private investment in defence production by announcing:

○ Formulation of an industry-friendly Draft Defence Production Policy (DProP) 2018 to promote domestic production by public sector, private sector and micro, small and medium enterprises (MSMEs);

○ Development of two defence industrial corridors;

○ Additional `130 crore (€16.17 million) for assistance in prototype development under the make procedure for Indian Army projects.

• An increase of 3 per cent from ̀ 2,708 crore (€337.03 million) to `2,785 crore (€346.62 million) by Border Roads Development Boards and grants to states for strategic roads have increased by 60 per cent from `50 crore (€6.22 million) to `80 crore (€9.95 million) for the completion of the construction of the Rohtang tunnel and proposed construction of Zozila Pass and Sela Pass tunnels.

• Increase in budget allocation from `13 crore (€1.61 million) to `22 crore (€2.73 million) under the National Cadet Corps to motivate the youth to join the armed forces to address the shortage of manpower.

• In recognition of the assistance and aid that are provided by the armed forces for Human

Assistance and Disaster Relief (HADR) missions, the government has substantially increased the allocation to the grants in aid to the state government from `5 crore (€622,298) to `22 crore (€2.73 million).

• Capital revenue ratio is still short of the desired 60:40 split.

• Capital budget allocation would be barely enough to meet the committed liabilities.

1.2 Moving from Imports to Indigenization

India has the third largest military in the world and is the sixth biggest defence spender. India is also one of the largest importers of conventional defence equipment and spends around 30 per cent of its total defence budget on capital acquisitions. Sixty per cent of defence-related requirements are currently met through imports. The Make in India initiative by the government is focusing on increasing indigenous defence manufacturing and becoming self-reliant. The opening up of the defence sector to private sector participation is helping foreign OEMs enter into strategic partnerships with Indian companies and leverage opportunities in the domestic market as well as global markets. India’s focus on indigenous manufacturing in the defence space is paying off as the Ministry of Defence (MoD), over the last two years, unveiled several products manufactured in India like the HAL Tejas Light Combat Aircraft, the composites sonar dome, a portable telemedicine system for the armed forces, penetration-cum-blast (PCB) and thermobaric (TB) ammunition specifically designed for Arjun tanks, a heavyweight torpedo called Varunastra manufactured with 95 per cent locally sourced parts and medium range surface-to-air missiles (MSRAM). The Defence Acquisition Council (DAC), under the Ministry of Defence, cleared defence deals worth more than `82,000 crore (€10.20 billion) under the Buy and Make Indian and Buy Indian category. The deals include the procurement of light combat aircraft (LCA), T-90 tanks, mini

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unmanned aerial vehicles (UAVs) and light combat helicopters.

Hundred per cent foreign direct investment (FDI) is allowed in the defence sector, out of which up to 49 per cent is permitted under the automatic route and above 49 per cent is permitted through the government route on a case-to-case basis, where it is likely to result in access to modern technology. For financial year (FY) 2015-16, defence platforms worth `2,059.18 crore (€256.28 million), equipment and spares manufactured in India were exported to more than 28 countries. Some of the major defence equipment exported by Defence Public Sector Undertakings (DPSUs) and the Ordnance Factory Board (OFB) includes patrol vessels, helicopters and their spares, sonars and radars, avionics, radar warning receivers (RWRs), small arms, small calibre ammunition, grenades and telecommunication equipment.

Under the Skill India initiative, National Skills Qualification Framework (NSQF) compliant skill training is being promoted.

• 8 Industrial Training Institutes (it is) have been selected to upgrade their training infrastructure. Spare equipment in working condition is being donated to the ITIs by the OFB/DPSUs for training.

• The OFB/DPSUs have stepped up trainings under the Apprenticeship Act, 1961 from 2.5 per cent to 10 per cent of the strength.

1.3 Recent Developments1.3.1 Draft Defence Production Policy 2018

(DProP 2018)

The Government of India has recently announced the DProP 2018 to promote domestic production by public sector, private sector and MSMEs for comments and suggestions from experts and stakeholders and they intend to finalize it by next month. The government had announced the DProP in 2011, which also focused on self-reliance in defence production however despite that it has been 7 years and India still remains the world’s largest defence buyer, importing 60-65 per cent of its defence needs. DProP 2018 mentions

that India’s defence production has gone up from `437.46 billion (€5.44 billion) in 2013-14 to ̀ 558.94 billion (€6.95 billion) in 2016-17. The salient features of the policy are as follows:

• The vision of the DProP 2018 is to make India one of the top 5 countries in the world in aerospace and defence industry. It pushes for increased indigenization of defence production not just for purposes of self-reliance, but also to widen India’s export to other nations.

• The policy intends to capitalize on India’s information technology strengths to make India a global leader in cyberspace and artificial intelligence (AI) technologies

• The new policy commits to building an 80-100 seater civilian aircraft within the next 7 years.

• With a plan to allow higher foreign investments in niche defence technologies under the automatic route the government aims to increase the FDI cap from the current 49 per cent to 74 per cent in such technologies.

• The government has identified 12 military platforms and weapons systems for production in India to achieve the aim of self-reliance, they are fighter aircraft, medium lift and utility helicopters, warships, land combat vehicles, missile systems, gun systems, small arms, ammunition and explosives, surveillance systems, electronic warfare (EW) systems and night fighting enablers, among others.

• By 2025, the policy aims to achieve a turnover of `170,000 crore (€21.15 billion) in defence goods and services, involving additional investment of nearly `70,000 crore (€8.71 billion), and creating employment for nearly 2 to 3 million people.

• The policy elaborates on the 2 defence industry corridors namely in Tamil Nadu and Uttar Pradesh and stipulates that each corridor would have one major cluster of defence production units around an anchor unit. Creation of a special purpose vehicle (SPV) in each corridor would develop an

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ecosystem for defence production, with testing and certification facilities, export facilitation centres and technology transfer facilitation.

• The policy has planned strategies, portals and platforms such as ‘Competency Mapping’, ‘Defence Investor Cell’ and ‘Technology Perspective Capability Roadmap’ to facilitate indigenization of defence production

• The ‘Simplified Make-II’ procedure would be facilitated through this policy which act as an initiative for industries to enter defence sector.

• The policy will also liberalize licences that will be provided to defence industries, where requirements for renewal of licences will be pruned and companies with a track record will be given favourable consideration.

• It aims at advancing and boosting the existing public sector defence production units through skill development and overall programme management.

• Apart from synergizing all stakeholders and creating self-reliant defence sector, the policy also plans to export defence goods worth `7.7 crore (€958,340) to other countries. It also plans on setting up defence export organization in partnership with the industry and market domestically produced goods overseas.

• The policy says the tax regime will be rationalized to make domestic manufacturing attractive by ensuring that there is no tax inversion. Taxes on import of capital goods and services, inputs and components used in defence production will be rationalized, it says.

• The policy is silent, however, on the fate of ongoing global procurements of the platforms to be indigenized, including single-engine and carrier-borne fighters, infantry small arms, maritime surveillance systems and others.

The government has demonstrated its intent to develop and nurture intrinsic defence

production capabilities and promote indigenous defence manufacturing. The policy is a comprehensive wish-list to begin with, however, the implementation of the policy would be define the outcomes since it is yet to be seen how the policy will be transitioned into guidelines and regulations.

1.3.2 Time-bound mechanism for granting licences for defence production

Manufacturing in the defence sector has so far been governed by industrial licensing under the Industries (Development and Regulation) Act, 1951 (IDRA). Before 2001, manufacturing in the defence sector was limited to public sector companies (the OFB and DPSUs). However, in 2001, the government allowed 100 per cent Indian private sector participation in the defence manufacturing sector, subject to licensing under the IDRA, 1951. After the notification of the New Arms Rules, 2016, vide the Ministry of Home Affairs’s (MHA’s) notification dated May 19, 2017, powers and functions under sub-section (1) of section (5), clauses (b) and (c) of section 7 and Chapter III of the Arms Act, 1959, have been delegated to the Secretary, Department of Industrial Policy and Promotion (DIPP), in respect of defence items included in the Schedule. Consequently, the power to grant manufacturing licences, in respect of the category of arms and ammunition and defence items as per columns (2) and (3) of the Schedule to the said notification, has been delegated to the Secretary, DIPP.

Under the existing procedure, the Indian company has to obtain an industrial licence for defence manufacturing, unless the items which it intends to manufacture do not find mention in the defence product list. The application is then sent to the MHA for security clearance, and only after the clearance is given can the licence be issued. However, there are invariable delays in the grant of industrial licences. In order to overcome this issue, the MoD is contemplating developing a system that will ensure licence fast-tracking. This system will also have mechanisms in place that will issue industrial licences in a time-bound manner on short-, medium- and long-term basis. The system

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entails that if the MHA has not given security clearance for licences within a ‘reasonable’ time frame, the clearance should be deemed approved. This is a significant move that will promote the domestic manufacturing of military platforms and equipment. The Ministry of Defence (MoD) is examining the reform initiative in consultation with the MHA, which issues licences to defence manufacturers.

1.3.3 Draft guidelines for framing criteria for vendor selection/prequalification in Buy (Indian-IDDM), Buy (India) and Buy and Make (Indian)

In 2016, the MoD had revised the Defence Procurement Procedure (DPP) with the intention of achieving self-reliance in defence manufacturing and leveraging the economic opportunity in the Indian defence industry. DPP 2016 laid down vendor selection criteria for the ‘Make’ procedure and ‘Strategic Partnerships’. However, no explicit criteria were laid down for the selection of vendors for the Buy (Indian-IDDM), Buy (Indian) and Buy and Make (Indian) categories. Thus, there was a need to promulgate guidelines for framing criteria for vendor selection/prequalification in these categories. The draft guidelines circulated for inputs are in two parts: Part A deals with the parameters that may be considered for the shortlisting of vendors, and Part B lays down the process for applying the selected parameters to the process of vendor selection. The salient features of the guidelines are as follows:

• An applicant should be an Indian company (as defined under the Companies Act, 2013) owned and controlled by a resident Indian citizen, with control to appoint a majority of directors or control management. The maximum permitted FDI shall be 49 per cent.

• A vendor should be a manufacturing entity and not a trading company and should have a minimum of two years of experience in the manufacture of similar products. In case the product involves integration, previous experience is mandatory.

• The minimum average annual turnover for the last three years should not be less than 10 per cent of the estimated cost; the net worth of entities should not be less than 5 per cent of the estimated cost; the vendor should not be reporting losses in any three consecutive years in the last five years; and the entity should have a minimum credit rating equivalent to the CRISIL rating on the Corporate Credit Scale as CCR-BBB and SME-04 for SMEs.

• Vendors should hold valid industrial licences or should have applied for these licences before responding to the request for information (RFI).

• Based on the generic parameters, a more specific criteria should be developed by service headquarters (SHQs) with regard to technical and financial parameters.

• The capability of a vendor to receive an request for proposal (RFP) to participate in the procurement will depend on the value of orders already placed with the vendor by the MoD and still under execution.

• To incentivize startups procurement cases where the estimated cost is up to `25 crore (€3.11 million) may be considered on a case-to-case basis.

• In case of shipbuilding projects, the Indian Navy and Indian Coast Guard shall ensure that the criteria for capacity assessment of shipyards are stipulated in advance and known to all vendors.

1.3.4 Strategic partnership policy

The MoD promulgated the much-awaited Chapter-VII of the DPP 2016, ‘strategic partnership policy’, on May 31, 2017. The broad policy objectives are:

• The government has brought in the strategic partnership model (SPM) with the aim of institutionalizing a transparent, objective and functional mechanism to encourage broader participation of the private sector, in addition to the capacities of DPSUs/the OFB (Ordnance Factory Board), in the manufacturing of major

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defence platforms so as to reduce current dependence on imports.

• The SPM is expected to enhance competition, increase efficiencies, facilitate faster and more significant absorption of technology, create a tiered industrial ecosystem, ensure development of a wider skill base, trigger innovation, and promote participation in global value chains as well as exports

• Under this policy, a private sector partner will be selected by the government to associate with an OEM to make long-term investments in manufacturing infrastructure, an ecosystem of suppliers, skilled human resources and R&D for modernization.

1.3.5 Abolition of Foreign Investment Promotion Board (FIPB)

The Union Cabinet of India, chaired by Prime Minister Shri Narendra Modi, on May 24, 2017 approved the proposal to phase out the Foreign Investment Promotion Board (FIPB), which is an inter-ministerial body for processing FDI proposals and making recommendations to the government thereof for its approval. Cases that required government approval were first evaluated by the FIPB that was serviced by the Department of Economic Affairs (DEA), which is a part of the Ministry of Finance.

The FIPB was established by the Government of India pursuant to the Statement of Industrial Policy on 24 July 1991. In recent years, there has been a significant decline in the number of proposals that were brought before the FIPB for its approval owing to the liberalization of the FDI regime across various sectors. Currently, more than 90 per cent of the total FDI inflow in India is under the automatic route. So, for this purpose, the government has recently decided to abolish the FIPB and delegate its powers and functions to the concerned administrative ministry (AM). The concerned AMs will be responsible for monitoring compliances/conditions imposed under FDI approval, including past cases approved by the FIPB, and seeking the approval of the

minister in charge/CCEA (Cabinet Committee of Economic Affairs), as the case may be, as per the extant FDI policy. The DEA issued an office memorandum (F.No.01/01/FC on June 5, 2017) listing the concerned AM for 11 notified sectors/activities requiring government approval under the FDI policy.

While the erstwhile FIPB has been abolished, the DIPP, under the Ministry of Commerce and Industry, will be in charge of its successor mechanism. This will include the old FIPB portal that has now been placed under the DIPP under a new name—that is, the Foreign Investment Facilitation Portal. The portal will be the main interface used by investors to apply for bringing in FDI into the country. While the dissolution of FIPB is aimed at Ease of Doing Business in the country, it will be important for the MoD to adhere to specific timelines within which all applications would be disposed; this will assist in attracting more foreign investments in the sector.

The DIPP, in consultation with AMs/departments/sector regulators, has prescribed detailed standard operating procedures (SOPs) for processing FDI proposals on 29 June 2017. As far as defence equipment is concerned, the AM will be the DDP in the MoD. For defence items requiring an industrial licence (IL) under the IDRA, 1951, and/or Arms Act, 1959, for which the powers have been delegated by the MHA to the DIPP. Further, the Department of Defence Production, MoD, will be the AM for providing approval for FDI. Also, investments in the defence sector will require clearance from the MHA.

1.3.6 Export controls in line with international standards

The Directorate General of Foreign Trade (DGFT), vide Notification No. 5 dated April 24, 2017, has notified an amendment to the SCOMET list under the foreign trade policy. The revised list of items is part of India’s larger commitment to non-proliferation as enshrined in various laws, particularly the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005,

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and the Foreign Trade (Development and Regulation) Amendment Act, 2010. The revised list is also part of India’s efforts to harmonize its list of controlled items with those of the four multilateral export control regimes: the Missile Technology Control Regime (MTCR), Nuclear Suppliers Group (NSG), Wassenaar Arrangement (WA) and the Australia Group.

Category 6 of the SCOMET list has been populated as the munitions list, which includes the munitions list of the WA. The notification also mentions that the export of items specified in Category 6, except those covered under Notes 2 and 3 of the CIN of the SCOMET, will be governed by the extant SOP issued by the DDP. Unless prohibited, export may be permitted against an authorization issued by the DDP. Subsequently, the MoD has also issued a notification to align its own SOPs with the above change. In comparison to the previous SCOMET list which had eight categories, the revised list has nine broad categories, with each category containing an exhaustive list of items:

• Category 0: Nuclear material, nuclear-related other materials, equipment and technology.

• Category 1: Toxic chemical agent and other chemicals.

• Category 2: Micro-organisms, toxins.

• Category 3: Material, materials processing equipment and related technologies.

• Category 4: Nuclear-related other equipment, assemblies and components; test and production equipment; and related technology, not controlled under category 0.

• Category 5: Aerospace systems, equipment including production and test equipment, related technology and specially designed components and accessories thereof.

• Category 6: Munitions list.

• Category 7: Electronics, computers and information technology including information security.

• Category 8: Special materials and related

equipment, material processing, electronics, computers, telecommunications, information security, sensors and lasers, navigation and avionics, marine, aerospace and propulsion.

1.3.7 Impact of the goods and services tax on the aerospace and defence sector

The Government of India took a landmark step and implemented the goods and services tax (GST) with effect from July 1, 2017. GST being an indirect tax is a transaction based tax.

For smooth GST implementation, the government has formed a GST Council. Finance ministers of the states are the members of GST Council and the Council is headed by the Finance Minister of India. The GST council provides continuous recommendations to the government on various aspects of GST law such as compliances, industry issues, rates changes etc.

Prior to GST, there were multiple indirect taxes leviable on various transactions at each stage separately by the Union government and the states at varying rates. Such taxes included excise duty, service tax, VAT/CST, entertainment tax, luxury tax, lottery taxes, entry tax, state cesses and surcharges etc. All such taxes (except customs duty) have been subsumed under GST and there is one single tax (namely GST) applicable on supply of goods and services. However, there are few products which continue to be outside the ambit of GST like petrol, diesel, ATF, natural gas, crude oil etc.

GST has transformed India into a single integrated market, simplified taxes and reduced cascading effect of tax on the cost of goods and services, thereby, benefitting all stakeholders i.e. government, corporates and consumers.

Impact of GST on the defence procurements:

i. Custom duty exemption on imports: The custom duty exemptions on the import of specified goods like aircrafts etc. for defence purposes were removed for the imports done by the Government of India or state governments, contractors of government, PSUs or sub-contractors of

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PSUs w.e.f. April 1, 2016. This has resulted into significant increase in cost of such imported goods for defence purposes.

The position has been retained under GST. No defence related exemptions have been introduced under the GST law as well and such imports are made liable to both, customs and GST.

In the erstwhile regime, aircraft were typically procured on lease basis and there was no service tax on operating leases, however, financial leases (if any) of aircraft were subject to service tax @15 per cent on 10 per cent of the interest amount. Under GST, all types of leases have been subject to GST @5 per cent. To avoid dual levy of GST on aircraft leasing (one at the time of import and the other on lease rentals), the Government on July 8, 2017 introduced an exemption from GST which is payable on imports, provided the lease rentals are being subject to GST @5 per cent.

ii. GST on maintenance, repair and overhaul (MRO) industry: In the erstwhile regime, both VAT and service tax were applicable on maintenance activities undertaken in India (referred to as ‘works contract’). This resulted in higher tax burden for the MROs.

The GST law specifies that in case of such transactions (which are classified as a composite supply) i.e. supply comprising of two or more activities, the supply shall be deemed to be the supply of dominant aspect. In case of MRO activities, services being the dominant aspect, 18 per cent GST (rate applicable on services) is levied on MRO services of an aircraft undertaken in India. However, GST is not applicable if such MRO services are undertaken outside India.

1.3.8 Termination of the Bilateral Investment Treaty (BIT)

Background

BIT is an agreement establishing the terms and conditions for private investment by nationals

and companies of one state in another state and is established through trade pacts.

Most BITs grant investments made by an investor of one contracting state in the territory to the other, a number of guarantees, which typically includes fair and equitable treatment, protection from expropriation, free transfer of means, and full protection and security. Thus, BITs are agreements between governments of two countries for the reciprocal promotion and protection of investments in each other’s territories by individuals and companies situated in either state. They provide treaty-based protection to foreign investment. The bilateral investment treaties not only encourage capital flows into India but also provide a safe business environment for Indian investors abroad.

In India, the text for the Indian Bilateral Investment Treaty is approved by the Union Cabinet and thereafter revisions have also been made to the model text of the treaty based on recommendations of the Law Commission of India. The designated representative for signing the treaty is the Secretary, Department of Economic Affairs, Ministry of Finance, Government of India. Till date, India has signed BITs with 83 countries, of which 72 are currently in force.

Recently, India sent official notifications to as many as 57 countries (including the Netherlands, UK, France, Germany, Spain and Sweden) seeking termination of the BIT with whom the initial duration of the treaty has either expired or will expire soon. This policy initiative is essentially an outcome of India’s new Model BIT (2015) that provides a more balanced and coherent policy framework, in tune with domestic investment policies as well as new realities of the international investment landscape. The government intends to replace existing BITs with a new set of treaties in order to strike a fine balance between investor rights, regulatory space and investor responsibilities. India brought out the new model BIT after being dragged into international arbitration by foreign investors who sued for discrimination, citing commitments made by India to other countries in bilateral treaties.

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In the recent past, many multinationals have dragged India to international arbitration, citing treaty violation. In the case of White Industries versus the Government of India, the Australian investor cited a favourable substantive MFN provision in the India-Kuwait BIT that it said was absent in the India-Australia BIT. The Australian company, which argued for including the provision in the India-Australia BIT, won the case in 2012.

The new Model BIT is a major departure from earlier models (1993 and 2003) as it provides protection to foreign investors in limited circumstances. Under the new Model, controversial clauses such as MFN have been completely dropped, while the scope of national treatment (NT) and fair and equitable treatment (FET) clauses has been considerably narrowed down.

Does the termination of BIT mean the end of protections to the concerned investors?

Investment treaties provide investors with a means of managing the sovereign risk attached to a foreign investment. Specifically, an investment treaty can protect an investor and its foreign investment against unfair, inequitable, arbitrary or politically motivated conduct by the government of the state hosting the investment, or a denial of justice by its judicial organs. They also typically guarantee an investor full compensation if its investment is expropriated, as well as the right to be treated no less favourably than domestic investors or investors from other countries (i.e. MFN status).

Many investment treaties also require the host state to observe any obligations it has undertaken with regard to a qualifying investment (which is sometimes referred to as an ‘umbrella clause’). These substantive protections are often reinforced by a qualifying investor’s procedural right to bring a claim directly against the state hosting its investment through international arbitration (rather than through the local courts or, alternatively, through the investor’s own government in a process known as diplomatic protection).

The termination of the BIT would not necessarily mean the end of protections to the concerned existing or new investors. The treaties usually contain a ‘sunset clause’, which extends protection to all qualifying investments (made before the date of termination) for a specified number of years, while in some cases, the same extends indefinitely. For example, in case of the India-Netherlands BIT, all investments made in India before December 2016 (by Vodafone and other Dutch-based firms) will continue to benefit from the Treaty’s protections until December 2031 due to the sunset provisions contained in the BIT.

From an investor perspective, while there may be no immediate effect on existing investments covered by BITs to be terminated and protections may continue for some time, it is recommended that investors take stock now and consider how existing Indian investments are structured and whether they will continue to benefit from the best possible protection in the longer term.

Even where sunset periods exist in BITs, these protections may not continue for the full anticipated duration of an investment. In addition, given the potential for change in the investment environment in India, investor protections may take on a new level of prominence. If concerns exist, it may be sensible to consider restructuring existing investments to achieve better levels of protection.

1.3.9 Impact of the direct tax proposal of the Union Budget 2018 on the defence sector

The Finance Minister recently presented the Union Budget on February 1, 2018. While there were no specific proposals for the defence sector, there were some changes suggested, which may have some impact on the sector. The relevant direct tax proposals are as follows:

• Reduction in the corporate tax rate from 30 per cent to 25 per cent for domestic companies if the turnover for FY 2016–17 doesn’t exceed `2.5 billion (€31.11 billion). It has also been proposed to replace education cess of 3 per cent with health and education cess of 4 per cent, resulting

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in an increase in tax rates. Thus, potentially, the applicable tax rate for MSMEs could be reduced by around 5 per cent.

• The definition of business income has been expanded to include cases where an agent habitually concludes contacts or habitually plays the principal role, leading to the conclusion of contracts following the recommendations under BEPS Action Plan 7 of the Organization for Economic Cooperation and Development (OECD). It is further proposed that the ‘significant economic presence’ of a non-resident shall constitute a business connection in India. This is intended to cover business models which do not require a physical presence in India.

• A plan is to be chalked out to roll out e-assessment on a nationwide basis to impart greater transparency and accountability.

• Penal and prosecution provisions have been made stringent for failure to furnish tax returns/statement of financial transactions.

• Returns are to be filed within timelines for claiming deductions for computing total income.

• The exemption on long-term capital gains on listed securities is to be withdrawn, subject to grandfathering. These gains will be taxed @ 10 per cent (without giving effect to inflation) if the Securities Transition Tax is paid on the purchase and sale of such shares.

• The scope of deemed dividend tax on account of advancing loans and advances is widened by subjecting it to tax @ 30 per cent in the hands of a company.

2. KEY ISSUES AND RECOMMENDATIONS

While many issues have already been addressed (to varying degrees), there are some outstanding issues, especially on the fiscal and policy front, need redressal by the Indian government.

2.1 Taxation Regime The Indian tax regime is fairly complicated.

While finalizing bids, OEMs need to consider multiple taxes likely to be applicable through the supply chain such as custom duty, service tax, excise duty, state VAT, and entry tax. Such taxes are not entirely creditable or capable of being passed on to MoD, leading to higher bid prices due to cascading effect and distortions in bid pricing due to tax reasons.

Direct tax

• From a direct tax standpoint, whilst royalties/fees for technical services earned by non-residents from notified defence projects entered into with the government of India are exempt from tax in India, similar exemptions are presently not available for defence contracts executed with DPSUs acting on behalf of the MoD/Government of India. Further, notification in the official gazette as required for availing of the tax exemption is presently a time-consuming process.

• Foreign defence entities desirous of establishing a presence in India generally set up a liaison office for identifying opportunities, developing relationships with potential customers and providing administrative support. Indian revenue authorities have been quite aggressive in alleging/assessing such liaisons and support offices as permanent establishments (PEs) of non-resident OEMs/contractors in India. This has often led to frivolous tax demands and more frequent long-drawn tax disputes.

• The Income-tax Act, 1961 provides for a deduction on any expenditure of a capital nature incurred wholly and exclusively for the purposes of any specified business carried on during the year. The licensed manufacture and production of defence and aerospace equipment and parts thereof are not specifically included in specified business.

Indirect tax

• The government is looking to provide a level playing field to Indian private companies so as to incentivize domestic value addition

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and improve cost competitiveness of Indian companies. In this spirit, customs duty exemptions in relation to supplies to the MoD which were withdrawn earlier have been reserved status quo.

• Presently there is no GST exemption on MRO services of an aircraft undertaken in India. However, GST does not apply on MRO services undertaken outside India. Taxing of MRO services in India has resulted in increased cost for Indian private companies.

• Petroleum products (including ATF) have been kept outside the ambit of GST. ATF in India is 55-60 per cent costlier than the Gulf and Asian region.

• Presently, there is no exemption from levy of customs duty, GST in respect of supplies made under a defence project (except for training programme where the entire expenditure is borne by the government). This leads to increase in overall cost of the procurements by the MoD and DPSUs.

Recommendations

Direct tax

• Clarity is to be provided on the availability of tax exemption on royalties/fees for technical services contracts by non-residents (foreign OEMs) with DPSUs. Procedural delays in providing such tax exemptions may be looked into. In order to promote domestic manufacturing, such exemptions may also be extended to private companies as well.

• Necessary guidelines should be issued to reduce tax litigation in cases where a PE (permanent establishment) of the non-resident has been alleged and artificially high attribution of income has been made by the tax authorities. This shall ensure certainty in tax outcome, thereby encouraging investment.

• In order to encourage the Make in India initiative and investments in the defence sector, it is recommended to extend capital deduction under section 35AD to the manufacture and production of defence and aerospace equipment and parts thereof.

Indirect taxes

• With the withdrawal of exemptions, the cost of project has increased significantly. MoD should work with the Ministry of Finance to reinstate the exemptions and develop sector specific taxation heads which will not only help streamline defence purchases, but also improve costing estimates of products. MoD, being the sole buyer of defence products in India, will gain immensely if it can provide tax breaks to the suppliers.

• To improve cost competitiveness, GST exemption should be extended to MRO services undertaken in India.

• The cascading effect of ATF taxes have brought ruin to the A&D sector. To achieve cost efficiency ATF should be brought under the GST regime with a uniform rate across India.

2.2 Flexibility Required in the Offset Regime

• DPP 2013 and 16 are much more flexible than earlier versions: they allow a larger number of avenues for discharging offsets and also allow multipliers. However these provisions are not retrospective and since most ongoing contracts are under the highly restrictive DPP 2008, there are numerous challenges in actually discharging offset obligations and claiming credit.

• Due to the limited timeframe provided to fulfil offset obligations, global OEMs have found lesser reasons to invest in more sustainable, advanced and long-term engineering and manufacturing projects within India.

• Though flexibility to change Indian offset partners (IOPs) has been retrospectively allowed last year, it is still time consuming for OEMs to get approval for change of the IOP (it can take up to six months), in case an IOP is unable to fulfil its commitment. It becomes even more difficult if the new IOP proposed was not on the list of IOPs originally approved. This process leads to greater compliance cost and creates a difficult execution environment for discharge of offset contracts. OEMs feel that they should have more flexibility to change IOPs.

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• The offset credit mechanism for banking of offset claims is currently not time bound and highly inefficient and non-transparent. There are very few banking proposals that have been approved.

• Currently, only Tier-I sub-vendors on the main platform are permitted to discharge offsets to the extent of their workshare (by value) on behalf of the prime vendor, thereby restricting its scope. Tier-II and Tier-III sub-vendors are currently not permitted to discharge the offset obligations on behalf of OEMs.

• Group companies, sister concerns, and subsidiaries are not permitted to discharge offset obligations on behalf of the OEM without their being the part of the supply chain of the main platform/equipment being bought.

• Due to the limited timeframe provided to fulfil offset obligations, global OEMs have little incentive to invest in more sustainable, advanced and long-term engineering and manufacturing projects within India. Flexibility in performance period will enable a more transparent and controlled programme management by the OEM. Hence, a further extension in the period of performance will encourage more complex collaboration in defence manufacturing and development.

• The offset policy is complex and requires further simplification in the implementation stage as the documents to be submitted to MoD are voluminous, without any scope of e-filing.

• Indian industry is not fully capable to furnish the requisite raw materials for manufacture of high quality defence products, hence finds it difficult to support OEMs in meeting value addition requirements.

• The MoD may consider the introduction of a web based platform for effective offset management. The platform should be accessible by the MoD, OEMs and IOPs to manage and track offset projects to ensure that the commitments are met.

• OEMs have been facing challenges in transfer of technology (ToT) to the Defence Research and Development Organization (DRDO) on account of lack of laid down methodology

for valuation of such ToT. Technology transfer or technology acquisition (TA) to DRDO are permissible methods for discharge of offsets. However, OEMs face challenges on two counts:

i. Many OEMs have found it difficult to reach an agreed position with DRDO on value of technology (IPR) proposed to be transferred, primarily due to absence of established methodology for valuation of technology.

ii. Such TA by DRDO is restricted to only 30 per cent of value of offsets to be discharged. However, the actual value of technology proposed to be transferred far exceeds the 30 per cent threshold and any excess value due to this activity cannot be banked under the current provisions.

Recommendations

• Group companies or subsidiaries and Tier 2-4 sub-vendors of foreign OEMs should be allowed to discharge offset obligations on the behalf of respective OEMs, without any pre-defined restrictions – by value of work share.

• Defence Offset Management Wing (DOMW) should be better empowered to take quick decisions.

• Flexibility in performance period will enable a more transparent and controlled programme management by the OEM offset obligor. Hence, a further extension in the period of performance will encourage more complex collaboration in defence manufacturing and development.

• The period of offset discharge has been fixed at the period of supply of the main equipment plus two years as per the DPP. OEMs believe that it should be determined on basis the mutual negotiations between MoD and OEM taking into account various factors such as contract type, period of implementation, time taken for IOP to build capabilities and meet quality requirements.

• Instead of committing fixed dollar/percentage amounts to IOPs at the time of offset proposal submission, a more flexible approach that permits global OEMs to define offset amounts to be allocated to each IOP over the course

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of the programme may be adopted. This continuous feedback model will enable greater and more robust IOP engagement and will better benefit India’s industry across large, medium and small scale enterprise.

• The offset credit mechanism for banking of offset claims should be time bound and efficient and there should be a prescribed time limit for the DOMW for replying to questions.

• The MoD should expand the list of eligible services for discharge of offset obligations, to include assembly, integration and testing services; setting up testing infrastructure; undertaking skill development projects in India

• A pragmatic definition of ‘value addition in India’ should be considered. It is recommended that the minimum value demanded from the Indian vendor in Buy (Global) category be the reference point for granting full offset credit to the foreign OEM i.e. where value addition of 30 per cent is achieved, full offset credits should be granted against such products.

• A well-defined valuation methodology based on global standards may be laid down in the DPP for the cases involving TA to DRDO. Moreover, in case the value of technology proposed to be transferred exceeds the 30 per cent threshold, any excess value should be permitted to be banked.

• Provision for online filling of quarterly progress reports (QPRs).

2.3 Other Recommendations2.3.1 Licensing process

• List of items that will still require an industrial licence (negative list) should have items of a combative nature only.

• All other non-combative items such as, ‘specialized equipment for military training or simulators specially designed for training in the use of any firearm or weapon.’ And

‘Miscellaneous: concealment and deception equipment specially designed for military application, including but not limited to special paints, decoys, smoke or obstruction equipment and simulators, and metal embrittling agents,’ should be taken out of purview of licensing.

2.3.2 FDI

• FDI in defence of up to 74 per cent under automatic route should be permitted unconditionally.

• Additionally, FDI of 100 per cent in defence can be done. The criteria for such approvals should be made more quantitative and measurable.

2.3.3 Offsets

• New investment linked avenues for discharge of offset obligations, which enable certainty and quick discharge of offsets is an excellent initiative.

• New investment linked avenues for discharge of offset obligations should be eligible for a multiplier of at least five. Further, the process of investment should be transparent.

• Avenues for discharge of offset obligations as per latest DPP should be applied retrospectively to programmes for which contracts have not been signed yet.

• Group companies of the main vendor should also be allowed to carry out offset discharge on the main vendors behalf in addition to Tier-1 vendors.

• Value addition criteria for offset should not be applied to materials which are not available in India like electronic components etc.

• Approved banked credits up to the date of contract signature should be allowed to be used towards discharge of offset obligation even though such credits were not part of initial offset proposal.

• 20 per cent limit of offset discharge through engineering, design and development and software development should be enhanced.

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2.3.4 Miscellaneous

The numbers of RFIs being issued is increasing and often, these are re-issued several times. The depth and the complexity of information requested is far beyond a Request for Information and they are more in the nature of a Request for Proposal. This creates an unnecessary burden and costs on potential bidders. We, therefore, recommend that:

• Restrict RFIs to those that will reach RFP stage

• RFI to be limited to simple products information and in principle compliance matrix to Make in India initiatives and DPP obligations.

• Disclose the Service Capital Acquisition Plan (SCAP) and Annual Acquisition Plan (AAP) to major defence players in order to partner more effectively with the Indian Industry to address the requirements.

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FINANCIAL SERVICESAcknowledgements: Rajeeb Ranjan Mallick (Home Credit) – Chairman, Financial Services Sector Committee & its Members

Knowledge Partner: Achin Malik & Sameer Sheth – TMF-Group

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India’s financial system remains stable, while the concerns on banks’ asset quality remain. The transition of credit intermediation from the banking sector to the non-banking sector though welcome, calls for increased monitoring and prudential regulation. The results of the latest systemic risk survey conducted by the Reserve Bank of India (RBI) during April-May 2017 indicated that among the major risk groups; global, macroeconomic and institutional risks continued to be perceived as ‘medium’, while financial market risks were perceived as ‘low’.

2017 was a remarkable year in many ways as certain major reforms were undertaken. The transformational goods and services tax (GST) was launched at the stroke of midnight on July 1, 2017. The reforms like the Real Estate (Regulation and Development) Act (RERA), 2016 and the long-festering twin balance sheet (TBS) challenge was decisively addressed by sending the major stressed companies for resolution under the new Insolvency and Bankruptcy Code (IBC), 2016 and implementing a major recapitalization package (about 1.2 per cent of GDP) to strengthen the public sector banks seeking to stimulate the flow of credit to spur private investment. This should allow real GDP growth to reach 6.75 per cent for the year as a whole, rising to 7-7.5 per cent in 2018-19, thereby reinstating India as the world’s fastest growing major economy.1

The year was also exceptional for the Indian primary markets with record initial public offerings (IPOs). Insurance dominated the year in terms of new listings. The top five IPOs were from the insurance industry, e.g. New India Assurance, General Insurance Corporation, SBI Life Insurance, ICICI Lombard General Insurance and HDFC Standard Life Insurance.

The efficiency and competitiveness of the banking sector is likely to increase with entry of differentiated

banks, posing some transitional challenges to the universal banks. The mutual funds market is expanding beyond the top 15 cities. Various initiatives by regulators to develop the corporate bond markets seem to be bearing fruit as reflected in increased issuance and turnover in the secondary market. Concerns arising from frauds and cyber-attacks remain elevated with the recent global ransomware attacks. Various responses by the regulators in this regard include setting up of an Inter-disciplinary Standing Committee on Cyber Security by the RBI.

The government seems to be committed to its target of increasing the inclusion of every household in the financial system so that the masses can get all the legitimate benefits arising out of the growth of the country and in turn, the funds mobilized from the people could also be brought in the formal channel thereby giving the economy of the country an extra thrust to lead the path of growth.

The advancements whether in the form of digitization or regulations result in expectations by European companies for further improvement by the Government of India to strengthen the financial sector. The EBG, through this paper and on behalf of European companies have highlighted issues and suggested recommendations so that the real issues are discussed and addressed in the right forum.

While the government initiatives are helping to move towards globalization and creation of opportunities for becoming a developed nation with focus on investment in infrastructure growth, education and healthcare schemes, finance, tax and governance reforms promoting digital economy with incentives and rewards; it is imperative that the issues and recommendations are mentioned in this paper are also discussed appropriately for an inclusive growth.

EXECUTIVE SUMMARY

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Macroeconomic developments in the year 2017 have been marked by swings. The Economic Survey 2018 describes the first half of India’s economy temporarily “decoupled”, decelerating as the rest of the world accelerated – even as it remained the second-best performer amongst major countries, with strong macroeconomic fundamentals. The reason lay in the series of actions and developments that buffeted the economy: demonetization, teething difficulties in the new GST, high and rising real interest rates, an intensifying overhang from the TBS challenge, and sharp falls in certain food prices that impacted agricultural incomes.

In the second half of the year, implementation of the much-awaited GST caused operational issues which partly arose due to the lack of clarity and understanding. But the economic growth improved as the shocks began to fade, corrective actions were taken, and the synchronous global economic recovery boosted exports. Reflecting the cumulative actions to improve the business climate, India jumped 30 spots on the World Bank’s Ease of Doing Business rankings2, while similar actions to liberalize the foreign direct investment (FDI) regime helped increase flows by 20 per cent. And the cumulative policy record combined with brightening medium-term growth prospects received validation in the form of a sovereign ratings upgrade, the first in 14 years.

The Central Statistics Office (CSO) has forecast real growth of gross domestic product (GDP) for 2017-18 at 6.5 per cent. However, this estimate has not fully factored in the latest developments in the third quarter, especially the greater-than-CSO-forecast exports and government contributions to demand. Accordingly, real GDP growth for 2017-18 as a whole is expected to be close to 6.75 per cent. Given real GDP growth of 6 per cent in the first half, this implies that growth in the second half is expected to rebound to 7.5 per cent, aided

by favourable base effects, especially in the fourth quarter.3 A significant part of this growth and financial inclusion is expected to come at the back of strong financial services especially the non-banking sectors. It is evident from the fact that the share of non-banking financial companies (NBFCs) in total credit extended by banks and NBFCs together increased from 9.5 per cent in March 2008 to 15.5 per cent in March 2017. NBFCs credit intensity, i.e., credit as per cent of GDP, has also increased at a steady pace, reaching 8 per cent at end March 2017. Industry receives about 60 per cent of total credit by NBFCs, followed by retail, services and agriculture.4

India has a diversified financial sector expanding rapidly with the increase in demand for financial services and NBFCs have continuously played a critical role in encouraging growth of the Indian economy and have made commendable contribution towards the government’s agenda of financial inclusion. They have been successful in filling the gap in offering credit to retail customers in underserved and unbanked areas by extending unsecured loans to first time borrowers. NBFCs’ contribution and future potential in financing micro, small and medium enterprises (MSMEs) has been duly recognized by the government as well.

Over the years, the Indian financial system has grown a great deal with gross national savings (GNS) remaining close to 29 per cent of GDP. GNS are estimated to increase from US$ 669 billion (€542.32 billion) in 2015 to US$ 940 billion (€761.99 billion) in 2019, growing at a compound annual growth rate (CAGR) of 8.87 per cent. The wealth of India’s high net worth individuals (HNIs) is likely to expand at a CAGR of 19.7 per cent and reach around US$ 3 trillion (€2.43 trillion) by 2020. Mutual fund industry’s assets under management (AUM) recorded a CAGR of 15.25 per cent over financial year FY 2007-17.5

It is a tough phase for the banking sector,

1. INTRODUCTION

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since the demand for banking services has increased following demonetization and it is hoped that the NBFC’s will be able to ease the pressure on mainstream banking system. The growth of technology has caused disruption in the financial system. The greater resilience and adaptability, coupled with some ‘out of the box’ thinking, have put the NBFC sector in a bright spot. This has resulted in a very welcome scenario where leading global financial institution like the World Bank and investment funds (including pension funds) are also increasingly engaging and investing in the sector.

The scope of the paper is to cover financial services excluding banking sector since they are evolving as a specialized sector and have specific challenges and recommendations which needs to be highlighted.

1.1 Market Description1.1.1 Non-banking financial companies (NBFCs)

refers to financial intermediaries which offer various services that include equipment leasing, hire purchase, loans, investments and chit fund activities. These entities play a vital role in offering credit to the unorganized sector and to the small borrowers at the local level.

NBFCs are categorized into two types on the basis of their liability structure: deposit-taking NBFCs (NBFCs-D) and non-deposit taking NBFCs (NBFCs-ND). As at end-March 2017, there were 11,522 NBFCs registered with the RBI out of which 178 were NBFCs-D and 11,344 were NBFCs-ND entities. There were 220 systemically important non-deposit taking NBFCs (NBFCs-ND-SI) which are subject to more stringent prudential norms and provisioning requirements.6

1.1.2 The domestic insurance industry appears to be very vibrant. India with 3.42 per cent penetration rate in the insurance sector offers greater penetration potential when compared to global average of 6.2 per cent.

Over FY 2002-17, life insurance premiums expanded at a CAGR of 13.28 per cent growing the market from US$ 10.5 billion (€8.51 billion)

in FY 2002 to US$ 64.92 billion (€52.62 billion) in FY 2017. Owing to the solid economic growth, higher personal disposable incomes in the country and demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning; the Indian life insurance is set for stupendous growth.7

The non-life insurance market grew from US$ 2.6 billion (€2.11 billion) in FY 2002 to US$ 19.8 billion (€16.05 billion) in FY 2017. Over FY 2008-17, non-life insurance premiums increased at a CAGR of 17.7 per cent.

1.1.3 The AUM industry in India is among the fastest growing in the world. Total AUM of the mutual fund industry clocked a CAGR of 15.25 per cent over FY 2007-17. India registered a record inflow of amount of US$ 51.02 billion (€41.36 billion) in mutual funds in FY 2016-17. According to the Association of Mutual Funds in India (AMFI) data, this was the highest investment in mutual fund schemes since the fiscal 1999-2000. Mutual fund (MF) equity portfolios in India reached a 10-year high of 49.3 million, by end of 2017.8

1.1.4 The number of listed companies on NSE and BSE increased from 6,445 in FY 2010 to 7,501 in December 2017. The market capitalization of all the companies listed on the BSE reached a record `150 lakh crore (€1.86 trillion) backed by high gains in the broader market. The revenues of the brokerage industry in India are estimated to grow by 15-20 per cent to reach `18,000-19,000 crore (€2.24-2.36 billion) in FY 2017-18, backed by healthy volumes and a rise in the share of the cash segment.9

1.1.5 The wealth management industry is an emerging segment in India. This is demonstrated with the fact that between 2011 and 2016, number of HNIs in India has seen a steady rise at a CAGR of 12.73 per cent and it is estimated that high net worth households would grow at an even faster rate till 2019 growing at a CAGR of about 21.5 per cent. India has over 286,000 households with net worth of more than US$ 1 million (€0.81

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million) with assets close to US$ 584 billion (€473.41 billion).

India has 219,000 high net worth individuals having net wealth of US$ 877 billion (€710.92 billion) as of 2016, and the population of HNIs is expected to double by 2020. By the end of 2020, Indian HNI wealth is estimated to grow to over US$ 3 trillion (€2.43 trillion).10

1.1.6 European companies are global players, demonstrated by the fact that out of the world’s top 20 non-financial multinational corporations (MNCs) ranked by foreign assets, 14 are from the European Union (EU), according to the United Nations Conference on Trade and Development (UNCTAD).11 The EU offers important opportunities in terms of technology sharing and know-how, providing high level synergies in sectors where EU companies are world leaders.

It is an opportunity for European companies to utilize their experience of expansion in their existing markets and benefit on the basis of operational excellence by creating new products and innovating based on existing capabilities and experiments.

1.2 Recent developments1.2.1 The IBC, 2016 was introduced to consolidate

and amend the laws relating to insolvency resolution of companies and limited liability entities, partnerships and individuals, which are contained in various enactments, into a single legislation. The main focus of this legislation is at providing resurrection and resolution in a time bound manner for maximization of value of debtor’s assets. The IBC has put forth an overarching framework to aid sick companies to either wind up their business or engineer a revival plan, and for investors to exit.

Notably, the IBC has also empowered the operational creditors (workmen, suppliers etc.) to initiate the insolvency resolution process if default occurs. This is expected to be a major change for the lending business (banks and non-banks) as it gives an additional support by implementing a concrete and fast track

process for recovery of bad debts from non-performing loans.

1.2.2 The GST replaced all indirect taxes levied on goods and services by the central government and state government and got implemented by July 1, 2017. Its implementation has a far-reaching impact on almost all the aspects of the business operations in India. GST is a value-added tax levied at all points in the supply chain, with credit allowed for any tax paid on input acquired for use in making the supply. It applies to both goods and services in a comprehensive manner, with few exceptions. The GST is levied concurrently by the central government (CGST) and the state government (SGST). The inter-state supplies within India would attract an integrated GST (IGST), which is the aggregate of CGST and the SGST of the destination state.

After GST regulation, these financial institutions are required to get a separate tax registration for each of the states they work in. All the services provided by NBFCs, insurance companies, asset managers, etc. will be now covered under GST and they are eligible to claim input credits as applicable and detailed by the Central Goods and Services Tax Act, 2017.

1.2.3 The RERA, 2016 is an Act passed by the Indian Parliament. The RERA seeks to protect the interests of home buyers and also boost investments in the real estate sector. The majority of the provisions of RERA came into force from May 1, 2017. For long, home buyers had complained that real estate transactions were not transparent and heavily in favour of the developers. RERA and the government’s model code, aim to create a more equitable and fair transaction between the seller and the buyer including the investors. It will bring more accountability and transparency which will open up more avenues for investments in real estate. Thus this should create a positive impact on the real estate investment community including NBFCs who lend heavily to that sector.

1.2.4 The Foreign Account Tax Compliance Act (FATCA) came into effect in 2014 with focuses on collecting information on US persons, in

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order to share such with the Internal Revenue Service (IRS) if it was applicable. On similar note, India committed to participate as of January 1, 2016 (early adopter) and comply with Common Reporting Standard (CRS), a broader initiative from the Organization for Economic Cooperation and Development (OECD) which englobes over 101 countries with information reporting obligations. This required the financial institutions and other entities to report the required detailed information to the income tax authorities so that they can automatically exchange relevant information with their counterparts globally. The filing deadline was May 31, 2017.

All financial institutions have an additional reporting requirement to report detailed information of the financial accounts maintained by such financial institutions. Thus, there is an additional reporting requirements for all financial institutions including banks, life insurance companies, NBFC, brokers, portfolio management services (PMS), funds, depository participants (DPs), investment entities, etc. as applicable.

1.2.5 The Indian government through Finance Act, 2016 amended the Indian income tax law (ITL) to introduce Sec 286 effecting provisions for additional transfer pricing (TP) documentation and country-by-country reporting (CbCR). This amendment was in line to its commitment to implement the recommendations of Action Plan 13 of base erosion and profit shifting (BEPS) issued by OECD.

On October 6, 2017, the Indian tax administration issued draft rules for CbCR reporting and the furnishing of the master file for public comments. After the submission of public comments from various industry stakeholders, on October 31, 2017, the Indian tax administration issued the final rules for the same. With the final rules now in place, the deadlines clearly carved out and the initial understanding of the rules complete, it has become imperative for the companies to take necessary action. The deadlines are stringent and details will need to be quickly collated for submission.

1.2.6 For a large and diverse country such as India, ensuring financial access to fuel growth and entrepreneurship is critical. With the launch of government-backed schemes (such as the Pradhan Mantri Jan-Dhan Yojana (PMJDY), there has been a substantial increase in the number of bank accounts, the total as on February 7, 2018 equals to `31.07 crore (€3.86 million).12

2. KEY TRENDS IN FINANCIAL SERVICES

A digital transformation is taking place in the financial services industry, with a host of non-bank innovators offering both customer facing and back office financial technology products and services. This transformation includes emerging market economies, and in many places offers a viable digital alternative to traditional banks, which have left significant populations underbanked.

2.1 Rising Investments in Digital Infrastructure – A Fully Integrated IT Organization

The rise of digital technology has dramatically altered the landscape in the financial-services sector. Banks offer financial planning and trading applications through smartphones and social media; cloud technologies are widely accepted, and in many cases robotics are already reducing cost and increasing quality.

This has provided new opportunities (and new competitive threats) for the industry. There is thus a significantly higher premium on the performance of the information technology (IT) teams in financial services institutions. To meet the demands of the new marketplace — to offer competitive, feature-laden, well-designed digital products and services, with a much faster speed-to-market, while lowering costs and continuing to support legacy systems — an IT function has to be flexible, efficient, and responsive. But those adjectives are not always applied to conventional IT departments. Many financial-services firms will have to do much

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more than merely re-examine their go-to-market strategies; they must also dispassionately reassess their IT operating model, and be prepared to jettison the approaches they have used for decades.

2.2 Consolidation in Financial Services Industry

Due to consolidation in the financial services industry, the non-bank financial institutions (NBFIs) need to work together to provide a one-stop solution to their customers. This presents a strategic opportunity for them to ensure sustainable growth over a long term. Partnerships with payments banks, bill payment providers and other financial institutions, such as insurance and asset management companies, will help the NBFCs offer the complete proposition – from deposits to lending, investments and transactions. The reach of the NBFCs, along with their strong understanding of the market, can help them position themselves as a better alternative to the traditional ways of banking.

2.3 Recent Changes to the NBFC Segment

The NBFC segment has evolved considerably over a period of time in terms of operations, heterogeneity, asset quality, profitability and regulatory architecture. The RBI has been working on consolidating the various categories of NBFCs. At present, there are 12 categories of NBFCs. The latest addition is the NBFC peer to peer (NBFC-P2P) lending platform. Guidelines on NBFC-P2P have been issued by the RBI in October 2017. The RBI issued a discussion paper on regulation of the P2P lending platform as a NBFC. The government notified P2P as a NBFC activity on September 18, 2017 following which regulations were issued on October 4, 2017. The new regulations are expected to bring a major shift in crowd funding in India.

2.4 IPO and Fund-raising Activities in 2017

The capital markets are flooded with IPO

of NBFCs, asset management companies, life insurance companies and the Non-Life insurance companies. There is a positive interest seen in entire 2017 from domestic institutions via IPO’s and foreign institutions including private equity firms to invest in this sector. This is evident from the fact that a total of 153 IPOs were issued in the Indian stock markets in 2017, which raised a total of US$ 11.6 billion (€9.40 billion). Even private equity (PE) investments in India increased 59 per cent to US$ 24.4 billion (€19.77 billion) in 2017, with average deal size of $34.8 million (€28.21 million).13

2.5 Data Security Data is the new oil and with so much data

being generated every second, hackers are constantly devising ways to acquire it. As most cyber security measures up till now have been reactive rather than preventive in nature, financial institutions will now begin to adopt additional measures to ensure data security at all stages using a combination of encryption, one time passwords (OTPs), biometric authentication and more. In a digital environment, it becomes incumbent on financial Institutions to have an effective cyber security policy as part of their overall risk management framework. Cyber-attacks entail a reputational risk for these Financial Institutions, as they undermine customer confidence and risk a lot of valuable and confidential data. In 2017 itself, we witnessed multiple cyber-attacks and threats to the digital world.

2.6 Digitization in Insurance Sector The world over, financial services are

experiencing a moment of disruption. Multiple smaller players are working on specific problems in the life insurance value chain — from customer on-boarding and financial planning to customer servicing. These are driving the incumbents to change their conventional way of thinking. These challengers have seen benefit in collaborating with the incumbents rather than trying to upend the business.

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This trend will continue in the coming year. The traditional players will use data science, deep learning tools, automation, mobility and cloud computing to make their processes frictionless, reduce costs and improve their agility. Players in industry are investing in Information Technology to automate various processes and cut costs without affecting service delivery. It is estimated that digitization will reduce 15-20 per cent of total cost for life insurance and 20-30 per cent for non-life insurance. From October 2016, the Insurance Regulatory and Development Authority of India has mandated having an e-insurance (electronic insurance) account to purchase insurance policies.14

2.7 Union Budget of India 2018-2019 The Union Budget for 2018-1915 was presented

to the parliament by Indian Finance Minister Arun Jaitley on February 1, 2018. This Budget is expected to be the last of this government prior to elections which are expected to happen over the next twelve months, and the focus was around ensuring that the rural economy was adequately benefited.

The Budget emphasizes the need for developing a robust ecosystem with a strengthened agricultural and rural sector, of healthy and educated citizens, with abundant employment opportunities, with robust MSME segment and strong infrastructure sector. The reforms of the Budget place stress on ‘ease of living’ for the common man of this country, especially the less privileged. Few key features of the budget were:

Taxation:

• The Budget proposes a 10 per cent tax on transfer of listed equity shares, units of an equity oriented mutual fund and units of a business trust, where such gains exceed `100,000 (€1,244.60), with effect from April 1, 2018. The Budget also proposes to introduce limited grandfathering in respect of protecting gains realized on a mark to market basis up to January 31, 2018; an increase in share value post this date would be brought within the tax net. This is in line with the government’s intent

not to introduce taxes with retrospective effect and to protect any exodus from the Indian markets.

The introduction of a tax on long-term capital gains (LTCG) will result in higher tax costs for foreign portfolio investors (FPIs) especially after the amendments to the Double Tax Avoidance Agreements with Mauritius and Singapore, last year, which gave India the right to tax capital gains from sale of shares.

• On a more positive note, the Budget proposes to reduce corporate tax rates to 25 per cent for Indian companies whose annual turnover is less than ̀ 2,500 million (€31.11 million). This is in line with the earlier proposals of the finance minister (FM) and should enhance competitiveness and encourage global investors to Make in India. The FM has mentioned in his budget speech that the exemption is broad enough to cover 99 per cent of all tax-paying companies.

• Currently, a dividend distribution tax (DDT) of 15 per cent on a gross basis is applicable to companies on any amount declared, distributed or paid by a company by way of dividends. Further, certain deeming provisions have been included in the Income Tax Act (ITA) to curb tax evasion by closely held companies which distribute accumulated profits in the form of loans or advances to their shareholders instead of dividends in a bid to avoid paying DDT. These loans or advances are deemed to be in the nature of dividends and are brought to tax in the hands of the shareholders at the applicable tax rate and no DDT is payable at the corporate level. The Budget proposes to bring deemed dividends in the nature of loans or advances to shareholders under the scope of the DDT from April 1, 2018. Such deemed dividends are proposed to be subjected to a higher rate of tax at 30 per cent (without grossing up) as opposed to regular dividends.

• In the context of bankruptcy and insolvency laws, while 2017 witnessed a large number of cases being referred the National Company Law Tribunal, concerns have been raised on the fact that tax law has not yet caught up with the changes. The Budget proposes to promote the restructuring plans by introducing

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tax incentives such as the ability to carry forward losses despite change in ownership and minimum alternate tax (MAT) relief to the extent of unabsorbed depreciation and carried forward loss where a company has been admitted into the bankruptcy process. These proposals should further increase interest amongst investors in distressed assets.

Financial services

• To provide an impetus to International Financial Service Centre (IFSCs), the Budget has provided certain incentives by recognizing the need for a coherent and integrated regulatory framework for IFSCs to be able to compete with offshore financial centres. The FM has declared that the government will establish a unified authority for regulating all financial services in IFSCs. This is a welcome move as a unified regulator for IFSCs should provide for more effective and efficient decision-making, improve Ease of Doing Business and enhance the competitiveness of IFSCs vis-à-vis other offshore financial centres.

• In order to further promote the development of IFSCs in India, the Finance Bill proposes that transactions in the derivatives/bonds/global depository receipts (GDRs), by a non-resident on a stock exchange located in an IFSC shall be exempt from capital gains tax in India, if the consideration is paid or payable in foreign currency. The aforesaid exemption shall reduce the transaction cost of trading on IFSC exchanges, and hence make them very competitive, and will provide the much needed impetus to lift the volume of derivative trades listed on the IFSC exchanges.

• We saw a phenomenal increase in recent times in the price of virtual ‘currencies’ (VCs) including bitcoin, in India and globally. With no regulations governing virtual currencies in India and despite no licences granted to any entity/company in an effort to prevent them from operating in such currencies, there was a real and heightened risk of investment bubble which may have resulted in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money.

Following the repeated cautionary circulars issued by the government and the regulators, the move to not consider crypto currencies as legal tender as part of Budget announcement will not only address these complexities on an immediate basis but it will also go a long way in eliminating every risk related to the use of crypto assets in India thereby securing the country’s economy. While the choice to invest in bitcoins and other crypto currencies will be open to end users, the government is taking proactive measures to curb frauds and illicit transactions.

• Refinancing policy and eligibility criteria set by the Micro Units Development and Refinance Agency (MUDRA) Bank will be reviewed for better refinancing of NBFCs. This will help NBFCs increase their exposure to MSME segment and help grow their client base.

• Three public sector general insurance companies National Insurance Company Limited, United India Assurance Company Limited and Oriental India Insurance Company Limited will be merged into a single insurance entity and will be subsequently listed. The government has approved listing of two insurance companies on the stock exchanges. This will help bring in economies of large scale, efficiency and transparency; while unlocking their value to the government exchequer.

Startups

• The Finance Bill extends the benefit of section 80-IAC to Startups incorporated on or after April 1, 2019 but before April 1, 2021. Under section 80-IAC, a startup engaged in an eligible business can elect to exempt its income from income tax for any three successive years within a block of seven years commencing from the date of its incorporation. Even the definition of ‘eligible business’ has been changed and brought closer to the definition of a startup as notified by the Department of Industrial Policy and Promotion which should allow startup which are neither engaged in the development of a new product or process, nor in a business not driven by intellectual property or technology, but nevertheless engaged

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in a business with high wealth creation and employment generation potential, to claim the benefit of section 80-IAC.

• While the above is a welcome move, however, the concerns of angel and venture capital investors were not addressed, whose portfolio startups often receive notices from the tax authorities seeking to characterize growth capital received as income taxable in the hands of the startup under section 56 (income from other sources) and section 68 (income from undisclosed sources).

• Startups continue to remain subject to the MAT, which makes it difficult for them to avail the benefit of losses carried forward in a meaningful manner.

Others

• BEPS Action Plan 13 recognized the need to develop robust rules for CbCR by multinational enterprises (MNE) to enhance transparency for tax administrations. As part of aligning Indian tax laws with the BEPS Action Plans, Finance Act, 2016 introduced section 286 in the ITA to provide for CbCR by Indian entities belonging to international groups.

• Other Budget proposals include introduction of a new scheme for assessments. The proposed scheme eliminates interactions between the tax officer and the taxpayer through an e-assessment model which will result in greater transparency and efficiency. The effort seems to in line with the dual aim of Ease of Doing Business and promoting the digital economy.

3. ISSUES AND RECOMMENDATIONS

3.1 Fund-raising Avenues and Prudential Ceilings for Exposure of Banks to NBFCs

NBFCs face a higher cost of borrowings which is eventually passed on to their borrowers in the form of higher interest on loans. It increases delinquencies and reduces profit margin which affects their credit rating with the banks in turn.

It becomes a vicious circle as with a low credit rating, cost of funds goes up further.

The exposure (both lending and investment, including off balance sheet exposures) of a bank to a single NBFC/NBFC-AFC (asset financing companies), which is not predominantly engaged in lending against collateral of gold jewellery, should not exceed 10 per cent/15 per cent respectively, of the bank’s capital funds as per its last audited balance sheet.

Banks may, however, assume exposures on such a single NBFC/NBFC-AFC up to 15 per cent/20 per cent respectively, of their capital funds provided the exposure in excess of 10 per cent/15 per cent respectively, is on account of funds on-lent by the NBFC/NBFC-AFC to the infrastructure sector.

Further, exposure of a bank to the NBFCs-IFCs (infrastructure finance companies) should not exceed 15 per cent of its capital funds as per its last audited balance sheet, with a provision to increase it to 20 per cent if the same is on account of funds on-lent by the IFCs to the infrastructure sector.16

To ease the fund raising problem, vide notification dated March 30, 2017, the RBI opened up the external commercial borrowings (ECBs) route for NBFCs, IFCs, NBFC-AFCs, holding companies and core investment companies (CICs) by allowing them to raise rupee-denominated ECBs with a minimum maturity of five years. This would allow NBFCs and infrastructure companies to borrow now at a more competitive rate from the international rather than the domestic markets.

While the government has been actively working towards resolving the liquidity issues of NBFCs, however, in view of increased liquidity with the banks post demonetization and the fact that the NBFC’s are reliant on them to meet their funding requirements; the EBG recommends to provide relaxation on the ceiling imposed on banks to provide finance to the NBFC’s to increase liquidity in the market promoting lending services.

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3.2 Participation in Priority Sector Lending (PSL)

India’s approach to financial inclusion has been multi-pronged. One of its major corner-stones is the presence of stipulations on priority sector lending by the commercial banks. For this purpose, priority sector includes the following categories, viz., agriculture; micro, small and medium enterprises; export credit; education; housing; social infrastructure; renewable energy; and others (like weaker section of the community). Indian commercial banks are required to lend 40 per cent of their credit to the priority sector. Even banks with 20 branches and above also have to achieve the 40 per cent total within a maximum period of five years over April 2013-March 2018 as per the action plans submitted by them and approved by RBI. However, NBFCs have been kept out of PSL initiative.

An important development during 2016-17 was the operationalization of the priority sector lending certificates (PSLCs) scheme in April 2016. This scheme allows a bank, to sell the over-achievement of its target in a particular sector through PSLCs to another bank, which can buy it to meet its target in that sector, while selling its own over-achievement of the target in another sector to another bank and so on. The RBI has provided a platform to enable trading in PSLCs through its core banking solution (CBS) portal (e-Kuber).

EBG strongly recommends to include NBFCs in this initiative if they get cheap funds from the banks to pass on the benefit to lowest end of the spectrum. This will not only aid the banks in meeting their targets but also have the ability to reach out to such low end of the borrower pyramid and manage the risk associated with such direct lending.

3.3 Enhancing Overall Cap for Corporate Bonds

In government’s endeavour to resolve the liquidity issues in the NBFI sector and deepen corporate funds further, Budget 2017-18 witnessed a positive move by allowing FPI’s

to invest in unlisted corporate bonds. This was followed by a circular issued by the Securities and Exchange Board of India (SEBI) on February 28, 2017 which allowed FPIs to invest in unlisted corporate debt securities in the form of non-convertible debentures/bonds issued by public or private Indian companies subject to the guidelines issued by the Ministry of Corporate Affairs, Government of India. While the move was welcome but it was later realized that the circular also maintained a combined corporate debt limit of `2.4 trillion (€29.87 billion) for extending the credit which has remained unchanged since 2013 and got breached very quickly resulting into many genuine companies being unable to reap benefits of this change due to this cap. As per reports, the debt limit utilization as per data on July 19, 2017 stood at 92.89 per cent,17 reflecting a need for an immediate increase in the limits. Multiple industry representations were made on this matter and to its credit, the RBI was quick to act on it and vide circular dated September 22, 2017, Masala bonds (Rupee denominated bonds) of `44,001 crore (€5.47 billion) were excluded from the combined corporate debt limit and released for additional FPI investment.

The EBG lauds the regulator for its swift action and requests to look into possibility of further simplifying it by creating a sub-limit for specific sectors who need this the most.

3.4 Simplification of KYC Requirements and Appropriate Digitization

3.4.1 Simplification of compliance with Prevention of Money Laundering (Maintenance of Records) Second Amendment Rules, 2017

Prevention of Money Laundering (Maintenance of Records) Second Amendment Rules, 2017 issued by Ministry of Finance effective June 1, 2017, requires immediate compliance with collecting and verifying of Permanent Account Number (PAN) and Aadhaar (issued by the Unique Identification Authority of India) for existing customers of the reporting entities

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within six months; failing which the accounts of those customers need to be suspended. While the EBG fully supports the intent of the government in ensuring maximum transparency in the ecosystem, however, for NBFIs which are in retail lending space especially in micro-finance sub-sector this is quite onerous as a lot of their customers are from low income group (and may not even have PAN cards) which in effect supports the financial inclusion agenda of the government by including the underserved sections of the society. Further, unlike high ticket mortgage loans which entail a longer loan processing time and multiple verifications, for small ticket loans, a quicker processing time helps these organizations to keep their costs low and enable them to pass the benefit to the customers.

EBG, therefore, recommends that the requirement for collecting PAN may be appropriately relaxed in case of loan transactions of individual customers below a certain reasonable limit as may be decided upon by the government. Reference may be drawn to the section 114B of the ITA which provides monetary limit against transactions up to which PAN is not mandatory.

3.4.2 Further digitizing Aadhaar/PAN linkage and making the relevant fields visible to the lenders while loan processing

The efforts of the government with respect to making Aadhaar a central mandatory document and linking it with bank accounts, PAN number etc. is commendable and is expected to bring more transparency into the system. Collection of Aadhaar number has also been made mandatory for lending companies as a compulsory document.

In order to further strengthen this initiative, EBG recommends that the government should open up certain fields of Aadhaar number such as PAN card, mobile number etc. to certain classes of NBFI’s especially systemically important NBFCs which are into financing. This not only protects the rights of lending NBFIs by ensuring know your customer (KYC) validation and lower costs of loan processing but also

empowers borrowers particularly the rural population with speedy loan disbursal at more affordable rates, thereby ensuring financial inclusion.

3.5 Issues Arising from Present Corporate Income-tax Regime

3.5.1 Earning on NPA’s to be taxed on cash basis rather than accrual basis

In accordance with the directions issued by the RBI, the NBFCs are required to follow prudential norms for accounting purposes which require them to defer income recognition in respect of their non-performing assets (NPAs). However, in practice, the income tax authorities used to tax the interest component on accrual basis thereby burdening them with unnecessary tax implications.

The Budget 2017-18 has extended the provision of section 43D of the ITA (taxing interest on receipt basis) to co-operative banks also (already available to scheduled commercial banks), but NBFCs have been kept out.

This has been a long standing demand from the NBFC’s and the EBG strongly believes that this should be addressed to provide them a level playing field with banks, financial institutions and state financial corporations.

3.5.2 Tax deduction for provisions for bad and doubtful debts

Under the existing provisions u/s 36(1)(viia) in the I.T. Act, a provision for bad and doubtful debts made by banks and FIs is allowed as a deduction to the extent of 7.5 per cent from the gross total income. Alternatively, such banks and FIs have been given an option to claim a deduction in respect of any provision made for assets classified by the RBI as doubtful assets or loss assets to the extent of 10 per cent of such assets. The Budget 2017-18 in a welcome move extended this benefit to NBFCs as well, however, the limit was capped at 5 per cent which needs to be looked into.

3.5.3 Treatment of special reserves under section 115JB of the Income Tax Act

NBFCs are statutorily required to transfer

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certain amount towards special reserve, debenture redemption reserve, create provision towards NPAs, diminution in the value of investments, etc. in accordance with the directions issued by RBI. However, the amount transferred towards these statutory reserves and provisions are required to be added back to the profits as per profit and loss account, as part of the adjustments required under section 115JB of the Act. This translates into a higher taxes being paid by NBFCs even though they are mandatorily required to create reserves/ provisions as per the RBI directions. Thus, there is a case for the government to consider allowing NBFCs to claim deduction towards creation of such reserves/provisions under section 115JB of the Act.

3.5.4 Relaxation under section 194A of the Income Tax Act

Section 194A of the Income Tax Act provides for deduction of tax at source (TDS) at the rate of 10 per cent on payment of interest (excluding interest on securities) to a resident. Sub-section 3 of section 194A provides for non-applicability of section 194A in some cases which include banking companies to which Banking Regulation Act applies. However, such exemption has not been extended to NBFCs.

Since NBFCs are supplementing the banks and these entities are also regulated by the Reserve Bank of India, EBG recommends that these NBFCs should be treated at par with banks and the benefit of ‘nil TDS’ should be extended to them as well.

3.6 Rural Customers Credit Rating Rural customers are not using banking

services as part of everyday life and are supported through merchants for short-term

finance needs. NBFC’s have to be wary of the changing culture with no credit rating in the rural area experiencing damage by lending to people who may take advantage of the easy lending norms.

The EBG recommends government to take steps to set up credit rating scores for the public at large and should provide data from other government backed schemes to share the information of credibility of people willing to have access to funds. Multiple alternate credit scoring mechanisms have surfaced over the period which can be of immense use for the NBFCs if channelized and regulated properly.

4. CONCLUSION The Indian economy is growing at a fast pace

and the government is taking steps to maintain the wheels of growth, touching the masses in terms of population as well as driving the necessary regulations and amendments for making it easier to do business in India.

Growing financial inclusion and government initiatives through special focus in the recent budget will open up services to poor, rural and other disadvantaged groups, population segments that have not always had easy access to financial services in the past. The NBFC sector assumes a critical role in financial inclusion as it caters to a wide range of financial activities particularly in areas where commercial banks have limited penetration. This sector has served the unbanked customers by pioneering into retail asset-backed lending, lending against securities and microfinance and aspires to emerge as a one-stop shop for all financial services serving the underserved.

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Endnotes

1 Economic Survey, 2018

2 World Bank press release dated, October 31, 2017

3 The Economic Survey, 2018

4 'Report on Trend and Progress of Banking in India' 2015-16 - www.rbi.org.in

5 Financial Services www.ibef.org

6 'Report on Trend and Progress of Banking in India' 2015-16 www.rbi.org.in

7 Insurance Sector in India- www.ibef.org

8 Financial Services – www.ibef.org

9 Financial Services – www.ibef.org

10 Financial Services - www.ibef.org

11 'The European Union and India: 50 Years of Partnership' – eeas.europa.eu

12 Pradhan Mantri Jan Dhan Yojana: pmjdy.gov.in

13 Financial Services – www.ibef.org

14 Insurance Sector – www.ibef.org

15 Union Budget of India 2018-2019 – www.indiabudget.nic.in

16 Bank finance to NBFC’s – rbidocs.rbi.org.in

17 Foreign Investment Limits in Corporate Bonds – www.fpi.nsdl.co.in

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FMCGAcknowledgements: Rajeev Batra – Senior Advisor, FMCG Sector Committee

Knowledge Partner: Sumeet Hemkar – Deloitte Touche Tohmatsu India LLP

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This paper analyses the inherent challenges and opportunities in one of the biggest sectors of the Indian economy: fast moving consumer goods (FMCG). The Indian FMCG sector is currently growing at a compound annual growth rate (CAGR) of 20.6 per cent, with an anticipated approximate turnover of US$ 103.7 billion (€84.06 billion) by 2020. The sector is broadly divided in the following categories – foods and beverages, health care, and household and personal care products. The urban and rural segmentation of revenues in the sector is at 60 per cent and 40 per cent respectively.

Growing awareness, easier access, and changing lifestyles are key growth drivers for the consumer market. The policies of the Government of India and the liberalized regulatory framework such as relaxation of licence rules, approval of 51 per cent foreign direct investment (FDI) in multi-brand and 100 per cent in single-brand retail, focus on agriculture, micro, medium and small enterprises (MSMEs), education, healthcare, infrastructure and employment under the Union Budget 2018-19 are set to drive growth along with the growth of e-commerce. These measures are

EXECUTIVE SUMMARY

also driving growth and opportunities in packaged food, dairy based products, food processing and personal and oral care segments.

Besides the opportunities, the paper also discusses the challenges faced by players in the sector, and ideates on recommendations to resolve such challenges. Such challenges, inter alia, include those under the goods and services tax (GST) regime such as lack of sufficient budgetary support for units located in states like Uttarakhand, Himachal Pradesh, Northeastern states or Jammu and Kashmir in comparison to the erstwhile indirect tax law, stringent regulations with higher penalties on advertisements under the Consumer Protection Bill, 2018, availability of fake/IPR infringing products, parallel imports and counterfeits, etc. The paper also discusses some unique tax and regulatory changes impacting the sector.

In the above backdrop, the paper analyses and concludes that the FMCG sector is at the cusp of a growth trajectory for at least the next five years and this trajectory can further swing northwards if the issues discussed in the paper are either resolved, or certain inherent implementation issues are taken care of.

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1. INTRODUCTION

1.1 Market Description The fast-moving consumer goods (FMCG)

sector is one of the largest sectors in the Indian economy, contributing about 2.4 per cent to India’s gross domestic product (GDP). It generated revenues worth US$ 49 billion (€39.72 billion) in 2016 and is expected to touch US$ 103.7 billion (€84.06 billion) by 2020. The sector is expected to post a compounded annual growth rate (CAGR) of 20.6 per cent in revenues.

Despite certain inherent challenges, the Indian retailing landscape continues to remain dynamic. India’s twin growth engines i.e. economic liberalization and demographic profile – set it apart from other nations and present a convincing business case for global retailers seeking to enter the market. Indeed, it is expected that India would be the third largest consumption economy in the world by 2025.

The FMCG sector can be broadly segmented as follows:

FMCG

Food and Beverages Healthcare Household and PersonalCare

It accounts for 19 per cent of the sector.This segment includes health beverages, staples/cereals, bakery products, snacks, chocolates, ice cream, tea/coffee/soft drinks, processed fruits and vegetables, dairy products, and branded flour.

It accounts for 31 per cent of the sector.This segment includes OTC products and ethicals.

It accounts for 50 per cent of the sector.This segment includes oral care, hair care, skin care, cosmetics/deodorants. perfumes, feminine hygiene and paper products, Fabric wash, household cleaners.

Source: Indian Brand Equity Foundation, February 2018Notes: OTC is over the counter products; ethical are a range of pharma products

23%

18%

18%

15%

9%

6%

6%5%

Revenue share of India (FY 2016)

Hair care

Foods

Health supplements

Oral care

OTC & Ethicals

Home care

Digestives

Skin care

Source: Indian Brand Equity Foundation, February 2018

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Among the primary sectors, household and personal care is the leading segment, accounting for 50 per cent of the overall market. Healthcare (31 per cent) and food & beverages (19 per cent) come next in market share. Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the sector. The market reach of the Fast Moving Consumer Goods (FMCG) industry is summarized below:

1. FMCG sector in rural and semi-urban India is estimated to cross US$ 220 billion (€178.34 billion) by 2025.

2. The urban segment is the largest contributor to the sector, accounting for around 60 per cent of total revenues and had a market size of around US$ 29.40 billion (€23.83 billion) in 20161.

3. Semi-urban and rural segments are growing at a rapid pace; they currently account for 40 per cent of revenues.

Urban/rural industry break-up (2016)

US$ 49 billion (€ 39.72 billion) Urban

Source: Emami, TechSci Research

40%

60%Rural

Source: Indian Brand Equity Foundation, February 2018

4. In the last few years, the FMCG market has grown at a faster pace in rural India compared to urban India.

5. FMCG products account for close to 50 per cent of total rural spending.

2. INDUSTRY TRENDS AND MARKET OUTLOOK

The FMCG sector has grown at an annual average of about 11 per cent over the last decade. Online portals are expected to play a key role for companies trying to enter the hinterlands. The internet has contributed in a big way, facilitating cheaper and more convenient means to increase the reach of a business. There is rise in digital commerce. Internet users in India are likely to grow from 390 million to 650 million by 2020. Estimates suggest that by 2020, up to 40 per cent of FMCG consumption (US$ 45 billion or €36.48 billion) is likely to be digitally influenced. E-commerce in FMCG can potentially grow to at a CAGR of 34 per cent. Digital influence is relevant for both mass and premium brands. Magnitude and shape of digital influence varies significantly based on ‘intent’ of consumption and ‘degree’ of category penetration. Interestingly, market leaders in offline may not necessarily be leaders in the digital space and vice versa.

Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the consumer market. The Government of India’s policies and regulatory frameworks such as relaxation of licence rules and approval of 51 per cent foreign direct investment (FDI) in multi-brand and 100 per cent in single-brand retail are some of the major growth drivers for the consumer market.

3. MARKET OPPORTUNITIES

3.1 Policy and Regulatory Framework• Industrial licence is not required for almost

all food and agro-processing industries, barring certain items such as beer, potable alcohol and wines, cane sugar, and hydrogenated animal fats and oils as well as items reserved for exclusive manufacture in the small-scale sector.

• The Government of India recognizes food processing and agro industries as priority sectors (for lending purposes). It also

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provides subsidies and incentives to cold storage chains to enable optimal utilization of food produce in India by minimizing wastages.

• Food Security Bill would reduce prices of food grains for below poverty line (BPL) households, allowing them to spend resources on other goods and services, including FMCG products. This is expected to trigger higher consumption spends, particularly in rural India, which is an important market for most FMCG companies.

• Under the Union Budget 2018-19, the standard deduction of `40,000 (€497.84) in place of transport allowance and reimbursement of miscellaneous medical expenses, will increase the disposable income available to the common people.

• The focus on agriculture, micro, small and medium enterprises (MSMEs), education, healthcare, infrastructure and employment under the Union Budget 2018-19 is expected to directly impact the FMCG sector. These initiatives are expected to increase the disposable income of the common people, especially in the rural area, which will be beneficial for the sector.

• The Indian government has approved 51 per cent foreign direct investment (FDI) in multi-brand retail, 100 per cent FDI in the cash and carry segment and in single-brand retail. These measures will continue to boost the nascent organized retail market in the country.

3.2 Sectorial opportunities in FMCG Industry

Major sectorial opportunities for FMCG sector are highlighted below:

• Packaged food: Only about 10-12 per cent of output processed is consumed in packaged form, thus highlighting the huge potential for expansion of this industry. India’s packaged food industry (including snacks and ready-to-eat foods) was expected to reach US$ 30 billion2 (€24.32 billion) by

2015. In a recent survey conducted by The Associated Chambers of Commerce of India (ASSOCHAM), it was revealed that 82 per cent of the workforce, in some of the key metros, prefers packaged food compared to eating outside food or at road-side eateries. The Indian packaged food market registered double-digit constant value growth in 2016. Edible oils overtook dairy to become the largest category in the market in 2016, as hygiene concerns and the growing interest in products offering health and wellness benefits drove the rapid shift from unpackaged to packaged oils. The Indian packaged food market is forecast to see strong growth over 2016-20213 driven by increasing product availability as a result of manufacturers’ new product developments and greater penetration of smaller cities and rural areas.

• Dairy based products: India is the largest milk producer in the world. Since the consumption is growing, many foreign companies are coming to India with a variety of dairy products. However, there is scope for growth for other players as the value added products form only 15 per cent to 20 per cent of the total dairy production. Considering the higher purchasing power, higher awareness and preference for tertiary processed milk products coupled with low availability, there is an opportunity to grow the spending on this category. India’s demand for milk and milk products is increasing twice as fast as the production of milk. The market is also witnessing a consumer shift towards healthier products such as ultra-high temperature processing (UHT) milk, probiotic drinks and yoghurts, etc.

• Oral care: The oral care industry, especially toothpastes, remains under-penetrated in India with penetration rates of around 50-55 per cent. With rise in per capita incomes and awareness of oral hygiene, the growth potential is huge. Lower price and smaller packs are also likely to drive up potential trading.

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• Food processing industry: The Indian food processing industry accounts for 32 per cent of the country’s total food market, one of the largest industries in India and is ranked fifth in terms of production, consumption, export and expected growth. It contributes around 14 per cent of manufacturing GDP, 13 per cent of India’s exports and six per cent of total industrial investment. The food processing industry is one of the largest industries in India and ranks 5th in terms of production, consumption & exports. As per the estimates for FY 2015, food processing sector stood at US$ 258 billion (€209.14 billion).4 The food processing industry is now covered under the Make in India drive of the Indian government. Both domestic and global firms have been focusing on product innovation to cater to domestic tastes, while also introducing international flavours. During FY 2011–16, India’s exports of processed food and related products (inclusive of animal products) grew at a CAGR of 11.74 per cent, reaching US$ 16.2 billion (€13.13 billion). Underlying features of the policy which will directly benefit the industry are:

○ 42 mega food parks being set up with an allocated investment of `98 billion (€1.22 billion). The parks have around 1,200 developed plots with basic infrastructure enabled that entrepreneurs can lease for the setting

up of food processing and ancillary units.

○ 138 cold chain projects are being set up to develop supply chain infrastructure.

○ Swiggy, a food delivery startup owned by Bundl Technologies Private Limited, has raised `230.34 crore (€28.66 million) in a Series C funding round, with its existing investors SAIF Partners, Accel Partners, Norwest Venture Partners and Apoletto Asia Ltd contributing 79 per cent of the new funds raised.

○ Union Budget 2016-17 allowed 100 per cent FDI under automatic route in marketing of food products produced and manufactured in India.

• Personal care: Penetration of many product categories is still low. Even among those where the penetration is higher, per capita consumption is comparatively low, thereby offering scope for high growth in future. Penetration of products such as hair oil and talcum powder is high in the country, however, some major products including ayurvedic oil, deodorants and men’s fairness creams recorded penetration of just 8 per cent, 8 per cent 4 per cent respectively in FY 2016. The beauty, cosmetics and grooming market in India is expected to reach US$ 20 billion (€16.21 billion) by 2025 from US$ 6.5 billion (€5.27

8.37%

91.63%

Contribution of food processing industry to India’s GDPthrough manufacturing (FY16)

Food ProcessingOther

June 2017Source: Ministry of Food Processing Industries (MOFPI), TechSci ResearchNote: (1) - Till December 2015, As per latest data availableFor updated information, please visit www.ibef.org

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billion) currently. As increasing number of customers are adopting the natural way of life, demand for ayurvedic and herbal products is expected to grow at a strong rate going forward.

4. RECENT DEVELOPMENTS Consumers have started demanding

customized products specifically tailored to their individual tastes and needs. The trend toward mass-customization of products is expected to intensify further.

Despite economic slowdown, consumers are willing to spend to buy premium goods at higher prices in the space of convenience, health and wellness.

Availability of products has become way easier as internet and different channels of sales have made accessibility of desired products to customers more convenient at the required time and place. Online grocery stores and online retail stores like Amazon, Flipkart, etc are making FMCG products more readily available.

Digital commerce is expected to play a big role in the near future as digitally influenced spend in FMCG is likely to rise to US$ 45 billion (€36.48 billion). 10 per cent of households to account for 60 per cent of digitally influenced FMCG consumption by 2020. Companies should invest in data driven market and create/shape the digital strategy.

5. INDIAN COMPETITIVENESS AND COMPARISON WITH WORLD MARKETS

The following factors can make India a competitive market on the global stage:

5.1 Availability of Raw Materials Owing to diverse agro-climatic conditions

in India, there is a large raw material base suitable for food processing industries. India is the largest producer of livestock, milk, sugarcane, coconut, spices and cashew and

is the second largest producer of rice, wheat and fruits and vegetables. India also produces caustic soda and soda ash, which are required for the production of soaps and detergents. The availability of these raw materials gives India the geographical advantage.

5.2 Low-cost Labour Force Low-cost labour gives India a competitive

advantage. India’s labour costs consistently rank among the lowest worldwide and are often cited as the country’s principal advantage as a manufacturing base. According to the Bureau of Labour Statistics, average labour compensation (including pay, benefits, social insurance, and taxes) in India’s organized manufacturing sector have only increased marginally in recent years, from US$ 0.68 (€0.55) per hour in 1999 to around US$ 1.50 (€1.22) per hour today. When compared with an average compensation of US$ 3.00 (€2.43) per hour in China’s manufacturing sector (a 20 per cent year-on-year increase fuelled by an annual 13 per cent rise in China’s minimum wage), India’s labour cost advantage places the country in more direct competition with emerging manufacturing jurisdictions such as the Philippines and Vietnam over now-declining China, Thailand, and Malaysia. Many multinational corporations (MNC’s) have established their plants in India to outsource for domestic and export markets.

5.3 Demographic Dividend and Advantage

Demographic dividend: India’s abundant labour force is English-speaking, young, skilled and cost-efficient. Government has initiated Self Employment and Talent Utilization (SETU) scheme to boost young entrepreneurs. Government has invested US$ 163.73 million (€132.73 million) for this scheme.

Demographic advantage: India is expected to rank amongst the world’s top three growth economies and amongst the top three manufacturing destinations by 2020.

• Favourable demographic dividends for the

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next 2-3 decades. Sustained availability of quality workforce.

• Strong consumerism in the domestic market.

• Strong technical and engineering capabilities backed by top-notch scientific and technical institutes.

5.4 Growing Domestic Market As income levels are rising, there is a clear

upwards trend in the disposable income of people. With the rise in disposable incomes mid-and high-income consumers in urban areas have shifted their purchase trend from essential to premium products. Rapid economic growth provides a large domestic market.

5.5 Infrastructure Investment Plans The Road Transport & Highways Ministry has

invested around `3.17 trillion (€39.45 billion), while the Shipping Ministry has invested around `80,000 crore (€9.95 billion) in the past two and a half years for building world class highways and shipping infrastructure in the country. The Government of India is expected to invest highly in the infrastructure sector, mainly highways, renewable energy and urban transport, prior to the general elections in 2019. This will help to reduce inefficiencies in the supply chain.

6. KEY ISSUES FACED BY THE INDIAN FMCG INDUSTRY

6.1 Impact of Ban on Non-recyclable, Multi-layered Plastic Material

This will be a total business stopper if the regulation comes through in the present proposed shape. Nearly 80 per cent of most FMCG products are in such packs.

In 2015, the Ministry of Environment, Forest and Climate Change circulated a draft of the Plastic Waste Management Rules, 2015, for public comments. The draft provided for

a stoppage on the use of non-recyclable laminated plastics/metallic pouches, multilayered plastics in packaging within three year of the rules coming into effect. Despite opposition by the industry, after several rounds of consultations, the ministry notified the revised rules on March 18, 2016. The following are the salient provisions of the rules:

• The rules provide for phasing out the non-recyclable multilayered plastic within two years. Rules define Recycling as “the process of transforming segregated plastic waste into a new product or raw material for producing new products.” Recoverable plastic waste has been included within the definition of recyclable materials. Hence, only plastic waste which would ultimately make its way to the landfill, as its RRI (recycle and recovery index) is 0, would have to be phased out.

• Rule 6 places a responsibility on the local body to develop and set-up infrastructure for segregation, collection, storage, transportation, disposal, etc. of plastic waste, either on their own or by engaging agencies or producers. The local body can seek assistance of producers and the system has to be setup in one year from the notification. The rules now recognize recovery as a legitimate part of waste management.

• Rule 9 places an obligation on producers alone, to work out modalities for a waste collection system based on extended producers responsibility (EPR), and involving state urban development departments, either individually or collectively, through their own distribution channels or through the local bodies. This has to be done within 6 months.

• The rules define EPR as “the responsibility of a producer for the environmentally sound management of the product until the end of its life”. The definition of EPR is not very clear. No clarity is available regarding the methodology for discharge of this responsibility – whether financially,

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or through awareness generation among consumers or otherwise.

• The primary responsibility for collection of used multilayered plastic sachets or pouches or packaging is placed on producers, importers and brand owners, who introduce the products into the market. A plan is required to be submitted to the state pollution boards within one year of the notification and has to be implemented within two years thereafter.

• Interestingly, FMCG is a small part of the overall plastic waste generated. Yet, this responsibility of collection of pouches, sachets or packaging is the only kind of plastic waste considered under Rule 9.

• ‘Form I’ to be used for registration of producers or brand owners is not aligned to the requirements of registration of producers and brand owners. It appears more to be for manufacturers.

Recommendations

The phasing out proposed to be done within two years looks unrealistic and impractical. Multilayered plastic being the most efficient way of packaging, the focus needs to be on deploying practical solutions of segregation and disposal of plastic waste rather than a complete ban or phasing of multi layered plastic packaging as proposed. In all developed jurisdictions of Europe and in the USA, there is no ban prescribed for multi layered plastic packaging. Instead, the focus is on efficient ways of disposal through the principle of EPR. The two year timeline is about to get over and no update/respite has been provided by the Government of India on phasing of manufacturing or use of non-recyclable multi-layered plastic.

The government’s decision to place responsibility for waste management on both the local bodies under Rule 6 and for collection on producers and brand owners under Rule 9, has created uncertainty around the responsibility for overall waste management. The industry needs a clear and uniform set of obligations

across India. EPR in itself reflects a positive step towards the industry’s participation in resolving national issues. The plain reading of the rules creates an environment of uncertainty as any local body may place different types of requirements from producers or brand owners. The government must consider a clearly defined, well-thought out and practical EPR mechanism, suited for India, with all affected stakeholders participating in its development. The obligations must be clear, well-defined and evenly spread across all industries, producers and brand owners. It should not be limited to just FMCG.

It is suggested that the Government of India looks at alignment between the central, state and local governments to strengthen the overall waste management system in India at the local body level. Under the Swachh Bharat campaign, initiatives should be taken to generate awareness among consumers to ensure that segregation of organic, recyclable and other waste happens at the consumer level itself.

6.2 Amendments to the Legal Metrology (Packaged Commodities) Rules, 2011 (the PC Rules)

The Ministry of Consumer Affairs, Food and Public Distribution (MCFPD), amended the PC Rules vide notification dated March 1, 2018 by allowing manufacturers/packers/importers for putting stickers/tags/online printing, etc. up to April 30, 2018 for making the mandatory declarations required under the Legal Metrology (Packaged Commodities) Rules, 2011.

The MCFPD amended the definition of industrial and institutional consumers in the PC Rules vide Notification No. G.S.R. 385(E) dated May 14, 2015. Rule 3 of the PC Rules prescribes that the labelling norms (including the obligation to affix a maximum retail price (MRP) by a manufacturer or importer of packaged goods) do not apply to purchases made by an industrial or institutional consumer.

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The amendment has expanded the definition of industrial and institutional consumers, allowing such industries and institutions to procure packaged goods from an importer or a wholesale dealer; prior to such amendment, obligation to affix MRP was exempt only when the industrial/ institutional consumer directly purchased pre-packaged goods from the manufacturer. This amendment further provides that it is mandatory that all such packages must bear a declaration ‘not for retail sale’.

6.3 Impact of Government Regulation on Advertisements

The Consumer Protection Bill, 2018 was introduced in Lok Sabha by the Minister of Consumer Affairs, Food and Public Distribution on January 5, 2018. The Bill replaces the Consumer Protection Act, 1986. A Consumer Protection Bill to replace the Act was introduced in 2015, but has been withdrawn post the introduction of the 2018 Bill. Key features of the 2018 Bill include the following5:

• Definition of consumer: A consumer is defined as a person who buys any good or avails a service for a consideration. It does not include a person who obtains goods for resale or goods or services for commercial purpose. It covers transactions through all modes including offline, and online through electronic means, teleshopping, multi-level marketing or direct selling.

• Rights of consumers: Six consumer rights have been defined in the Bill, including the right to: (i) be protected against marketing of goods and services which are hazardous to life and property, (ii) be informed of the quality, quantity, potency, purity, standard and price of goods or services, (iii) be assured of access to a variety of goods or services at competitive prices, and (iv) seek redressal against unfair or restrictive trade practices.

• Central consumer protection authority: The central government will set up a central consumer protection authority (CCPA) to promote, protect and enforce the rights of

consumers. It will regulate matters related to violation of consumer rights, unfair trade practices, and misleading advertisements. The CCPA will have an investigation wing, headed by a director-general, which may conduct inquiry or investigation into such violations.

CCPA will carry out the following functions, including: (i) inquiring into violations of consumer rights, investigating and launching prosecution at the appropriate forum; (ii) passing orders to recall goods or withdraw services that are hazardous, reimbursement of the price paid, and discontinuation of the unfair trade practices, as defined in the bill; (iii) issuing directions to the concerned trader/ manufacturer/ endorser/ advertiser/ publisher to either discontinue a false or misleading advertisement, or modify it; (iv) imposing penalties, and; (v) issuing safety notices to consumers against dangerous or unsafe goods and services.

• Penalties for misleading advertisement: The CCPA may impose a penalty on a manufacturer or an endorser of up to `10 lakh (€12,445.96) for a false or misleading advertisement. In case of a subsequent offence, the fine may extend to `50 lakh (€62,229.84). The manufacturer can also be punished with imprisonment of up to two years which may extend to five years for every subsequent offence. However, an endorser will not be liable to a penalty if he exercises due diligence to verify the veracity of the claims in the advertisement regarding the endorsement.

CCPA can also prohibit the endorser of a misleading advertisement from endorsing that particular product or service for a period of up to one year. For every subsequent offence, the period of prohibition may extend to three years. However, there are certain exceptions when an endorser will not be held liable for such a penalty.

• Consumer disputes redressal comm-ission: Consumer disputes redressal

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commissions (CDRCs) will be set up at the district, state, and national levels. A consumer can file a complaint with CDRCs in relation to: (i) unfair or restrictive trade practices; (ii) defective goods or services; (iii) overcharging or deceptive charging; and (iv) the offering of goods or services for sale which may be hazardous to life and safety. Complaints against an unfair contract can be filed with only the state and national CDRCs. Appeals from a district CDRC will be heard by the state CDRC. Appeals from the state CDRC will be heard by the national CDRC. Final appeal will lie before the Supreme Court.

• Jurisdiction of CDRCs: The district CDRC will entertain complaints where value of goods and services does not exceed `1 crore (€124,459.68). The state CDRC will entertain complaints when the value is more than `1 crore but does not exceed `10 crore (€1.24 million). Complaints with value of goods and services over `10 crore will be entertained by the national CDRC.

• Product liability: Product liability means the liability of a product manufacturer, service provider or seller to compensate a consumer for any harm or injury caused by a defective good or deficient service. To claim compensation, a consumer has to prove any one of the conditions for defect or deficiency, as specified in the bill.

Issues

• The Consumer Protection Bill, 2018 provides that an endorser will not be liable to a penalty if he exercises due diligence to verify the veracity of the claims in the advertisement regarding the endorsement. This provision provides a regulatory loophole and may enable celebrities to stay out of the purview of prescribed penalties while endorsing. On one hand, the Bill has penalty provisions for endorsers while on the other it gives them a getaway route. This could undermine the effectiveness of the provision since there is no specified

parameter for what comprises ‘due diligence’.

• In case of online sale of fake goods, the Consumer Protection Bill, 2018 does not affix a responsibility on the online e-platforms hosting sale of such goods.

• Section 79 of the Information Technology Act (IT Act) defines the word intermediary as “any person who on behalf of another person stores or transmits that message or provides any service with respect to that message and includes telecom service providers, internet service providers, web-hosting service providers, search engines, online-payment sites, online auction sites, online marketplaces and cyber cafes”.

• Intermediaries are not liable for any third party information, data, or communication link made available by them if their function is “limited to providing access to a communication system over which information made available by third parties is transmitted or temporarily stored or hosted; the intermediary does not initiate the transmission, select the receiver of the transmission, and select or modify the information contained in the transmission; and the intermediary observes due diligence while discharging his duties under this law and also observes such other guidelines as the Central Government may prescribe in this behalf”.

• Unfortunately, the proposed law does not have any provision to counteract Section 79. It is not effective as far as preventing this category of online fraud. Section 100 of the Bill provides that ‘the provisions of this Act shall be in addition to and not in derogation of the provisions of any other law for the time being in force’. Section 101 empowers the Central Government to make rules, a step which could be taken to address this, but the rules cannot take precedence over the IT Act because the IT Act is a special law which will prevail over the general and prior law.

• Therefore, in effect, a consumer who is

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unaware of a fraud, and does not request a return within the time period specified in the online seller’s trading policy, will have no recourse later.

6.4 Model Shops and Establishments Act Rollout

The Ministry of Labour and Employment rolled out the Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill, 2016 in July 2016 which may be adopted by different states.

• The Model Shops and Establishment Act would give a boost to employment opportunities with focus on opportunities to women as they would be permitted to work during night shifts with adequate safety and security provisions.

• It would provide the retailers a freedom to operate 365 days in a year and flexible opening / closing time of the establishment, no discrimination against women, online registration through a simplified procedure etc.

This will help boost sales for the FMCG sector which typically operated under a brick-and-mortar store model. In 2017, the Government of Maharashtra introduced Maharashtra Shops And Establishments (Regulation Of Employment And Conditions Of Service) Act, 2017 vide notification dated September 7, 2017.

6.5 Recent Updates from the Goods and Service Tax (GST) Perspective in the FMCG Sector• With the implementation of GST law, several

taxes applicable on the FMCG sector like excise duty, VAT/central sales tax, entry tax and service tax were subsumed with effect from July 1, 2017. Instead, all transactions attract GST as per the applicability. Several products under the FMCG sector like shampoo, hair dyes, skincare products, cosmetic/ perfumery products etc were subject to highest tax slab of 28 per cent

under the GST regime. However, within a few months of implementation, the GST Council carried out a rationalization of these rates on November 14, 2017, and consequently rates of most of these products of mass consumption were placed under the 18 per cent tax bracket (rather than 28 per cent), which is lower than the tax rate that was applicable under the erstwhile indirect tax regime.

• The question that arises as a result of the rate rationalization is whether such companies have adequately passed on the benefit of such reduction in tax incidence to end consumers. This is on account of the anti-profiteering provision, introduced as an anti-inflationary mechanism under section 171 of the Central Goods & Services Tax Act, 2017, which mandatorily requires a reduction in prices, in case of any reduction in tax or increase in benefit of input tax. With the lack of clear guidelines on how to pass on the benefit to end customers, FMCG companies have struggled with the methodology for reducing prices in a market driven economy. It has not been clear so far the price reduction needs to be carried out within the first month, first six months or first year. Also there is no clarity on whether the aforesaid GST benefit has to be determined on an entity level or a product level, an FMCG company would normally have a variety of products within the same product bracket as well. Thus the anti-profiteering measure will also require companies to constantly revisit their prices with the evolving law. It is also not clear whether such computation has to be done for products which are still to be cleared from manufacturing location or would also apply to product stocks lying with distributors/ dealers. It is a tedious task to ensure that distributors and subsequent dealers also re-visit pricing and re-label product is a task as they would have separate costs and credits.

• Another issue that has affected the FMCG industry is the lack of sufficient budgetary

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support under the GST regime for units located in states like Uttarakhand, Himachal Pradesh, North Eastern states or Jammu and Kashmir. Under the erstwhile regime, several FMCG manufacturing concerns were set up in areas that enjoyed area based excise duty exemptions. However under the GST regime, there is no such ab-initio tax exemption available. In order to reduce the hardship of such units, budgetary support has been provided by the Department of Industrial Policy and Promotion (DIPP) to such units in the area based exemptions for the residual periods for which the units would have operated under the area based exemption scheme. Such support is being provided by way of refund of GST limited to the share of CGST and integrated GST (IGST) retained after the devolution of taxes to the states. This only works out to 58 per cent of the CGST amount paid and 29 per cent of the IGST paid by such unit. However, the amount of such refund is quite less in comparison to the erstwhile regime and it has contributed to financial difficulties faced by these units. Another area of plight is state incentives, which were provided to industrial units set up in specified areas. They have also been re-visited by the respective state governments and the scope of such benefits has also curtailed after the introduction of GST regime. Thus, further adding to the woes of the industry.

• An important issue affecting retail stores is related to sales that are boosted through hefty discounts and freebies like buy-one-get-one free. Many consumer goods companies have had to tweak their discount strategies as gifts and freebies have a GST impact under the new tax regime, as these most likely will require input tax credit reversals and hence additional cost at the hands of consumer goods companies.

Recommendations

• Anti-profiteering: It is recommended that

guidelines are issued by the government at the earliest that clarify the methodology that needs to be adopted by FMCG companies for passing on the benefit to end customers. Specifications around whether pricing check has to be carried out across all intermediaries in the supply chain and whether it needs to be done at a product level would help companies.

• Lack of sufficient budgetary support: Since majority FMCG companies set up shop areas in excise-free areas, additional budgetary support must be provided to them in order to tide them over.

• Clarification under discounts: Clarification is required on what all is included in the realm of discounts under the GST regime and whether freebies and buy-one-get-one-free are to be treated as gifts or whether to be treated as promotional efforts taken by a business.

6.6 Enforcement of trademarks for brand protection against rampant sale of fakes, trademark infringements and look-alikes

Trademark infringement and counterfeiting has become a ubiquitous problem growing at an exponential rate in India taking undue advantage of the consumer and trade. Counterfeit products are a health hazard and against the interest of the consumers, interest of the industry and also the government at large, due to loss of income to the exchequer through unaccounted sales, taxes, etc. of counterfeits. In light of risks and protection of interests of all the stakeholders, it is important to provide the necessary support and infrastructure to the intellectual property (IP) right holders to allow them to effectively fight counterfeit products and people involved. Counterfeiting has now become part of a complex and ever evolving organized crime network which requires swift and efficacious actions by the right holders and law enforcement officials on receipt of relevant information to ensure success of such actions against counterfeiters.

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Section 115(4) of the Trade Marks Act, 1999 (TMA) mandates that an opinion from the Trademark Registry on the impugned trademark is required before an officer equal to the rank of a deputy superintendent of police takes cognizance and further actions, including search and seizure with respect to offences of applying and selling of goods with false trademarks, i.e. infringement and counterfeiting. This creates an impediment in taking timely actions allowing people ample time to get away. With such a prerequisite for the police, offences under TMA cannot be considered fully cognizable as intended, desired and required by the industry and intellectual property (IP) holders. The opinion from the trademark registry as above takes considerable time due to lack of resources and department priorities impeding expedited actions against counterfeiters by the trademark proprietors and the police.

Trademark proprietors are using the judicial or copyright infringement route to take actions due to extreme delay in procuring such opinion for police actions under trademark law. This is not only increasing the burden of the judiciary but also makes the section in TMA otiose and irrelevant.

Using the copyright infringement route is also not viable because of the requirement of registration documents by the law enforcement officials. However, it is important to note that as copyright vests on creation and registration is not compulsory, documents of proprietorship are not available with copyright owners, making it difficult for the law enforcements officials to determine the rights and limiting actions against counterfeiters under copyright protection.

According to the 2014 International IP Index by the US Chamber of Commerce’s Global Intellectual Property Centre (GIPC), India’s percentage score has fallen from 25 per cent in 2012 to 23 per cent. Several factors led to deterioration of the IP environment in India. For instance6, in the biopharmaceutical sector, “Indian policy continued to breach international standards of the protection of

innovation and patent rights, revoking patents generally accepted around the world and announcing that other patented medicines are being considered for compulsory licenses.” The continued use of compulsory licences, revocation of patents, and weak legislative and enforcement mechanisms across all IP rights raise serious concerns about India’s commitment to promoting innovation.

Recommendations

Trademarks are intellectual property that reflect the source of origin which is the primary issue in the case of counterfeited products whereas copyright is with respect to creative protection and complements the trademark law to fight against counterfeiters and infringers. Relying on copyright only rather than trademark also increases the possibility of misuse as copyright infringement is much more difficult to identify than trademark infringement due to the creative aspect involved. Therefore, mandating an opinion for action against trademark infringement as opposed to copyright infringement being fully cognizable, is discriminatory, irrational and inequitable towards the industry.

In light of the of the time period lapsed since the law came into effect and its bleak relevance, the government should delete the requirement of an opinion as above and provide the right holders as well as the law enforcement officials to effectively enforce their rights and take appropriate actions against these offenders harming the public at large.

In summary, while it has become harder to obtain intellectual property rights (IPRs) in India, it continues to be difficult to enforce IPRs. The focus should therefore shift to enforcement of IPRs. It is also suggested that to speed up the adjudication processes, the Central Government consider fast track courts for intellectual property enforcement cases.

6.7 Issues with Labelling of Cosmetics

In June, 2014, the Ministry of Consumer Affairs

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issued a Notification under the Legal Metrology Act purporting to amend the Legal Metrology (Packaged Commodities) Rules 2011 by introducing Rule 6(8) which provides that “every package containing soap, shampoos, toothpastes, and other cosmetics & toiletries shall bear at the top of its principal display panel a red or as the case may be brown dot for 5 products of non-vegetarian origin and a green dot for products of vegetarian origin”. This issue falls within the scope of the Drugs and Cosmetics Act, 1940 and thereby, beyond the jurisdiction of the Legal Metrology Act, 2009.

It has been confirmed by the Honourable Supreme Court of India, in the judgment pronounced in the matter of Indian Soaps and Toiletries Makers Association v. Ozair Husain and Ors7, that the accurate law under which such a mandate can be provided is the Drugs and Cosmetics Act, 1940.

Further, there are several practical difficulties in complying with such a provision. Cosmetic products are complex and the formulations contain many ingredients. Many of these ingredients are prepared by processes involving multiple steps. Thus, the original chemical identity of the ingredient is lost. These processes are carried out irrespective of whether the material is of plant or animal origin. Consequently, if any of these ingredients are present in a formulation, it is not possible to determine if it is of animal or plant origin.

There are neither technical tests nor any methodology for a manufacturer to confirm whether its source ingredients are vegetarian or non-vegetarian. Each ingredient for a cosmetic, is sourced from various suppliers. The manufacturers would at best have to rely solely on representations made by its various suppliers for the purposes of labelling. It is practically impossible for a manufacturer to actually be aware and comply with the labelling requirements. Further, they would be held responsible for any violation thereof if a product is mis-labelled and there would be no consequences on the suppliers.

In the absence of clear definitions, there is ambiguity in the definition and understanding of animal origin, like, for instance, honey, wax or silk essence, none of which is defined as either being from animal or from vegetarian origin.

The Indian Beauty and Hygiene Association challenged the Notification before the Bombay High Court in 2014 and the matter is currently sub judice. The Honourable Court has directed that no coercive action should be taken for non-compliance with the Notification during the pendency of the mater.

Recommendations

Considering the significant practical difficulties in implementing the Notification and in light of the opinion of the Drug Testing and Advisory Board and the decision of the Honourable Supreme Court, the Government of India should reconsider its stand.

6.8 Parallel Imports and Counterfeits Parallel import is a scenario where goods are

brought in a jurisdiction without the permission of the brand owner (i.e. IP right holder). These goods are not counterfeit goods, but merely unauthorized imports from the brand owner’s perspective. On account of the lower costs of the parallel importer (as there are no brand management and advertising costs), the products are available cheaper. The manufacturers, oppose this practice as it eats into their legitimate sales.

Further, owing to the unauthorized imports, there are instances where due to variance in product formulations (different countries may have a different product formulation which is suited best for its consumers), the consumer experience of a brand may be negatively affected. In some industries, the authorized resellers may not be able to provide proper after-sales service or replacement.

Under the TMA, infringements of a registered trade mark under Section 29(1) covers imports or exports of goods. Imports of goods under Registered Trademarks require consent of

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registered proprietor of the trade mark before imports. Similar provisions exist under Indian Copyright Act, 1957, Patents Act, 1970 and Designs Act, 2000.

However, Circular No. 13/2012 dated May 8, 2012 issued by CBEC (the Circular) on parallel imports, states that parallel imports of branded goods are permitted under the TMA. The circular refers to section 30(3)(b) of the TMA without, in any manner, clarifying or interpreting this provision but merely reproducing it. It concludes that TMA permits parallel imports and on the basis of such conclusion, directs the field formation of the customs authorities across India to follow the circular. In the circular, the nodal authority namely DIPP, being the administrative ministry concerned, has merely reproduced the section 30 of the TMA in its internal advice to customs. There is no clarification, express or implied, provided in the Circular, that “no consent” of the registered proprietor is required before, or at time of importation of branded products. Under the TMA, registration is confined to territory of India only. The registration of a trade mark is territorial and not for markets beyond the territory of registration. Under Section 29, inter alia, a mark which is identical with a registered trade mark with respect to good for which it is registered, will be a case of infringement of trade mark if such identical mark is used by a person other than a registered trade mark proprietor. Under section 30(3)(b) of TMA, imports are subject to the same restriction. Any use of a registered trade mark by any person without the consent of the registered proprietor is treated as infringement. The intent of law cannot be to penalize the domestic infringers and let importers who infringe go free.

Since the issuance of impugned circular, custom authorities at seaports, airports, and inland container depot have stopped examination and inspection of containers that represent carrying imported goods that are freely importable including branded parallel imported goods. This has prompted the traders, importers to import counterfeit goods and there is a surge in sale of counterfeit goods

in markets. While the circular seeks to address the parallel imports by issuing directions under the impugned circular, it had the effect of legitimizing counterfeit goods.

Recommendations

Counterfeit in FMCG industry, and more so in the cosmetic industry have become a major concern. Fake imported products are freely available at throw away prices. Unless customs authorities carry out 100 per cent examination and intimate the right IP holders, this problem cannot be resolved. IP holders, are not being called upon to verify the suspected branded imported goods. Significant quantity of fake / counterfeit goods is entering into the country because right holder consent is not sought anymore.

Therefore, based on the present provisions of the TMA, it is suggested that a further clarification be issued by which the above position is suitably reflected. The Central Board of Excise and Customs (CBEC) should do the needful at the earliest by which it is clarified that consent of the right IP holder in each case of import under TMA will be required.

7. CONCLUSION India represents a good opportunity for

international retailers in single brand retail, cash and carry, and e-commerce, as the country appears to be on the cusp of a strong growth phase over next five years. The tipping point for brick and mortar retail continues to be the opening up of FDI norms in multi-brand retail, a move that is not expected in the near-term. The 2017 Global Retail Development Index (GRDI) titled ‘The Age of Focus‘ has placed India at the top position among 30 developing countries on ease of India doing business behind solid growth in retail sales and strong growth prospects for GDP. GDP is expected to grow at 7 to 7.5 per cent over the next two years making India the world fastest growing major developing market. Increase in the internet penetration and improvement in the physical infrastructure will make India an

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attractive place for investment, especially when some of the trade related difficulties based

by the industry, and as discussed above are alleviated.

Endnotes

1 http://www.ibef.org/industry/fmcg-presentation

2 http://www.s-ge.com/sites/default/files/private_files/India%20-%20Opportunities%20in%20the%20consumer%20food%20sector%20-%20September%202014.pdf

3 http://www.euromonitor.com/packaged-food-in-india/report

4 https://www.ibef.org/download/Food-Processing-June-2017.pdf

5 http://www.prsindia.org/billtrack/the-consumer-protection-bill-2018-5035/

6 http://www.business-standard.com/article/economy-policy/protecting-patents-india-worst-in-world-114012900371_1.html

7 AIR 2013 SC 1834

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Notes

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HOMELAND SECURITYAcknowledgements: Rupan Sidhu (G4S) – Chairperson, Homeland Security Sector Committee & its Members

Knowledge Partner: Dhiraj Mathur, Cdr Gautam Nanda, Nipun Aggarwal & Ruchika Verma – PwC

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EXECUTIVE SUMMARY

Homeland security as an independent sector is a relatively new concept in India. It is now one of the most aggressively pursued sectors of the country, with both the government and industry investing heavily to provide the best technology to security agencies, be it the police, paramilitary or defence forces. In India, the Ministry of Home Affairs (MHA) is responsible for matters concerning internal security, Centre-state relations, central armed police forces, border management and disaster management. In addition, the ministry also makes certain grants to the union territories (UTs).

The paper discusses some of the key projects that are being undertaken by MHA to address the internal security aspects such as: Comprehensive Integrated Border Management System (CIBMS); modernization of police forces; Coastal Security Scheme (CSS); National Intelligence Grid (NATGRID); and Bureau of Police Research and Development (BPR&D) modernization plans.

In addition, the private security industry is also a critical piece in maintaining security in India. The industry is responsible for not only protecting many of the India’s institutions and critical infrastructure systems including industry and manufacturing, utilities, transportation,

and health and educational facilities, but also for protecting intellectual property and sensitive corporate information, but also individual lives. The industry is one of the largest employers in India with around over 8.5 million private security personnel employed across the country, with an estimated at `570 billion (€7.09 billion) revenue.

Considering the growth in demand for security services, domestic firms are seeking capital to expand rapidly, while international firms are collaborating and consolidating to gain visible market share in India. In addition, technological advancements such as in the form of electronic surveillance have elevated the need for specialized skills to be made available in the industry. Yet the industry facing some critical issues in the form of: public and private sector investments, adoption of best practices, training of employees, collaboration amongst wide spectrum of service providers, enforcement of Private Security Agencies Regulation Act and lives and livelihood of workmen.

The following paper discusses the importance of issues inhibiting the growth of homeland security including private security services in India and provides suggestions and recommendations to counter them.

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1. INTRODUCTION

1.1 Market Overview Homeland security as an independent sector

is a relatively new concept in India. It is now one of the most aggressively pursued sectors of the country, with both the government and industry investing heavily to provide the best technology to security agencies, be it the police, paramilitary or defence forces. In India, the Ministry of Home Affairs (MHA) is responsible for matters concerning internal security, Centre-state relations, central armed

police forces, border management and disaster management. In addition, the ministry also makes certain grants to the union territories (UTs).

1.1.1 Budget analysis

MHA has been allocated `89,837 crore (€11.18 billion) in Union Budget 2018-19. This is an increase of 13 per cent over the revised estimate in 2017-18, which was `79,781 crore (€9.92 billion). Further, this is 11 per cent higher than the budget allocation of last year, which was `71,861 crore (€8.94

1.8 1.7 1.8 1.5 1.4 1.7 1.7

8 8.8 9.4 9.1 9.510.5 11.7

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Homeland security budget allocation (billion US$)

Capital Revenue

Source: Controller General of Defence Accounts

CRPF,

BSF, 19%

CISF, 9%ITBP, 6%AR, 6%

SSB, 5%

NSG, 1%

Others, 30%

Allocation in 2018–19 budget (per cent)

AR: Assam Rifles, BSF: Border Security Force, CISF: Central Industrial Security Force, CRPF: Central Reserve Police Force, ITBP: Indo-Tibetan Border Police, NSG: National Security Guard, SSB: Sashastra Seema Bal

Note: Budget amount in INR (`) has been converted to US$ figures at the average currency exchange rate in the respective years.

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billion). The budget allocations for some MHA responsibilities have seen changes:

• 13 per cent increase in budget allocation for Assam Rifles from `4,924 crore (€612.83 million) in 2017-18 to `5,548 crore (€690.50 million) in 2018-19.

• 2 per cent reduction in border infrastructure and management from `2,039 crore (€253.77 million) in 2017-18 to `1,750 crore (€217.80 million) in 2018-19.

2. KEY PROJECTS Some of the key projects that are being

undertaken by MHA to address the internal security aspects are appended below. These projects are potential market opportunities that need to be addressed by the private sector.

2.1 Comprehensive Integrated Border Management System (CIBMS) (US$ 388 million/€314.53 million)

The forces are already using CCTV cameras, night thermal imagers and sensors in sensitive areas. But the technology used is not superior. More than 150,000 floodlights have been installed on 50,000 poles by the government on the border to track movement along the borders using binoculars. An important component of the CIBMS is the use of satellite imagery, which will help the security forces to find out details of the terrain and fortifications across the border. A major Indian defence player has been awarded an order for a pilot project to supply CIBMS to

the Border Security Force (BSF). This order is an initial phase of the border management project of India’s MHA to enable round-the-clock surveillance of Indian borders. The CIBMS being fielded is locally designed and developed system. Besides boosting India’s Make in India initiative, it also allows BSF to have in-country lifecycle support and upgrades. The CIBMS will establish a multi-tier security ring at the border using a variety of sensors, to identify any infiltration attempts and will be operational 24x7x365. Sensors (viz. thermal imagers, radar, aerostat with electro-optical payload, optical fibre intrusion detection systems, unattended ground sensors and underwater sensors) can detect threats not just on the surface but also underground and underwater. The command and control system processes data from each of these sensors and fuses them together, forming a Common Operational Picture (COP) for timely decision assist to troops on the ground.

2.2 Modernization of Police Forces For 2018-19, the Central government has made

allocations towards four schemes related to the modernization of the police. These include:

• Modernization of State Police Forces (MPF) Scheme

• Crime and Criminal Tracking Network and Systems (CCTNS) Scheme

• Security Related Expenditure (SRE) Scheme

• Special Infrastructure Scheme (SIS) for Left Wing Areas

2016-17 Actuals 2017-18 Revised 2018-19 Budget Percentage change Budget Estimate 18-19/Revised Estimate 17-18

SRE and SIS for LWE areas

`1,390 (€172.99) `1,766 (€219.79) `2,260 (€281.27) 28 per cent

Modernization of State Police Forces and CCTNS

`840 (€104.54) `811 (€100.93) `897 (€111.64) 10.6 per cent

Total `2,230 (€277.54) `2,577 (€320.73) `3,157 (€392.91) 22.5 per cent

Expenditure related to modernization of police force

Note: Values in crore `; approx. conversion in million €

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2.2.1 MPF

In September 2017, the Government of India approved the implementation of the umbrella scheme of MPF for a three-year period from 2017-18 to 2019-20 with a total outlay of `25,061 crore (€3.12 billion), which includes a central outlay of `18,636.30 crore (€2.31 billion). One of the sub-schemes under this umbrella scheme is ‘Assistance to States for Modernization of Police’, with a central outlay of `7,380 crore (€918.51 million) for the three-year period. The scheme was designed to equip the police with the latest equipment and infrastructure. Special provisions have been made under MPF for internal security, law and order, women’s security, availability of modern weapons, mobility of police forces, logistics support, hiring of helicopters, upgrade of police wireless, the national satellite network, CCTNS project and the e-prison project.

2.2.2 CCTNS

In 2017, the Cabinet Committee approved the proposal for the extension of the implementation phase of the CCTNS Project for another year beyond March 31, 2017. The extension would help in achieving the remaining objectives of the project comprehensively. The maintenance phase of the project will continue till 2022, as approved earlier. With a total outlay of `2,000 crore (€248.91 million) a sum of `1,550 crore (€192.91 million), which was the total allocation to the project thus far, has been spent till 2016-17. MHA will undertake steps to integrate the various organs of the criminal justice system, such as the police, courts, prisons, prosecution, forensic laboratories, fingerprints and juvenile homes, with the CCTNS database. This Interoperable Criminal Justice System (ICJS) will be a useful resource for all stakeholders, including policymakers. The digital police portal will enable citizens to register FIRs online and initially offer seven public delivery services in 34 states and UTs. The CCTNS portal will provide investigators the complete records of any criminal from anywhere across the country.

2.3 Coastal Security Scheme (CSS) Currently, Phase-II is under implementation

w.e.f. 2011 for a period of 5 years, with an outlay of US$ 235 million (€190.50 million). The police are initiating steps to recruit retired coast guard personnel on contractual basis and appoint them in the state’s marine police stations.

2.3.1 International Ship and Port Facility Security (ISPS) Code

The ISPS Code is a comprehensive set of guidelines and regulations established for the security of ships and port facilities. Developed by the International Maritime Organization (IMO) in response to the 9/11 attacks, the code is constituted in the International Convention for the Safety of Life at Sea (SOLAS), an international maritime treaty. All 148 signatories of the treaty, including India, are required to comply with the ISPS Code. The purpose of the set of regulations is to establish a standardized framework across international ports and ships, which then allows governments to efficiently evaluate risks and offset threats and vulnerabilities to shipping and port facilities through alterations to security levels and to undertake the security measures prescribed by the code. Compliance with the ISPS Code falls within the spectrum of central programmes related to maritime security.

2.3.2 National Automatic Identification System

The Directorate General of Lighthouse and Lightships (DGLL) established the national AIS network by setting up 74 shore stations on existing lighthouses along the Indian coast for facilitating aid to marine navigation and tracking of SOLAS vessels. The automatic identification system (AIS) network plans to track all SOLAS-compatible vessels and also those carrying transponders as per the Directorate General of Shipping’s notices. This will provide an overall image of AIS-compliant vessels along the Indian coastline. Thus, apart from management, the AIS network will aid navigation and enhance value addition in regulatory roles of the Directorate General

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of Shipping, and help in creating maritime domain awareness along the coastline. The national AIS network comprises the following:

• Biometric ID cards for coastal fishermen: The Centre’s sector scheme on the issuance of biometric ID cards to coastal fishermen at a total cost of ̀ 72 crore (€8.96 million) was launched by the Ministry of Fisheries on December 11, 2009. The Central government has provided a 100 per cent grant to state governments, UT administrations and other implementing agencies for the scheme. A consortium of three Central Public Sectors Unit (CPSUs), led by Bharat Electronics Limited (BEL) along with state governments and UTs, has been entrusted with the work of the digitization of data and card production and issuance.

• Vessel Tracking Management System (VTMS): Approved by the Defence Acquisition Council (DAC) under the Ministry of Defence (MoD) and deployed by the Indian Navy, eight coastal radars were set up within the frameworks of the National Command Control Communication Intelligence (NC3I) programme to help counter potential infiltration from terrorists and pirates. The radar stations in Gujarat integrate with 33 other coastal radar stations across the nation to create a complex network of marine tracking that is controlled by the Information Management and Analysis Centre (IMAC) in Gurgaon. The DAC also approved four mobile surveillance stations in Kutch and Khambhat, which will be equipped with the VTMS.

2.4 National Intelligence Grid (NATGRID)

NATGRID was set up by the government in the aftermath of Mumbai attacks at an estimated cost of US$ 745 million (€603.92 million) to enable monitoring of terrorist operations through existing banking, finance, transportation and other networks. The physical

infrastructure at Delhi and Bengaluru is now expected to be completed by March 31, 2018, while connectivity between user and providing agencies along with a certain amount of basic analytics and data sharing was expected to be in place by September 2018. The Centre has empowered NATGRID to keep track of security-related data to access the Income Tax (IT) Department’s records on individual taxpayers as well as PAN card holders. NATGRID and the IT department could soon sign a pact to operationalize the data sharing arrangement.

2.5 BPR&D Modernization Plans The ongoing modernization projects of the

Bureau of Police Research and Development (BPR&D) are:

• Setting up of National Police Technology Development Centre (NPTDC), IIT Delhi.

• Setting up of National Police Information Technology Centre (NPITC), Bengaluru.

• Impact assessment of the MPF Scheme for states for 2009-2017.

• Conducting a national-level competition of architects for police building and prison building designs.

• Regional workshops on formulation of State Action Plan under the umbrella scheme.

• Compliance with recommendations of the DGP/IGP Conference.

• Constructional model police station building in Manipur/Mizoram and Sahnewal/Kolkata.

2.5.1 Model police station project

The Tamil Nadu government suggested two police stations – Anna Nagar in Chennai and RS Puram (B2) in Coimbatore – for model smart police stations as per the norms fixed by the Central government. The two model police stations being built in the Guntur district in Andhra Pradesh aim to encourage public interaction with the police and create a pleasing work environment for the men in uniform.

2.5.2 Smart police stations

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MHA has introduced the concept of SMART (S – sensitive and strict, M – modern with mobility, A – alert and accountable, R – reliable and responsive and T for trained and techno-savvy) police stations across the country. The BPR&D prepared a plan for building such police stations across the country. The Home Ministry also asked the state governments to send the details of the police stations to be turned into model ‘SMART’ stations.

2.6 Central Reserve Police Force (CRPF)

The CRPF is all set to purchase 25 high-end drones to equip itself to better conduct anti-Maoist operations and deal with terrorists in Jammu and Kashmir. These drones are being purchased to help the CRPF personnel during surveillance, reconnaissance and detection in day and night operations in Jammu and Kashmir, and in the dense forests of Maoist-hit states like Chhattisgarh, Jharkhand, Andhra Pradesh, Telangana, Madhya Pradesh and Maharashtra.

3. PRIVATE SECURITY SECTOR The security industry is a large and expanding

area of the economy with an estimated global market worth of US$ 173 billion (€140.24 billion). The private security industry in India, valued at `570 billion1 (€7.09 billion) is also promising. The Indian industry is still nascent and is likely to see exponential growth both in terms of manpower employed and market share due to rapid infrastructural and economic development, leading to an increased need for prevention, detection and protection of assets and citizens against criminal acts such as fraud, terrorism, theft, drug-related offences and violent crimes. Yet another factor adding to the demand is the increase in individuals joining the billionaire league and seeking private protection at all times.

The private security industry is one of the largest employers in India and is continuously growing. The private security industry is amongst the largest employers in India,

employing almost 8.5 million people and has the potential to employ 3 million more people by 2020.2 Manned guarding continues to be the service line with maximum employment and is also the highest revenue generator for the private security industry, contributing to 80 per cent of the revenue, followed by cash services. With a high level of advancements in technology, services like electronic security services, integrated facility management and security architecture and engineering will see greater prominence in the time to come. This not only has the potential to improve the quality of services offered by security companies but may also prove to be a boon for the large workforce who will have the opportunity to up-skill themselves and progress to engaging employment conditions. With the passage of time, security companies have evolved from servicing only homes and businesses and are now focusing on servicing the government.

However, the industry operates amidst some real challenges:

• In November 2017, the government has replaced the FEMA Regulations with a new set of regulations i.e. Foreign Exchange Management (Transfer or Issue of Security by a Person resident outside India), 2017 (2017 FEMA Regulations). In the said 2017 FEMA Regulations, the maximum FDI permitted in private security agency (PSA) sector has been limited to 49 per cent under government route, which is opposite to the government’s larger agenda of liberalization. This is in disparity with the consolidated FDI policy, 2017 that has the FDI permitted through the automatic route up to 49 per cent with a provision of increase in the FDI in a company engaged in private security agency business to 74 per cent with government approval.

• As per industry sources, 60 per cent of the security service providers still operate as unorganized, thereby keeping the sector pricing oriented and amenable to unfriendly employment practices and making it difficult to monitor quality and compliance.

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• The sector continues to be perceived by the workforce as non-aspirational, as people are unaware of career prospects and the benefits that can be achieved.

• Technology integration is yet another challenge as it is widening the gap between the well-established players and smaller players in the industry.

• Most clients are now looking for technology-enabled security solutions which some of the bigger players in the industry already have; however, because of high capital and highly skilled manpower requirements, it is getting harder for smaller companies to keep up with the pace.

• Lack of quality manpower, high attrition rates and compliance requirements also continue to pose major challenges to the growth of the manned guarding security services market.

Recent policy initiatives

1. Recategorization: In January 2017, vide a Gazette Notification, workers in private security have been recategorized under the Minimum Wages Act, along with a modification in the minimum rate of daily pay. Security guards without arms have been recategorized as ‘skilled’, and security guards with arms and security supervisors have been categorized as ‘highly skilled’.

2. Wage rate revision: The Central Government has also revised the minimum wage payable to employees of the ‘watch and ward’ sector to `6373 (€7.92) per day effective April 2017. Stakeholders are of the opinion that more changes need to be brought in to make the sector more streamlined and profitable.

Government policies are changing the game quickly with important decisions being taken to overcome challenges. However, the industry stakeholders are of the view that more changes at the policy level and improved enforcement could help private security grow further and make the sector more viable for investments. Some key suggestions are creating a grading framework for private security players in the market and having a single window licence process.

4. WAY FORWARD The threats and challenges being faced by

various agencies need to be addressed in order to deploy an effective internal security mechanism. Smuggling of drugs and contraband, terrorism, illegal unreported and unregulated fishing, and flow of migrants from neighbouring countries are variables that underscore the need for coastal protection. There is much that can be done to counter the threats and challenges which are posed to internal security. Some recommendations are listed below:

• Consolidation of various stakeholders.

• More cooperation between state and central government agencies.

• MHA to concentrate on modernization of police forces.

• Inclusion of private players in security.

• Integration of marine police in the coastal security chain to track coastal fishing activity.

• Setting up of Central Marine Police Force to standardize equipment and seamlessly integrate all the realms of coastal security.

• Fast-tracking the setting up of the National Marine Police Training Institute in Dwarka (Gujarat), followed by intense interaction between the institute and the Marine Police Training Centres in states and UTs.

• Setting up of a multi-disciplinary National Maritime Authority (NMA) under the aegis of MHA.

• Strengthening the human intelligence (HUMINT) capability.

• More emphasis on security infrastructure.

• Deployment of a satellite constellation for surveillance.

• Creation of a joint technical cadre along with logistics infrastructure for maintenance of assets so as to address the issues related to operational availability of these assets.

• Optimum utilization of funds allocated under various schemes.

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• Enactment of the Coastal Security Bill which has been pending since 2013.

• Increased interaction with other countries so as to adopt and customize the best practices being followed by them.

• Formulation of standards and policy for the procurement of equipment for internal security.

• Induction of hovercraft and Unmanned Aerial Vehicles (UAVs) with the security forces.

• Adoption of layered security measures for VA and VPs as a practice.

• Introduction of latest technology across all facets of security.

• Integration of all databases across various central and state agencies involved in law enforcement.

• The Government should correct the disparity in FDI regulations that has been

introduced by recent change in FEMA regulations. Further, it is recommended that the government considers liberalizing the present FDI policy (which allows only 49 per cent FDI in private security agencies) to permit enhanced FDI up to 74 per cent (under automatic route), to go up to 100 per cent under the approval route. The change could make the sector more attractive to global security players, thus bringing in increased benchmarks of service quality, efficiency and process orientation.

• The procurement of licences from multiple states has proven to be troublesome for almost all major players in the market. Therefore, it is recommended to have a one-stop solution for PSAs to procure licences. A dedicated portal for this can ease out the process and automation can help in avoiding multiple tasks.

Endnotes

1 FICCI. (2015). Private security services in India. Retrieved from http://ficci.in/spdocument/20673/FICCI-GTReport.pdf (last accessed on 3 November 2017)

2 Ibid

3 VDA Minimum Wages order dated 03 April 2018, Ministry of Labour and Employment. Retrieved from https://clc.gov.in/clc/node/572 (last accessed on 5 April 2018)

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Notes

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ICT Acknowledgements: Sanjeev Varma (Altran India) – Chairman, ICT Sector Committee & its Members

Knowledge Partner: Mahesh Jaising, Manoj Kumar & Sangita Prakash – Deloitte Touche Tohmatsu India LLP

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EXECUTIVE SUMMARY

Direct Tax

• The theme of the Union Budget 2018 on the tax side has largely been rationalization with no big bang changes for information and communications technology (ICT). The silver lining has been the reduction of headline corporate tax rate to 25 per cent from 30 per cent for companies having turnover up to `250 crore (€31.11 million) in FY 2016-17 and is expected to be a stepping stone to an overall reduction of corporate tax rate to 25 per cent as announced by Finance Minister, few years ago.

• The other key highlights include changes to tax holiday provisions for start-ups entailing relaxation on the scope of their activity and extension of the tax holiday period, rationalization of deduction/incentive for employment generation, implementation of the e-assessment proceedings.

• Also, further steps have been taken to implement some recommendations provided in OECD BEPS Action Plan by expanding the scope of business connection in relation of agency PE in line with the multilateral instruments, non-resident digital having significant economic presence based on thresholds to be prescribed by the revenue.

• While the Budget has had various rationalization measures, there have also been some unattended/unfinished items such as research and development incentives not revived /extended, rationalization of the patent box regime, rationalization of the equalization levy provisions etc.

Indirect Tax

• From an indirect tax perspective, the Budget

has increased the rate of customs duty rate on certain ICT specific goods like cellular mobile phones and parts, smart watches etc. While this increase in duty has been made under the government’s Make in India initiative, the manufacturing sector in India is somewhat still in a nascent stage and may not be able to cater to the demand. This is especially the case in case of PCBs and other parts of mobile phones.

• There have been no other announcements in the Budget from an indirect tax perspective, since all goods and sales tax (GST) related amendment making powers are with the GST Council.

• The Council has in fact made several announcements in the last 9 months addressing both law as well as procedural related changes that were required under the new tax regime and this has been well received and appreciated by the industry. However, a few areas that may still need to addressed include:

o The upfront exemption provided in respect of import of goods (now available under September 2018). It should be extended without any time limit and the same should also made available for domestic procurements.

o The personal liability imposed on the directors to pay tax, interest and penalty on default of the company should be deleted and the prosecutions proceedings proposed on the company as well as on the managerial personnel should be resorted only on completion of the adjudication proceedings.

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1. INTRODUCTION Information Technology (IT) and Information

Technology Enabled Services (ITeS) including Business Process Management (BPM)1

1.1 Market Description The global sourcing market in India continues

to grow at a higher pace compared to the IT-BPM industry. The global IT and ITeS market (excluding hardware) reached US$ 1.2 trillion (€972.76 billion) in 2016-17, while the global sourcing market increased by 1.7 times to reach US$ 173-178 billion (€140.23-144.29 billion). India remained the world’s top sourcing destination in 2016-17 with a share of 55 per cent. Indian IT & ITeS companies have set up over 1,000 global delivery centres in over 200 cities around the world.

More importantly, the industry has led the economic transformation of the country and altered the perception of India in the global economy. India’s cost competitiveness in providing IT services, which is approximately 3-4 times economical than the US, continues to be the mainstay of its unique selling proposition (USP) in the global sourcing market. However, India is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centres in India.

The IT industry has also created significant demand in the Indian education sector, especially for engineering and computer science. The Indian IT and ITeS industry is divided into four major segments – IT services, BPM, software products and engineering services, and hardware.

India is leading with the highest proportion of digital talent in the country at 76 per cent compared to the global average of 56 per cent. Indian IT and BPM industry is expected to grow to US$ 350 billion (€283.72 billion) by 2025 and BPM is expected to account for US$ 50-55 billion (€40.53-44.58 billion) out of the total revenue.

1.1.1 IT hardware2

The Indian information and communications technology (ICT) hardware market was

pegged at US$ 18.25 billion (€14.79 billion) in the financial year 2015-2016. The boost is mainly due to increased sales of phablets, smartphones, notebooks and printers. Key growth drivers are improving economic indicators, growing disposable income, penetration into rural markets, tier-2 and tier-3 cities, online and digital marketing, the e-commerce boom and the government’s reform initiative for the sector.

However, despite the robust growth rates, stiff competition, pricing pressure and cheap imports remain key challenges in the domestic ICT market, especially for smaller IT resellers and distributors. Those are mostly partnership/proprietorship companies, working on very low margins and often with liquidity and solvency issues.

1.1.2 Telecommunication3

India is currently the world’s second-largest telecommunications market with a subscriber base of 1.05 billion and has registered strong growth in the past decade and half. The Indian mobile economy is growing rapidly and will contribute substantially to India’s gross domestic product (GDP), according to report prepared by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG). The country is the fourth largest app economy in the world.

The liberal and reformist policies of the Government of India have been instrumental along with strong consumer demand in the rapid growth in the Indian telecom sector. The government has enabled easy market access to telecom equipment and a fair and proactive regulatory framework that has ensured availability of telecom services to consumer at affordable prices. The deregulation of foreign direct investment (FDI) norms has made the sector one of the fastest growing and a top five employment opportunity generator in the country.

The Indian telecom sector is expected to generate four million direct and indirect jobs over the next five years according to estimates by Randstad India. Significant employment

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opportunities are expected to be created due to combination of government’s efforts to increase penetration in rural areas and the rapid increase in smartphone sales and rising internet usage.

The mobile industry is expected to create a total economic value of `14 trillion (€174.24 billion) by the year 2020. It would generate around 3 million direct job opportunities and 2 million indirect jobs during this period. India has become the second largest smartphone market in the world as shipments increased 23 per cent year-on-year in Q3 2017, to reach more than 40 million units.

Rise in mobile-phone penetration and decline in data costs will add 500 million new internet users in India over the next five years creating opportunities for new businesses. The monthly data usage per smartphone in India is expected to increase from 3.9 gigabytes (GB) in 2017 to 18 GB by 2023.

Data usage on Indian telecom operators’ networks (excluding Reliance Jio), doubled in six months to 359 petabytes or 3.7 million gigabytes per month as 4G data usage share increased to 34 per cent by the end of June 2017. According to a report by leading research firm Market Research Store, the Indian telecommunication services market will likely grow by 10.3 per cent year-on-year to reach US$ 103.9 billion (€84.23 billion) by 2020. In the Finance Bill 2018, the government has allocated US$ 1.57 billion (€1.27 billion) for telecom infrastructure, which is expected to generate further employment in the sector.

1.1.3 R&D and innovation4

The research ecosystem in India presents a significant opportunity for multinational corporations across the world due to its intellectual capital available in the country. Legions of Indian engineers working across the globe highlight the highly trained manpower available at competitive costs. Consequently, several multinational corporations (MNCs) have shifted or are shifting their research and development (R&D) base to India. These R&D bases either develop products to serve the local

market or help the parent company overseas deliver new innovative generation of products faster to the markets across the world.

India’s engineering R&D (ER&D) globalization and services market reached US$ 22.3 billion (€18.08 billion) in 2016 and is set to rise to US$ 38 billion (€30.80 billion) by 2020. India accounted for 40 per cent (US$ 13.4 billion or €10.86 billion) of the total US$ 34 billion (€27.56 billion) of globalized engineering and R&D in 2016. India has a total of 25 innovation centres in the country and has been ranked as the top innovation destination in Asia and second in the world for new innovation centres. The country accounts for 27 per cent of Asia’s new innovation centres. India has moved up to the 60th position in the 10th edition of Global Innovation Index (GII) in 2017 and is likely get into the list of the top 25 nations in the next 10 years. While the government has announced phasing out of the income-tax incentives for R&D in Budget 2017, consistent encouragement for R&D would be vital for India to achieve the aforementioned thresholds.

1.2 Recent Developments The last couple of years have seen invigorated

efforts in measures by the Indian government to encourage and promote the ICT sector in the country. Some of the key initiatives include the following:

1.2.1 Digital India The Digital India programme is a prodigious

initiative of the government that envisions emphasis on e-governance and transformation of India into a digitally empowered society. Initiatives launched under this programme such as Digital Locker System, MyGov.in, eSign, e-Hospital application, Digitize India Platform (DIP) etc. appear to be steps in the right direction that should enhance usage of technology in delivery of a host of services. The estimated impact of Digital India by 2019 would be cross cutting, ranging from wide broadband connectivity, Wi-Fi in schools and universities and public Wi-Fi hotspots resulting

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in generation of significant business and employment opportunities, in the technology, telecom and electronics space.

In the Finance Bill 2018, the government has proposed to increase the digital intensity in education and move gradually from ‘black board’ to ‘digital board’. The skills of teachers is proposed to be upgraded through the recently launched digital portal ‘DIKSHA’. The NITI Aayog is empowered to initiate a national programme to direct government’s efforts in the area of artificial intelligence, including research and development of its applications. This move would usher huge investment in development of artificial intelligence in India.

To invest in research, training and skilling in robotics, artificial intelligence, digital manufacturing, big data analysis, quantum communication and internet of things, Department of Science & Technology is to launch a Mission on Cyber Physical Systems to support establishment of centres of excellence. To support this, the government has doubled the allocation of Digital India programme to `30.73 billion (€382.46 million) in 2018-19.

The government has allocated `10,000 crore (€1.24 billion) to set up 5 lakh (500,000) Wi-Fi hotspots to provide broadband access to 5 crore (50 million) rural people. Further, all trains in India are to progressively provided with Wi-Fi, CCTV and other state-of-the-art amenities. To increase efficiency and transparency and to reduce the harassment taxpayers face during assessments, an electronic IT assessment system is expected to be rolled out across the country. Also, all toll payments are proposed to be shifted from cash to the digital mode and tags will be introduced on the basis of ‘pay as you go’.

1.2.2 Startup India Startup India, a flagship programme of this

government is an admirable initiative and has received thumbs up from all stakeholders in the startup ecosystem.

Acknowledging the long gestation period for startups, the income-tax definition has

been amended for an entity to be considered as a startup for up to 7 years (from earlier 5 years) and a biotechnology startup for up to 10 years from the date of its incorporation/ registration. The scope of definition has also been broadened to include scalable business model with high potential of employment generation or wealth creation. Additionally, no letter of recommendation from an incubator/industry association shall be required for either recognition or tax benefits.

The Budget 2018 also proposes a separate policy to be evolved for issuance of hybrid instruments to attract foreign investments for the startups and venture capital firms.

1.2.3 Make in India5

India’s ER&D services sector, which is among the fastest growing sub-sectors within the IT/BPM ecosystem, can benefit from the policies and support infrastructure provided by the Make in India initiative to establish India’s leadership position in the global R&D services market. Global market for ER&D services is traditionally dominated by service providers from France and Germany, who have built their capabilities by leveraging the local manufacturing and industrial ecosystem in European markets. In recent years, service providers from India have emerged as preferred partners for global R&D services sourcing, and a few major service providers from India are among the ‘Top 10’ vendors in the global ER&D services market. Taken together with Global In-house Centres (GICs) of MNCs across industries, India is fast emerging as a regional and global powerhouse in ER&D services. By leveraging the emerging manufacturing and industrial ecosystem enabled by Make in India initiative, India has the potential to become the global leader in ER&D.

In the Finance Bill, 2018, to promote Make in India, the government has proposed to increase customs duty on mobile phones from 15-20 per cent, on some of their parts and accessories to 15 per cent and on certain parts of TVs to 15 per cent. It is expected that

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this move would incentivize Make in India objectives of the government.

1.2.4 Smart Cities Mission6

The Smart Cities Mission of the government is a bold, new initiative. It is meant to set examples that can be replicated both within and outside the smart city, catalysing the creation of similar smart cities in various regions and parts of the country.

In the approach of the Smart Cities Mission, the objective is to promote cities that provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment and application of ‘smart’ solutions. The focus is on sustainable and inclusive development and the idea is to look at compact areas, create a replicable model, which will act like a lighthouse to other aspiring cities. The core infrastructure elements in a smart city would include:

i. Adequate water supply,

ii. Assured electricity supply,

iii. Sanitation, including solid waste management,

iv. Efficient urban mobility and public transport,

v. Affordable housing, especially for the poor,

vi. Robust IT connectivity and digitization,

vii. Good governance, especially e-governance and citizen participation,

viii. Sustainable environment,

ix. Safety and security of citizens, particularly women, children and the elderly, and

x. Health and education.

1.2.5 Ease of Doing Business A spate of initiatives to improve Ease of

Doing Business are being announced with an emphasis on simplification and rationalization of existing rules and absorption of information technology to make governance more efficient and effective. These initiatives of the government are certainly in the right direction and have started showing results with India’s

ranking in the World Bank’s Doing Business Report 2018 moving 42 places in the last three years in the World Bank’s Ease of Doing Business with India breaking into top 100 for the first time. 7

To carry the business reforms for Ease of Doing Business deeper and to every state of India, the Government of India has identified 372 specific business reform actions. All states have taken up these reforms and simplifications in a mission mode constructively competing with each other. These detailed initiatives would help in further improving the Ease of Doing Business in India.

The government has announced the setting up of a National Logistics Portal to link all seven different relevant ministries, including shipping, road transport and highways, railways and civil aviation, which is expected to significantly benefit the logistics industry as the industry will have to deal with only a single ministry and will be a significant push towards digitization and will significantly contribute to Ease of Doing Business.

The government is also transforming the method of doing its business by introduction of e-office and other e-governance initiatives in central ministries and departments.

1.2.6 Union Budget 2018 announcements From a tax and regulatory perspective, Union

Budget 2018 made few proposals which would directly impact the ICT industry and the ones among them are as follows:

• To increase the benefit to startups, it is proposed to provide the existing profit linked deduction to the startups which are incorporated on or after April 1, 2019 but before April 1, 2021. Further, the definition of eligible business has been expanded to include a business which is carried out by an eligible start up engaged in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation. The turnover limit criteria of eligible startup

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has been amended such that the total turnover of its business does not exceed `250 million (€3.11 million) in any of the 7 previous years commencing from the date of incorporation.

• Lowering the tax rate to 25 per cent for all domestic companies with total turnover up to `2,500 million (€31.11 million) during FY 2016-17. These change from the government is a welcome and is stepping stones to an overall reduction of the headline tax rate of 25 per cent as announced by the finance minister previously. Also by the reduction of corporate tax rate almost 99 per cent of the companies will be tax benefited and in return will make micro, small and medium enterprises (MSME) sector more competitive as compared to larger companies. This could help smaller ICT players and new startup companies.

• The definition of ‘business connection’

under the Income-tax Act is proposed to be expanded to cover the following:

o The scope of agency business connection is proposed to expanded to cover a principle role played by the agent in facilitating a sale by a non-resident in line with agency permanent establishment in the multilateral instrument (MLI); and

o To include “significant economic presence” of a non-resident that would be determined based on a threshold of revenue or number of users /customers as would be prescribed by the government. This is in line with the recommendations of the OECD BEPS Action Plan 1.

While the above amendments do not impact the double tax avoidance treaties entered into by India, India would pursue renegotiation of treaties in line with the above positions and

Description of Goods Up to February 1, 2018 From February 2, 2018

USB cable for cellular mobile phone 7.5%/10% 15%

LCD/LED/OLED panels for TVs/other parts of LCD/LED/OLED TVs

7.5%/10% 15%

Telephones for cellular networks or other wireless networks

15% 20%

Side key of cellular mobile 7.5% 15%

Specified goods for use in manufacture of cellular mobile phones and specified parts/sub-parts/ accessories of cellular mobile phones

10% 15%

Printed circuit board assembly (PCBA), moulded plastics of charger or adaptor of cellular mobile phones

Nil 10%

Wrist wearable devices 10% 20%

Machines for reception, conversion and transmission of voice images and other data

10% 20%

Parts of machines for reception, conversion and transmission of voice images and other data

10% 15%

Microphones and stands, wired headset, audio frequency electric amplifiers, certain aerials and aerial reflectors

10% 15%

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implementation of the MLI would have to be watched out for.

• Other announcements in direct tax front include (i) rationalization of deduction under section 80JJAA – incentive for employment generation, (ii) non-residents and foreign companies to apply for PAN in certain cases, (iii) new regime for taxation of long-term capital gains on sale of equity shares etc., (iv) providing benefits to companies under insolvency proceedings, (v) introduction of team based assessment proceedings, (vi) rationalization of provisions relating to Country-by-Country Report, and (vii) rationalization of section 276CC relating to prosecution for failure to furnish return.

• No significant GST amendments were a part of the Union Budget.

• Rate of customs duty has been changed on a few products. The change in customs duty rates for goods specific to the ICT sector are as follows8:

• The government has been responsive to concerns raised by people on the GST implementation front and therefore the initial proposed compliance of three monthly returns has been reduced to only one return, with the other two returns being deferred for the time being. Further, measures to promote Ease of Doing Business have been proposed including relaxation of adjudications proceedings, exemptions for temporary import or export for repair, reverse charge mechanism on procurement of supplies from unregistered persons being suspended etc.

2. ISSUES & SUGGESTIONS

2.1 Fostering R&D and Innovation in India

2.1.1 Research and development The Department of Science and Technology

(DST) and Department of Scientific and

Industrial Research (DSIR), the two nodal agencies responsible for promoting science and technology (S&T) initiatives in the country continue to enable projects and opportunities; however, the R&D sector continues to be fraught with several unnerving challenges, a primary one being, lack of funding/ financing bodies, especially for new ideas and new investors.

There is also a need for an appropriate legislative framework for incentivizing innovators and commercialization of public-funded R&D, where the government, the recipient(s) of funds, the inventor, as well as the public benefit from the protection and commercialization of the intellectual property (IP) created. Another focus area is relaxation in visa norms for movement of technical personnel.

Recommendation

• The Indian government takes positive and focused steps towards increased collaboration among research and development (R&D) institutes, universities and private sector enterprises and leverage upon their cumulative strengths in funding, designing and implementing various research and innovation programmes.

• For uplifting the growth of innovation in India, the government should also look at reviving fiscal incentives with appropriate checks and balances and providing non-fiscal incentives including subsidies with respect to IP created in India to enable creation as well as sustenance of innovation culture in the country. This could include setting up innovation clusters similar to the manufacturing zones being demarcated for modified special incentive package (MSIP) benefits and in line with international best practices on the subject.

• All regulations with respect to movement of funds as well as resources for R&D and innovation should have specific liberalization norms.

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2.1.2 Issues around increase in customs duty rate9

The ideal duty framework to grow domestic manufacture in India requires the import duty structure to be as follows:

• Highest for finished goods.

• Medium for intermediaries.

• Lowest for parts and components.

However, with the finished goods coming in at 10 per cent duty from non-FTA countries and virtually zero duty from FTA countries, the ‘ideal’ duty framework has been distorted.

One of the success stories of the Make in India programme is the significant thrust accorded to manufacture of mobile phones. It is estimated that almost 150,000,000 mobile phones were manufactured in 2016 and approximately 500,000,000 mobile phones would be manufactured in India in the next few years.

However, the current activity in factories can at best be described as basic assembly. It is extremely important that encouragement is given for greater value addition in India with the right skills training and opportunities.

While, the argument of increasing the customs duty rate to promote Make in India is definitively appreciable, the government needs to ramp up the manufacturing base in India which is currently at a nascent stage. This requires a definitive plan than just an increase in customs duty rate to make it a success.

2.1.3 Issues around taxation

1. Reduction of corporate tax rate for MSME’s

Issues

The reduction of corporate tax rate for MSME from 30 per cent to 25 per cent with turnover up to `2,500 million (€31.11 million) during FY 2016-17. This could help smaller IT/ITES players. While this is in line with the proposals laid down in the earlier budget to gradually reduce the corporate tax rates and provide a road map for reduction in tax rates, some

incidental changes would facilitate the benefit being fully realized by the MSMEs.

Recommendation

• Companies with a turnover less than `2,500 million (€31.11 million) should not be subject to MAT.

• Levies such as buyback distribution tax (BDT) and dividend distribution tax (DDT) at the rate of around 20 per cent significantly impair the returns to the shareholders as there is significant cumulative outflow in the hands of the company. A holistic view on rationalization of multiple corporate tax rates should be adopted.

• It is also recommended that a specific clarification be issued that in addition to the base rates of tax, there would be no further levy of surcharge or education cess, such that the base rate is the effective rate of tax being levied on taxpayers.

2. Initiatives for startups by extending the period of claiming deduction

Issues

The profit linked deduction (Section 80-IAC) available to the eligible startups has been extended to the startups which are incorporated on or after the April 1, 2019 but before the April 1, 2021. This is a welcome change. Further, Section 80-IAC defines an eligible startup as having turnover below `250 million (€3.11 million). However, certain issues continue/arise on startups, such as:

a. Definition of startups continues to be vague and subjective and hence prone to litigation

b. The turnover threshold of `250 million (€3.11 million) is low and the period of 7 years is less given the longer period startups take to record profits

c. If the turnover goes up within a period of 7 years, will it no longer be an eligible startup.

Recommendation

• Startups should be exempted from minimum alternative tax (MAT).

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• The deduction should be available to startups at-least for the first ten years and limit of `250 million (€3.11 million) turnover should be enhanced particularly in the later years.

3. Carry forward of losses by startups

Issues

Section 79 of the Income Tax Act, 1961 provides that where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested and being an eligible startup as referred to in Section 80-IAC, loss shall be carried forward and set off against the income of the previous year, if all the shareholders of such company which held shares carrying voting power on the last day of the year or years in which the loss was incurred, being the loss incurred during the period of seven years beginning from the year in which such company is incorporated, continue to hold those shares on the last day of such previous year.

The said Section provides for a 100 per cent lock-in for the promoters/shareholders for a period of 7 years to carry forward losses which may hampers new investors to come in and promote startups.

Recommendation

• The move to restrict the promoters to lock-in their investments for seven or more years is challenge for new startups and in-fact given inherent risk of startups, they should be permitted to carry forward their losses even pursuant to change in the shareholding. Such a change would be in line with the government’s intention of supporting and encouraging startups.

4. Entities to apply for Permanent Account Number (PAN) in certain cases

Issues

Section 139A has been proposed to be

amended such that every person, not being an individual, which enters into a financial transaction of an amount aggregating to `250,000 (€3,111.49) or more in a financial year shall be required to apply to the assessing officer for allotment of PAN.

In order to link the financial transactions with the natural persons, it is also proposed that the managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer or office bearer or any person competent to act on behalf of such entities shall also apply to the assessing officer for allotment of PAN.

In the above proposed amendment, following are the primary issues:

• There is no clarity on the term ‘financial transaction’ used in proposed provision.

• As per Section 206AA(7), requirement to furnish PAN shall not apply to specified person for specified payment. Relaxation given under Section 206AA(7), may become redundant on account of the proposed provision.

• This is a burdensome requirement for non-residents.

Recommendation

• The term ‘financial transaction’ needs to be clarified based on the nexus with India and based on taxable income.

• Relaxation similar to that provided under Section 206AA should also be provided under Section 139A.

• It may also be clarified that any one director/person competent to act on behalf of person covered in any clause (v) should be required to obtain PAN.

5. Prosecution for not filing return of income in case of companies

Issues

The provisions of Section 276CC provide for prosecution in case of willful failure to furnish return of income in due time. The Section provides immunity from prosecution is granted

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inter alia in case where the tax payable on the total income determined on regular assessment, as reduced by the advance tax, if any paid, and any withholding tax does not exceed `3,000 (€37.34). It is proposed to exclude companies from the above immunity in order to prevent abuse by shell companies or companies holding benami properties.

Although the proposed amendment is to target shell companies or companies holding benami properties, non-resident companies/entities not filing return on the ground that income is not taxable could be covered within the ambit the aforesaid provision.

Recommendation

• The proposed amendment should be withdrawn or should be appropriately amended to clarify non-applicability to non-resident taxpayers having no taxable income.

6. Business connection – significant economic presence

Issues

It is proposed to expand the scope of the term ‘business connection’ by introducing the concept of ‘significant economic presence’ (SEP).

SEP has been defined as transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India provided the revenue therefrom exceeds monetary threshold as may be prescribed; or systematic and continuous soliciting of business activities or engaging in interaction with users (exceeding the number as may be prescribed) in India through digital means.

Whether or not the non-resident has a residence or place of business in India or renders services in India is not relevant. Only so much of income as is attributable to the specified transactions or activities to be deemed to accrue or arise in India.

Recommendations

7. Amendment in respect of country-by-country report (CbCR)

Following amendments were proposed in connection with CbCR:

• The time allowed for furnishing the CbCR, in the case of parent entity or alternative reporting entity (ARE), resident in India, is proposed to be extended to twelve months from the end of reporting accounting year.

• Constituent entity resident in India, having a non-resident parent, shall also furnish CbCR in case its parent entity outside India has no obligation to file the report in the latter’s country or territory.

• The time allowed for furnishing the CbCR, in the case of constituent entity resident in India, having a non-resident parent, shall be twelve months from the end of reporting accounting year.

• ‘Reporting accounting year’ has been defined to mean the accounting year in respect of which the financial and operational results are required to be reflected in the report referred to in section 286 (2) and 286 (4).

• The due date for furnishing of CbCR by the ARE of an international group will be the due date specified by that country or territory.

Issue

• Currently, there is no clarity on whether the Indian constituent entity is required to file CbCR in India in the scenario where the parent entity is not obligated to file the CbCR but voluntarily files the CbCR.

Recommendation

• The words “where the parent entity is not obligated to file the report” be replaced with “where the parent entity has not filed or will not file the report of the nature referred to in sub-section (2)”.

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8. Continuation of area based exemption, given that substantial investment have been made by the companies in setting up operations in such areas

Issues

• Under the erstwhile regime of indirect taxation, the government had given incentives to encourage setting up new industrial units or units undertaking substantial expansion by way of outright exemption of excise duty and refund of excise duty paid. Various States had also formulated different schemes for incentivizing industrialization in their areas to boost trade and increase employment opportunities by way of exemption from payment of value-added tax/central sales tax (VAT/CST) for a particular period, deferral of payment of VAT/CST or refund for a particular period and grant of incentives equivalent to tax payable.

• Basis of the incentives afforded by the central and the state governments, the units

were set up with huge capex. However, the GST law is silent on the manner of grandfathering the exemptions granted.

Recommendation

• While there have been announcements that the benefit would be grandfathered, industry eagerly awaits an announcement of the scheme under GST. This is critical right from a pricing stand point to overall business planning and to add impetus to Make in India.

• It is urged that the states respectively announce the scheme of the benefits soon.

2.1.4 GST related issues

1. Refund of GST paid on capital goods

Issues

• The CGST Act provides two instances where refund can be claimed:

o Zero rated supplies made without payment of tax; and

Sl No Issues Recommendation

1 Although the above amendment emanates from BEPS Action Plan 1 and has been introduced to address tax challenges arising in digital businesses which do not require physical presence of itself or agent, there is no reference to ‘digital’ in respect of transaction in goods, services or property.

Clarification may be provided that transactions in respect of any goods, services or property carried out only through digital means are covered.

2 There is no clarity on what is meant by –

• ‘carried out by non-resident in India’;

• ‘systematic and continuous soliciting of business activities’; and

• ‘engaging in interaction with users’.

Clarifications may be provided as regards meaning of the above phrases.

3 There is no method prescribed for determining income as is attributable to such transaction or activities.

Method for determining income as is attributable to such transaction or activities may be provided.

4 BEPS Action Plan 1 (AP 1) from which the current proposal emanates, has not given final recommendations yet (final recommendations on digital economy tax is expected only in 2020).

India should (i) defer the levy based on the final recommendations of AP 1 report and (ii) await a broader global consensus, before levying the tax since the tax has wide spread ramifications for overseas companies doing business with India

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o Inverted duty structure.

• IGST payable on imports by export oriented units/Software Technology Parks of India (EOU/STPI) has been exempted only till March 31, 2018.

• Thus, post this period, where a refund is also not allowed, it would put undue strain on the finances of the companies as EOU/STPI engaged in 100 per cent exports have huge investments by way of capital expenditure.

• The procedure for procurement of supplies of goods by EOU/STPIs has been prescribed. The procedures prescribed therein would be time consuming and lead to unnecessary delays in procurements to be made by EOU/STPIs.

• Consequently, not extending the upfront exemption to EOU/STPI units would be a huge burden to such service export units.

Recommendation

• Upfront exemption in respect of import of goods should be extended without any time limit and this benefit be provided for domestic procurement as well in the absence of which all the STPI/EOU units would resort to imports for availing upfront exemption and this would be contrary to the intention of the Make in India policy of the government.

• It is also requested that the procedures prescribed recently be relaxed.

• In the absence of any extension of time limit in availing upfront exemption, it is recommended that refund of input credits on capital goods should therefore be permitted by way of an amendment to the provision.

2. Implications on the directors and other key managerial personnel in case of recovery proceedings and offences by a company

Issues

• With effect from July 1, 2017, GST has been introduced and similar to the erstwhile

service tax regime, there are provisions whereby for any offence committed by a company, the person in charge of the company can be held responsible, resulting in prosecution and/ or imposition of pecuniary penalties.

• Thus, it is imperative to understand the provisions of the GST law pertaining to adjudication, recovery and prosecution as well as the safeguards/precautions be put in place to ensure that the chances of institution of legal proceedings against and prosecution of such persons by the revenue authorities is mitigated.

• Under the GST law, company personnel can be exposed on two fronts – one on personal liability side and other from a prosecution perspective. We have summarized the implications below:

a. Proceedings to invoke personal liability of the directors

• According to the CGST Act, when any tax, interest or penalty due from a private company cannot be recovered, then the liability to pay such amount is on every person who was a director of the private company during such period.

• The question of recovery of GST from directors arises only if the private company fails to pay the GST so demanded. The Director can be made personally liable in such cases which can result in attachment of bank accounts or immovable property and other assets.

b. Prosecution under GST

• As per the CGST Act, in case of any offence committed by a company referred to in the Act, every person, who, at the time of the offence being committed was in charge or was responsible for the conduct of business, then both he and the company would be deemed to be guilty of the offence.

• Further, where an offence under the CGST Act has been committed with the consent or connivance of, or is attributable to any negligence on the part of, any director,

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manager, secretary or other officer of the company, such director, manager, secretary or other officer is deemed to be guilty of the offence.

• Offences attract pecuniary punishment and/ or imprisonment.

• The above provision applies equally to private and public companies.

• Thus, it is of paramount importance that the directors as well as other officers exercise due diligence in the day-to-day operations and work towards mitigation of any offences.

• Though the law does not specifically provide, prosecution proceedings can be launched without adjudication.

Recommendation

It is recommended that the law concerning prosecution proceedings exclude the deeming fiction making directors liable for an offence and ensure that prosecution proceedings are not launched without completion of adjudication proceedings.

3. Generation of e-way bills

Issues

• Introduction of e-way bills has put an end to the proposed free movement of goods under GST regime and has again retained the earlier method of check post verification and detention leading to inordinate delay in doing business and increase in logistics costs.

• As per the CGST rules, the Commissioner is empowered to himself or authorize another person to physically verify the conveyance carrying the goods and can undertake necessary action. This procedure would again interrupt the free movement of goods.

• Additionally, with the advent of e-way bills, the compliance burden on the registered person along with the transporter would significantly increase. Further, the accounting system of such persons should

be able to capture all the details required for generation of such waybills and numbers in order to map the movement of goods.

Recommendation

To retain the spirit of GST, i.e. unification of tax norms for the country it is recommended that the concept of e-way bill should be completely done away with in order to ensure free movement of goods since carrying of tax invoice along with goods should suffice as adequate documentary evidence.

Alternatively, it is recommended that an exemption be provided with respect to the compliances under e-way Bill Rules with respect to B2C transactions.

3.2 Ease of Doing Business

3.1.1 Stalled FTA talks between India and the EU

India is currently the fastest growing economy in the world and a strategic partner for the EU, representing a sizable and dynamic market of 1.25 billion people. For these reasons, the EU and India are committed to further increase their bilateral trade and investment through the Free Trade Agreement (FTA) negotiations.

Negotiations around a FTA were launched in 2007. After substantial progress was made through sixteen rounds of negotiation, there has been no consensus reached on key outstanding issues that include improved market access for some goods and services, government procurement, geographical indications, sound investment protection rules, and sustainable development.

Recommendation

It is recommended that all efforts should be taken to finalize the India-EU FTA which would greatly assist in fostering trade relations between India and the EU.

3.1.2 Overall infrastructure development in the country

A key driver including key performance indicator of any economy is its infrastructure. In this backdrop, the overall civil as well as

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technological infrastructure development in the country has not been commensurate with development of technology. While enterprises/businesses are growing, the infrastructure needs in terms of basic building blocks including regulatory parameters have not reached the same level and this area requires significant amount of focus and initiatives. For instance, traffic management, consistent power supply, environment pollution (air, water and soil), quality of roads / highways, are the perineal problems presently being faced in the country which directly and indirectly contribute to the efficiency as well as performance of the ICT sector.

Recommendation

Apart from allocating sufficient funds for infrastructure developments growth, a proper implementation agency may be established to ensure that the funds are utilized in an efficient way and progress on specific projects continuously monitored.

3. CONCLUSION India is an emerging economic powerhouse. It

is a growing domestic market and an expanding export hub for information technology and innovation activities. Therefore, it needs to address the issues articulated above to ensure sustained growth and success in the absence of which it would become extremely challenging to do business. Furthermore, European businesses would face a hard time in doing business and bringing in fresh investments in these sectors into India. Specific plans for each sector need to be made and chinks in the economy need to be ironed out to ensure that India continues to remain a sought after investment destination and also render Indian ICT exports competitive in the international arena.

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6 http://smartcities.gov.in/upload/uploadfiles/files/What%20is%20Smart%20City.pdf

7 Finance Minister's Budget Speech 2018

8 https://in.deloitteresources.com/functions/tax/_layouts/15/WopiFrame.aspx?sourcedoc=/functions/tax/Documents/i n - t a x- k n o w - y o u r- b u d g e t - 2 0 1 8 - d e t a i l e d - a n a l y s i s .pdf&action=default

9 Deloitte Budget Recommendations for CEAMA

Endnotes

1 https://www.ibef.org/industry/information-technology-india.aspx

2 https://atradiuscollections.com/global/reports/market-monitor-ict-india-2017.html

3 https://www.ibef.org/industry/telecommunications.aspx

4 https://www.ibef.org/industry/research-development-india.aspx

5 ht tps: / /www2.deloi t te.com/content/dam/Deloi t te/ in/Documents/industries/in-india-services-sector-ges-2017-noexp.pdf

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LOGISTICSAcknowledgements: Julian M Bevis (Maersk Group) – Chairman, Logistics Sector Committee

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EXECUTIVE SUMMARY

In 2017 and going into 2018 the logistics sector has continued to suffer from a wide range of systemic problems. In consequence, India’s logistics costs, which are a significant contributor to manufacturing and other trade related costs, are high compared to her competitors. The adverse effect upon India’s competitiveness in international markets is self-evident. Similarly India’s Ease of Doing Business rating in the logistics sector, while improving, remains low.

In response, the government’s attention is now increasingly focused upon this sector, which is clearly positive. This focus needs to be sharpened and the pressure for delivery increased significantly if the all-important cost competitiveness index is to be materially changed. To help facilitate such change the industry itself must work more closely with the government to improve the standard and level of interaction across all stakeholders. Consultation by the government too has room for improvement. Failing this, damaging misapprehensions will persist.

It is commendable that the government is now addressing the creation of more physical infrastructure across most sectors, but delivery needs to improve. Further, there is a need to recognize that infrastructure is not just about physical assets. It is as much about the regulatory environment where there remain many policy distortions and inefficiencies. The propensity of the government to regulate by policy diktat as opposed to allowing the market, where it is effective, to rule and to determine prices needs to be curbed. It follows also that for effective markets to emerge there must be adequate scale, thereby giving cargo interests the ability to exercise free choice between suppliers. Unless and until such mechanisms can be brought to bear costs will be slow to decline materially. It also has to be acknowledged that the development of effective markets takes time and that therefore the use of regulators in some sectors where egregious monopolies persist, as is the case with railways, is essential. Rail costs in India are unnecessarily high for freight and greater exposure to regulation of both price and practices is de rigueur if rail is to recapture volume.

The implementation of the goods and services tax (GST), albeit somewhat untidy in its early stages, will materially improve market effectiveness. The change from a patchwork of rules which differ from state to state, to a national regime will eventually make a substantial and beneficial difference. It is essential though, for these benefits to fully accrue, that the multiplicity of other agencies, some official and some less so, which still impact the road freight industry, should be similarly rationalized. Similarly, the fact that customs regulations are often inconsistent and unduly complicated is a burden upon the collecting agencies and industry alike. The implementation of community systems in ports and airports alike is essential.

Across all sectors there is an urgent need to handle all transactions electronically. Only by this means will transparency improve and the pernicious, role of a multitude of expensive intermediaries, be reduced.

The road freight sector remains a particular challenge being faced with poor highways, an extraordinary patchwork of legislation in some respects and a marked absence of the necessary enforcement in others. In this sector safety standards simply must improve and this needs to be a joint focus of industry and the government. It is well understood that this is a difficult area. Hence the importance of industry/government cooperation.

Across all sectors the introduction of uninterrupted electronic communications to facilitate processing and transparency is a high priority. Policy distortions like the outdated cabotage rules in the shipping sector, and restrictions in the aviation sector, all of which ultimately adversely affect the market and indeed the common man, require swift examination to improve market effectiveness.

The list of issues is daunting but the prospects for progress are improving. The Government of India is clearly alive to the challenges and must work now to transform excellent intent to delivery. The logistics industry needs to be part of this transformation and to work collaboratively to the common aim of creating an effective and efficient market.

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1. INTRODUCTION This document is the fifth edition in the series

of summaries of issues that face European logistics providers operating in the Indian market.

The purpose of the document remains as previously suggested. This is not to try and provide solutions, rather to provide an agenda for discussions between the European logistics industry and the various stakeholders in India be they the government, regulatory and/or statutory bodies or other private sector entities. It is hoped that these discussions will lead to collaborative solutions to the issues identified.

Whatever else is said, it is the firm view of the logistics group that progress will be impeded unless a greater effort is made by industry to approach government on a multilateral basis rather than as currently tends to happen, bilaterally which leads to confusion and lack of focus.

As with the previous edition, the length of the paper is much reduced. The purpose is simply to list the main issues as a prelude to engagement with government.

The background to the paper’s production continues to change for the better, albeit there remains a great deal to accomplish.

There is a clear and increasing recognition by the government at a senior level of the importance of logistics to the health of the economy and to the success of the programmes that are designed to improve its performance. Delivery though remains a problem, and issues remain in the key areas of competitiveness and Ease of Doing Business. Generally the logistics industry is still not able to deliver the level of service that is required.

Far as long as these issues remain, Indian manufacturing will remain relatively uncompetitive.

2. COMMON THEMES, MAIN RECOMMENDATIONS

There are a number of common themes across

all the sectors. These are summarized below. It is believed that unless these principles can be adopted, progress is likely to be slow at best.

2.1 The present practice of relying upon detailed regulation of every process and enterprise to achieve policy ends needs to be controlled. Policy makers need to accept the principle of regulation by market forces. This includes all pricing activities by infrastructure operators.

2.2 It follows therefore that infrastructure must be created in sufficient quantity to allow the functioning of an effective market. Unless this happens, users cannot have real choice between modes and between suppliers in one mode. This probably means that there has to be an effective planning process to provide infrastructure in advance of anticipated demand.

2.3 It has to be acknowledged by policy makers that the logistics industry is interlinked across all modes. No one mode or hub can operate in isolation and those solutions that do not recognize these essential features of the industry will deliver sub-optimal solutions.

2.4 The logistics industry is now an essential element within the manufacturing industry. A competitive and effective manufacturing industry will not emerge unless it is supported by effective logistics.

2.5 The organization of government ministries must recognize the interlinked nature of all logistics sectors and their essential links to manufacturing. The present structure of separate ministries operating without coordination will not deliver effective solutions. At the same time logistics must be accorded proper status as an industry.

2.6 It must be recognized that ‘infrastructure’ is as much a matter of the legislative infrastructure as it is about the provision of physical infrastructure. The processes, procedures and values governing the operation of infrastructure may be the difference between effective and inefficient infrastructure, and can drive capacity enhancement.

2.7 The legislative structure governing the logistics

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industry contains several outdated regulations that are inappropriate to modern transport methods. These have to be updated and/or removed altogether.

2.8 As far as possible, all elements of the logistics industry should be privatized.

2.9 Such legislation as may be necessary has to be applied uniformly across the country. The practice of allowing significant local variations on a theme that should be common is a significant impediment to an effective logistics industry.

2.10 The role of customs and its interaction with the logistics industry needs continuing review to make it a trade facilitator rather than an inhibiter.

2.11 Across all modes, economies of scale are a paramount consideration. Logistics planning must recognize this.

2.12 India must develop transport hubs, particularly in the container shipping and air transport sectors. Such hubs have to have the appropriate legislative infrastructure as well as the physical infrastructure.

2.13 The rules governing the interaction between government and infrastructure operators, the so called PPP (public-private partnership) model needs review to redress the balance of risk and reward which is currently skewed in favour of the government.

2.14 The planning process is over centralized and does not enable coordinated industry input and participation in implementation which itself must allow greater flexibility.

2.15 There are serious skills shortages across the sector.

2.16 Across all sectors there is a need to facilitate the handling of transactions electronically to increase the speed of information flow, reduce costs and the pernicious role of intermediaries, and thereby enhance Ease of Doing Business.

2.17 Safety must be enhanced across the sector. At present, this falls short in terms of regulation and management attention. It is unfortunate that transport is delivered at such human cost.

3. ROAD TRANSPORT3.1 The standard and extent of roads capable of

supporting road freight transport remains poor.

3.2 While GST has been implemented, there remains a multiplicity of other agencies impeding the free movement of road transport.

3.3 There is no formal training of drivers and attendants.

3.4 Safety standards are low and there exist very few organized training programmes.

3.5 International best practices of route optimization and freight management through the use of multiple trailers for single horse (i.e. tractor) are prevented in India due to archaic interpretations of the Motor Vehicles Act. Further, the interpretations of this act as it applies to allowing for multiple trailer single horse (MTSH) type operations differ from state to state depending on the interpretation of the specific state’s regional transport office (RTO) officials. It is recommended that a nation-wide circular to all RTOs to allow separate registration of tractors and trailers.

3.6 Develop well defined laws that differentiate the legal obligation of tractor owner and trailer owner while goods are in transit. These laws should be national in scope and not left to the interpretation of RTOs or individual states.

3.7 Multiplicity of regulations applicable to truck movement in India coupled with random inspections on the road by different agencies responsible for implementing these regulations lead to multiple stoppages. Such stoppages, including those at checkpoints and entry-points, could add up to as much as 10 to 14 hours per day for trucks in transit. It is suggested that tax related check-posts are done away with in the post GST regime and replaced with risk-management based flying squads for random inspections. The registration of information for intra-state movement is done through an automated system. All stops made by flying squads would have to be registered by the officials, and physical inspections if any, be undertaken on camera. All RTO inspections should also be made on-camera and all

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stoppages registered online by officers and made s.t. RTI Act.

3.8 Road weight legislation has to be enforced nationally.

4. AIR FREIGHT TRANSPORT4.1 There is an urgent need to implement

comprehensive e-governance systems across the industry, supported by a robust electronic data interchange (EDI) customs system with adequate back-ups.

4.2 Implementations of cargo community system at all airports and terminals capable of working without manual intervention.

4.3 Landing and navigation charges remain high thus adding to India’s high logistics costs.

4.4 Sea-air, road-air freight development has been extremely limited.

4.5 24x7 availability of key officials.

4.6 Best practice sharing between airports needs to be adopted.

4.7 Royalties and service tax on all airport services is making air freight unnecessarily expensive.

4.8 The processes for part shipment of imports is a major issue and amendment processes take days.

4.9 Excess and over-carried cargo is an integral part of the business but, the process of regularization is too slow.

4.10 Allow establishment of cargo ‘villages’ to allow build up and handling of unit load devices (ULD’s) and pallets as per international practice.

4.11 Where air freight operators are able to build full ULD, the practice of charging for full handling by the terminal operators needs to be curbed.

4.12 The practice whereby terminals operators and ground handlers are the same needs to be changed. Operators need to be given a choice.

5. CONTAINER SHIPPING 5.1 The development of port user community

systems in all ports to serve all users and

stakeholders is essential. These exist in almost every port in competitive markets and greatly facilitate the handling of transactions.

5.2 The requirement of shipping lines to register with customs is superfluous and is an unnecessary burden on lines.

5.3 The exemption of vessel sharing agreement needs to be extended for 5 years failing which this internationally accepted best practice will have to cease which will add considerable and unnecessary additional costs for India’s international trade.

5.4 The recent focus on direct port deliveries is supported by lines and terminals alike but the implementation of the new arrangement leaves a great deal to be desired.

5.5 In certain cases light dues collection is being duplicated, adding unnecessary costs.

5.6 The current rail pricing structure for containers remains an impediment. Railways must be able to compete effectively and to reverse the transfer of cargo to road.

5.7 The movement of containers across state boundaries will be facilitated by GST but the rules around taxation of the container itself are burdensome and need to be changed.

5.8 Landside connectivity in many ports remains inadequate.

5.9 The cabotage issue remains unresolved.

6. PORTS AND TERMINAL SERVICES

6.1 TAMP: The TAMP (tariff authority for major ports) issue remains unresolved. While there are indications that the government intends to do away with the TAMP for new terminals, there is as yet no clarity as to how existing terminals which remains subject to legacy pricing guidelines are to be dealt with. A way needs to be found whereby those terminals can be transitioned unconditionally to a more appropriate set of guidelines leading eventually to a fully market driven pricing regime.

6.2 Port user community system: There must be established in all ports effective cargo

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community systems that enable access to and from all users of common data.

Currently very few EXIM transactions are automated. There is limited exchange of information and the users cannot extract information.

The system must permit a multidirectional interchange of information and must become the sole permitted means of communication for all cargo information for all stakeholders.

6.3 Improvement of the PPP/MCA model: The present PPP/MCA (public-private partnership/model concession agreement) model does not provide an adequate balance of risk and reward with the result that projects are often not financially rewarding.

6.4 Custodian bond, bank guarantee and insurance norms for custodian as per the ‘Handling of cargo in customs areas regulations’: It is not necessary for terminals to take out insurance to cover customs duty when they already have insurance for the infrastructure and the value of cargo and containers. This is a practice that applies nowhere else in the world and could safely be dispensed with in India.

6.5 Cost recoveries from customs for provision of customs officers: It is requested that the Central Board of Excise and Customs (CBEC) stop collecting charges for build-operate transfer (BOT) terminals. This requirement has already been disallowed in some states and needs to be removed across the country.

6.6 Remote clearance of vessels by immigration and customs: The inward and outward clearance of vessels needs to be handled in advance and on line.

6.7 Allocating of space in ports for testing laboratories for animal/plant quarantine, textile and the Food Safety and Standards Authority of India (FSSAI): While steps have apparently been taken to instruct major ports to allocate land and/or space within ports, little progress has been made, with the result that the delays incurred through the dispersal of these facilities continues.

6.8 Secure improvements in the physical and regulatory infrastructure providing connectivity both for landside and marine: While there have been some improvements, landside issues remain in some ports. As part of this there is an urgent need to move traffic away from road to rail which essentially means reducing the road’s pricing advantage.

6.9 Create a more constructive legislative environment around labour issues and ensure that ESMA legislation can be invoked without delay: While ESMA exists on the statute books it needs to be suitably amended and applied to prevent damaging labour stoppages.

6.10 Removal of the cabotage legislation that inhibits the development of transshipment hubs in India. For this to be effective there must be changes in the relevant tax and custom legislation. The recent circular issued by Ministry of Shipping does not really change the situation. The cabotage restriction needs to be removed completely. It goes without saying that Indian Flag and International Flag operators must be on an equal footing.

6.11 Relative costs: It has been long the contention of the industry that marine costs levied by the major Ports in India are unnecessarily high. The consequences for India’s relative competitiveness are self-evident.

6.12 Customs: Uniform application of customs rules both across ports and inland facilities

6.13 Landlord arrangements: Ports to move nationally to landlord and concessionaire arrangements under equitable PPP structures.

7. EXPRESS LOGISTICS7.1 Ensuring appropriate space is set aside for

dedicated and exclusive express handling facility for express operators in the airport premises with city and airside access for express operators with own aircraft. Such space needs to take into consideration the unique needs of express, and is thus located next to aircraft parking and transit bays. Additional features required by express operators especially if

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India is to develop an express logistics regional hub are:

i. Self-ground handling for express companies with own aircraft.

ii. Customs is encouraged to give custodianship to express operators. Custodianship for express operator is essential for seamless operations leading to speed and security of operations.

7.2 Simplification of trans-shipment procedures.

7.3 Allowing export commercial shipments to use courier by integrating an export module in the courier EDI currently jointly being developed in PPP mode by Express Industry Council of India (EICI) and CBEC.

8. RAILWAYS8.1 Rail rates are high in absolute terms (as

compared to other national rail networks) and relative to road, which is causing significant loss of traffic to rail. This has implications for the existing network, for the environment and quite possibly for the future of the DFC.

8.2 The disparity between road and rail pricing, and the consequent utilization issues on rail is giving rise to traffic imbalances which are hurting asset utilization.

8.3 Railways have a significant land bank which could be utilized to release value and attract inward investments.

8.4 The PPP/MCA model being used by railways needs to produce a more equitable share of risk and reward.

8.5 The restrictions on wagon maintenance by private rail operators need to be relaxed as this is a disincentive for private operators.

8.6 Rail pricing needs to take account of considerations of their value proposition.

8.7 There appears to be a preference for PSU’s for rail projects. Private equity needs to be given consideration as well.

8.8 The completion of the Western and Eastern corridors of the DFC physical infrastructure and finalization on its pricing and operational model

need to be prioritized. The east coast and cross links of the DFC need to be prioritized.

8.9 Railways need to resist the temptation to apply surcharges unnecessarily.

8.10 There is a need to run more scheduled trains to give certainty to the exim trade.

8.11 The restricted commodity list needs to be done away with.

8.12 There is justification for increasing the benefits for boxes using the upper tier of double stack trains.

8.13 Double stack trains can be used for four 20 feet container per wagon. This is possible and would bring traffic back to rail.

8.14 The hub and spoke operations at e.g. Khatuwas should be more widely publicized as these bring benefits for the Exim trade.

8.15 Issues around traction and crew shortages during peak periods remain.

8.16 There needs to be a greater degree of trade representation and consultation in railway decision-making.

8.17 There are continuing congestion issues on trunk routes particularly in the Mumbai-Delhi corridor.

8.18 There is a need to improve the utilization and effectiveness of Railways owned container Rail terminals by giving access to them by private rail operators.

8.19 Conversely the utilization and effectiveness of the private freight terminals needs to be enhanced by allowing them to handle multiple train and traffic types.

9. TRADE FACILITATION9.1 The logistics industry appreciates the recent

initiatives towards developing an effective single-window and a single-common online declaration for customs and all allied agencies. It looks forward to further systemic reforms that would ensure zero downtime of the customs EDI and a paperless system that accepts scanned electronic copies ALL documents required for clearance with digital signature.

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In addition, some other expectations of the logistics sector include:

i. Inclusion of a wide category of entities (ACP or accredited client programme, AEOs or authorized economic operators, star trading houses, and large manufacturers) for the benefit of deferred duty payment (DDP) scheme announced by the Finance Minister in his Budget speech. Limiting this to just AEO and ACP category (even a reformed AEO category) would be self-defeating, and become a tool in the hands of a few ‘AEO’ freight forwarders to develop their business. The obvious implications for rent-seeking and favours that would perpetuate the AEO programme would defeat the entire purpose of transparency. India’s large manufacturers who are responsible

member of global supply chains should be allowed to have this facility as a matter of course, whether or not they get AEO status or not.

9.2 Delays happen at assessment level where assistant/Deputy Commissioner counter signature is required due to assessable value being greater `1 lakh (€1,244.60). This delay is again due to the shortage of officers and the multiple tasks expected to be done by Assistant/Deputy Commissioner. It has been industry’s long standing demand that the limits be re-defined in light of the fact that the purchasing power value of `1 lakh (€1,244.60) has declined substantially from the time this limit was first promulgated. Assistant/Deputy Commissioner signature requirement should be applicable only to shipments with assessable value greater than `5 lakh (€6,222.98).

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OIL & GASKnowledge Partner: Gokul Chaudhri, Debasish Mishra & Sumit Singhania – Deloitte Touche Tohmatsu India LLP

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EXECUTIVE SUMMARYIndia is the world’s third largest energy consumer (after the United States and China) accounting for 5.5 per cent of the total global energy consumption, and had an energy demand of nearly 723.9 million tonnes of oil equivalent (Mtoe) in the year 2016. The increasing economic growth, coupled with growing urbanization and wide consumer base that needs access to energy, is likely to push India’s energy demand even further.

India’s primary energy production increased at a growth rate of 1.7 per cent in 2016, and accounted for 56 percent of domestic consumption. While presently, India’s primary energy basket is skewed towards fossil fuels, coal being the main source of energy, in the medium to long term, it is expected that renewable sources of energy and nuclear power will play greater role in the energy mix.

India is the one of the largest importers of crude oil in the world with imports constituting more than 80 per cent of the total domestic oil consumption. India also was the fourth largest importer of liquefied natural gas (LNG) in 2016, accounting for 5.68 per cent of global imports. However, India has potential to meet a higher share of demand from domestic production of crude oil and natural gas.

The government has taken several policy as well as administrative measures in order to augment domestic oil and gas production and reduce dependency on imports. Some of the key developments include unveiling of the new Hydrocarbon Exploration & Licensing Policy (HELP); demand based bidding under an Open Acreage Licensing Policy (OALP) instead of extant cyclical bidding rounds; shift from cost recovery model to a more progressive revenue sharing model; and grant of pricing and marketing freedom. A National Data Repository has also been set up to provide seamless access to India’s exploration and production (E&P) seismic data to investors through digital medium, with a view to harness the potential of India’s large basinal area.

Key recommendations for the sector

1. The government should provide a level-playing field to private-run oil companies by way of extending calibrated subsidies or compensation to recoup under-recovery/high operating losses, similar to state-owned oil companies.

2. The government should rationalize the sunset clause for tax holiday by phasing out deduction for production sharing contracts (PSCs) or revenue sharing contracts (RSCs) entered into on or after April 1, 2017, and not undertakings commencing commercial production after such date. The meaning of term ‘mineral oil’ also needs to be clarified to include natural gas eligible for tax holiday.

3. In order to stimulate private investments in E&P operations, the government should extend adequate fiscal incentives such as providing 100 per cent deduction in respect of development and production costs under Section 42 of the Income-tax Act, 1961 (IT Act), in accordance with provisions of the Model RSC. Alternatively, E&P projects may be included within the meaning of ‘infrastructure facility’ eligible for investment-linked deduction under section 35AD of the IT Act.

4. Taking into account that E&P projects are capital intensive and require significant financing, the government should exempt them from applicability of thin capitalization rules under 94B of the IT Act. Alternatively, a higher ratio (i.e. greater than 30 per cent) may be prescribed for such projects to ensure the limitation on interest deduction is triggered only in exceptional cases.

5. All petroleum products such as petrol, diesel and natural gas should be brought under ambit of the goods and services tax (GST) regime to avoid cascading of taxes and balance the increased cost of production. Alternatively, the government should ensure that incidence of GST flows seamlessly across the value chain by allowing a refund of non-creditable input taxes in the hands of the recipient.

The oil and gas industry has been at an inflection point for couple of years now, marked by a spate of policy and regulatory reforms. Government’s renewed vigour for enhancing domestic production is an encouraging sign and is expected to catalyse large scale private investments for new field discovery and enhanced recovery from already discovered hydrocarbon acreages. Downstream infrastructure is set for major capacity additions over next five to seven years, and this could well be a new sunrise sector for investors to look at in this space.

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1. INTRODUCTION

1.1 Market Description1.1.1 With an estimated gross domestic product

(GDP) of US$ 2.439 trillion (€1.98 trillion) in the year 20171, India is the seventh largest economy in the world and third largest on the basis of its purchasing power parity2. India is among the fastest growing economies of the world with GDP growth rate estimated at 6.75 per cent for financial year (FY) 2017-183, and targeted growth rate of 7-7.5 per cent for FY 2018-19 and above 8 per cent in the near future.4 The energy sector is crucial for sustaining and further improving the growth momentum in the economy.

1.1.2 India was the third largest energy consumer in the world in 2016 (after the United States and China), with a share of 5.5 per cent in the global primary energy consumption5. India’s energy consumption is projected to grow at 4.2 per cent per annum up to 2035, faster than all major economies of the world.6

1.1.3 India’s energy demand has increased to 723.9 million tonnes of oil equivalent (Mtoe) in 2016; however, the per capita consumption of energy is much lower than the world average due to large population. Increasing economic growth, coupled with growing urbanization and a wider consumer base that needs access to energy is likely to push India’s energy demand even further. The energy demand is expected to double to 1,516 Mtoe by 2035.7

1.1.4 India’s primary energy production increased at a growth rate of 1.7 per cent in 2016 (an increase of 8 Mtoe), which is less than the 10-year average, and accounted for 56 per cent of domestic consumption.8 India’s energy production as a share of consumption is expected to continue at 56 per cent by 2035.9

India’s primary energy basket is skewed towards fossil fuels, coal being the main source of energy. Though the country’s energy requirements in the medium to long run shall continue to be met predominantly by fossil fuel sources, i.e. coal and oil, dependence on renewable sources of energy and nuclear

power too is expected to increase many folds. India has ratified the Paris Agreement in October 2016 to combat climate change and has committed itself to increase the share of non-fossil fuels based power generation capacity to 40 per cent of its installed capacity. The government has set a target of installed renewable energy capacity of 175 gigawatt (GW) by 2022, comprising 100 GW from solar, 60 GW from wind, 10 GW from biomass and 5 GW from small hydro power.

1.1.5 In the primary energy space, oil and gas industry is an important pillar and ranks amongst India’s eight core industries. This industry is one of the highest contributor to the exchequer, by way of taxes, duties, levies, lease, licence fee, royalty, cess and profit petroleum. The sector contributes about 35.61 per cent to primary energy consumption in India10.

1.1.6 India’s crude oil consumption during FY 2016-17 (provisional) was 245.36 million metric tonnes (MMT), which was met by domestic production to the extent of 36.01 MMT and the balance by imports. India is one of the largest importers of crude oil in the world with imports constituting more than 80 per cent of the total domestic oil consumption. However, India has potential to meet a higher share of demand from domestic production with total crude oil reserves of 604.1 MMT as on March 31, 2017 (provisional).11

1.1.7 India’s natural gas (including LNG) consumption during FY 2016-17 (provisional) was 50.78 billion cubic metre (BCM). Natural gas is majorly used in the fertilizers industry (33.72 per cent) followed by power generation (22.76 per cent) and domestic fuel (11.42 per cent).12

India increasingly relies on imported LNG and was the fourth largest LNG importer in 2016, accounting for 5.68 per cent of global imports13. The domestic production of natural gas (including LNG) during FY 2016-17 amounted to 31.9 BCM. However, India has potential to aid growing demand of natural gas of various sectors from domestic production, with total

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reserves of 1,289.81 BCM of natural gas as on March 31, 2017.14

1.1.8 In FY 2016-17, domestic production of petroleum products increased to 243.5 MMT from 231.2 MMT during FY 2015-16. The total domestic production (provisional) during 2017-18 (till January 2018) is 211.9 MMT. Further, total domestic consumption of petroleum products was 194.6 MMT during FY 2016-17 and 169.2 MMT during FY 2017-18 (till January 2018).15

1.1.9 While India is a net importer of crude oil, it is a net exporter of petroleum products with high-speed diesel (HSD) and motor spirit contributing a major share to exports. Export of petroleum products rose from 60.5 MMT during FY 2015-16 to 65.5 MMT during FY 2016-17. During FY 2017-18, export of petroleum products has reached 56.3 MMT till January 2018. Total export of petroleum products (in value term) rose from US$ 27.1 billion (€21.97 billion) in FY 2015-16 to US$ 29 billion (€23.51 billion) in FY 2016-17.16

1.1.10 India’s economic growth is closely connected to energy demand. The need for oil and gas is projected to grow further, providing vast opportunities for investment. To meet this demand, the government has adopted various policies, such as allowing 100 per cent foreign direct investment (FDI) in many segments of the sector, such as natural gas, petroleum products, pipelines and refineries (except for investment in public sector undertakings). This move, along with various others, has made the oil and gas sector in India a more viable place to invest. Today, India’s oil and gas sector attracts both domestic and foreign investment, as seen by the presence of Indian and foreign companies such as Reliance Industries Ltd (RIL), Essar, BP, Shell and Cairn. The cumulative foreign investment in the petroleum and natural gas sector between April 2000 and December 2017 stood at US$ 6.88 billion (€5.58 billion).17

1.2 Exploration and Production (E&P) – a brief history

1.2.1 Petroleum, being a natural resource, its

ownership and management is vested with the government. The sedimentary basins of India, on-land and offshore up to 200 metres isobath, have an aerial extent of about 1.79 million square kilometre (sq km). In the deep waters beyond the 200 metres isobath, the sedimentary area has been estimated to be about 1.35 million sq km. Total thus works out to 3.14 million sq km.

1.2.2 Till the 1990’s, E&P activities were dominated by two state-owned companies viz. Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL). With the aim to encourage private participation and step up investment in E&P, the government formulated the New Exploration Licensing Policy (NELP) in 1999 along with the Directorate General of Hydrocarbons (DGH). The government also permitted 100 per cent FDI (under automatic route) in E&P activities under NELP regime.

1.2.3 The first round of bids were invited in 1999, with DGH as a nodal agency for NELP implementation; since then, nine rounds of bidding have taken place, and more than 300 exploration blocks (deep-water/shallow water/on-land) have been offered to private participants. Production sharing contracts (PSC) under the NELP regime permitted the contractors a 100 per cent cost recovery from sale of oil and gas before sharing profit with the government; the cost recovery model provided an incentive to investors, especially in deep sea exploration activities, as it guaranteed recovery of all sunk costs which is key to attracting oil majors with proprietary technology.

1.2.4 Till date, 254 PSCs have been signed by the government in the nine NELP licensing rounds, however, commercial production could start in only three blocks and major gas discoveries have been mired in litigation and controversies.

1.2.5 To incentivize new investments, the Ministry of Finance had introduced a seven-year tax holiday under provisions of the Income Tax Act, 1961 (IT Act) for E&P operators engaged in commercial production of mineral oil and natural gas. However, vide the Finance Act, 2016, as a part of government’s overall plan

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to reduce the headline corporate tax rate from 30 per cent to 25 per cent, the tax holiday for E&P operators was phased out in cases where commercial production commences on or after April 1, 2017.

1.2.6 To encourage participation from foreign oil field service contractors and ensure world class technology is brought to the Indian E&P sector, the IT Act provides for concessional tax regime for non-resident oil field service providers; eligible contractors are exonerated from the requirement of maintaining books of account to avoid undue hardship and costs.

1.2.7 With respect to pricing of gas, the Cabinet Committee on Economic Affairs (CCEA) approved a gas pricing policy in October 2014. The gas price was linked to US Henry Hub, UK NBP, Canadian Alberta hub and Russian domestic prices. However, the price derived on the basis of the notified formula is not an ‘arms-length’ price; 70 per cent weightage has been accorded to gas prices in gas exporting countries/markets having a gas surplus, which is different from the Indian domestic gas scenario. CCEA also gave an in-principle approval for a premium on price charged for gas to be produced from new discoveries from deep water, ultra-deep water and high pressure-high temperature areas.

1.3 Recent Developments – Policy Framework (Upstream Operations)

The Prime Minister (PM) has set a target for reduction of 10 per cent in energy import dependency by 2022.18 In this regard, the incumbent government has taken several policy as well as administrative measures in order to augment domestic oil and gas production and reduce dependency on imports, for meeting the energy requirements of the country. As a result of the radical policy changes, the government is expecting cumulative investments of US$ 40 billion (€32.42 billion) in the Indian E&P sector in the short term (4-5 years)19.

Key policy developments in the oil and gas space have been discussed below.

1.3.1 Hydrocarbon Exploration & Licensing Policy

To stimulate new exploration activity for oil, gas and other hydrocarbons, in March 2016, the Union Cabinet approved a new Hydrocarbon Exploration & Licensing Policy (HELP). As part of this change, the government has endeavoured to make a policy shift from the extant PSC model, based on pre-tax investment multiple (PTIM) and cost recovery, to revenue sharing contract (RSC) model for licensing of hydrocarbon acreages. Under the new regime, the government will not be concerned with cost incurred by the explorer, and will instead receive a share of the gross revenues from the sale of oil, gas etc. The Ministry of Petroleum and Natural Gas (MoPNG) in June 2017 published the ‘Model RSC’ after taking into consideration stakeholders’ comments and inputs received on the draft version released earlier.

Under the new regime, contracts for hydrocarbon acreages will be based on ‘biddable revenue sharing’ wherein bidders would quote revenue share in their bids, forming a key parameter for selection of the winning bid. The bidder giving highest net present value of revenue share to the government, as per transparent methodology, would be preferred under such parameter.

Key features of HELP are as follows:

(a) Uniform licensing system covering exploration and production of all hydrocarbons, i.e. oil, gas, coal bed methane (CBM), etc., under a single licence and policy framework.

(b) Implementation of Open Acreage Licensing Policy (OALP) whereby a bidder can also apply to the government seeking exploration of any block, thereby not restricting exploration activity only to blocks put on tender by the government. For this purpose, the investor will submit expression of interest (EoI) for contracting the block/s of their choice, which will be subsequently awarded through bi-annual bid rounds.

In January 2018, the government has launched Bid Round I under OALP for

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international competitive bidding in respect of 55 selected blocks, each carved out by prospective bidders themselves in promising basins with an area of 59,282 sq km.20

(c) Setting up of National Data Repository (NDR) under the aegis of DGH, for providing seamless access to India’s E&P/seismic data to investors through digital medium, with a view to harness the potential of India’s large basinal area.

(d) Grant of pricing and marketing freedom for crude oil and natural gas produced under the new contractual and fiscal regime.

(e) Concessional royalty regime21 for deep water and ultra-deep water areas; no royalty payable for the first 7 years and thereafter, a concessional royalty rate of 5 per cent for deep water areas and 2 per cent for ultra-deep water areas. For shallow water areas, royalty has been reduced from 10 per cent to 7.5 per cent. For on-land fields, royalty rate to be 12.5 per cent and 10 per cent for oil and gas and coal-bed methane (CBM) blocks respectively.

1.3.2 Discovered Small Field Policy (DSF Policy)

The government brought out the Discovered Small Field Policy, 2015, to early-monetize the already discovered hydrocarbon fields. The CCEA had approved 69 marginal fields for offer under the DSF Policy in September 2015. These areas were already discovered but could not be monetized due to various reasons such as isolated locations, small size of reserves, high development costs, technological constraints, fiscal regime, etc.

In May 2016, 67 discovered small fields were clubbed into 46 contract areas and were offered through an open and transparent international competitive bidding process under a new fiscal regime in the DSF Bidding Round 2016 (DSF Policy Bid Round-I). The new fiscal terms included revenue sharing arrangement with the government (instead of cost sharing), marketing and pricing freedom for both oil and gas, moderate royalty structure, waiver of oil cess, etc. A total of 134 e-bids were received for 34 contract areas, with participation by

47 companies. Subsequently, the CCEA has approved award of contract in 31 contract areas. It is expected that locked hydrocarbon volume of 40 MMT of oil and 22 BCM of gas will be monetized over a period of 15 years.22

Recently, the Union Cabinet has approved extending the DSF Policy to identified 60 discovered small fields/un-monetized discoveries for offer under DSF Policy Bid Round-II. These include 21 fields/discoveries from the DSF Policy Bid Round-I which were put on offer but could not be awarded due to insufficient response from the investor. The discoveries are estimated to have 194.65 MMT of oil and oil equivalent gas in place.23

1.3.3 Marketing and pricing freedom for new gas production from deep water, ultra-deep water and high pressure-high temperature areas24

The Finance Minister in his Budget speech for 2016 had proposed to incentivize gas production from deep water, ultra-deep water and high pressure-high temperature areas, which are presently not being exploited on account of high costs and risks. Subsequently, the CCEA has approved a new policy wherein marketing freedom including pricing freedom will be given to the producer for all discoveries which are yet to commence commercial production as on January 1, 2016, and for all future discoveries in such difficult areas.

However, such pricing freedom would be subject to a ceiling price on the basis of landed price of alternative fuels. The ceiling price shall be calculated as the lowest of landed price of imported fuel oil, weighted average import landed price of substitute fuels (namely coal, fuel oil and naphtha) or landed price of imported LNG.

The CCEA has also approved a policy providing marketing and pricing freedom to the CBM Contractors to sell the CBM at arm’s length price in the domestic market.25

1.3.4 Extension to PSCs for small, medium sized and discovered fields and pre-NELP exploration blocks which are due to expire

In March 2016, the government rolled out the

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policy decision for granting extension to PSCs for small and medium sized discovered fields due to expire from year 2018 onwards. Also, in April 2017, the government approved a policy for grant of extension to PSCs relating to pre-NELP exploration blocks. Extension shall be for a period of 10 years, or economic life of fields, whichever is earlier.

During the extended period, the government will be entitled to a 10 per cent higher share in profit petroleum than the share calculated using normal provisions of the PSC, during the extended period. Royalty and cess would be payable at prevailing rates and not at concessional rates stipulated in the PSC.

1.3.5 Creation of strategic crude oil reserves

Creation of strategic crude oil reserves is a significant step towards energy security of India and preventing supply disruptions, considering its dependency on oil imports. In Phase I of the program, storage facility at three locations viz. Visakhapatnam, Mangalore and Padur have been created. The Finance Minister in his Budget Speech of 2017 has proposed to set up caverns at two more locations namely Chandikhole in Odisha and Bikaner in Rajasthan, to increase the strategic reserve capacity to 15.33 MMT.

To incentivize establishment of such reserves, the government vide Finance Act, 2016, had provided an income tax exemption to income earned by foreign companies on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India, subject to satisfaction of prescribed conditions. Further, Finance Act, 2017 has exempted income arising to foreign companies on sale of leftover stock of crude oil from the strategic petroleum reserves after expiry of the agreement /arrangement, subject to certain conditions. The Finance Bill, 2018 has now proposed to extend this exemption to income arising from sale of leftover stock of crude oil on termination of the agreement/arrangement in accordance with terms mentioned therein.

In January 2017, the government through

Indian Strategic Petroleum Reserve Limited (ISPRL) has signed a definitive agreement for oil storage and management with Abu Dhabi National Oil Company (ADNOC) of UAE for filling up one of the two caverns at Mangalore facility. Also, ISPRL has invited preliminary expression of interest from reputed international parties for filling up of the Padur facility.26

Recently, ADNOC and ISPRL have entered into an agreement for investment by ADNOC of about US$ 400 million (€324.25 million) by way of storing crude in the underground rock cavern in Mangalore of capacity 5.86 million barrels (0.81 MMT). The period of storage will be 3 years with an automatic extension of 2+2 years.27

1.3.6 Integrated public sector ‘oil major’

The Finance Minister in his Budget speech of 2017 had proposed to create an integrated public sector ‘oil major’ through consolidation, merger or acquisition, to enable it to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders. Such integrated oil major would be able to match performance of international and domestic private sector oil and gas companies.

In line with the above announcement, ONGC has acquired government’s equity shareholding of 51.11 per cent in Hindustan Petroleum Corporation Limited (HPCL) vide agreement dated January 20, 2018. Through this acquisition, ONGC will become India’s first vertically integrated ‘oil major’ company, having presence across the entire value chain.28

Certain public sector undertaking (PSU) oil refineries have also expressed their interest in acquisition of Gas Authority of India Limited (GAIL) to help add natural gas transportation and marketing business in their respective portfolio.29

1.3.7 Other developments

(a) MoPNG has collaborated with the Ministry of Skill Development and Entrepreneurship to address the skill development needs across the value chain of the sector. MoPNG has also set up the Hydrocarbons Sector

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Skill Council (HSSC) with participation from public and private enterprises to cater to rising skills of the industry.

(b) The government has prepared a project to conduct 2D seismic surveys of all sedimentary basins of India to generate seismic data for initiating E&P activities.

1.4 Recent Developments – Policy Framework (Midstream and Downstream Operations)

1.4.1 The sector was opened up for FDI under automatic route in 200630. In relation to petroleum refining in case of PSU, FDI up to 49 per cent has been permitted31 under the automatic route, subject to not involving any divestment or dilution of domestic equity in existing PSUs. FDI in petroleum and natural gas sector was US$ 180.4 million (€146.24 million) in FY 2016-17. The FDI inflows during FY 2017-18 (till December 2018) were US$ 23.53 million (€19.07).32

1.4.2 FDI in marketing of transport fuels (petrol, diesel and aviation fuel) is also permitted33

subject to an investment of `20 billion (€248.91 million) in E&P, refining, pipelines or terminals.

The government is also working on a policy framework to grant marketing rights for CNG as transportation fuel to private firms; it is proposed to lower the threshold investment limit to `5 billion (€62.22 million) as against `20 billion (€248.91 million) (required for retail fuel stations) in the draft proposal.

1.4.3 In line with scaling demand for petroleum products, India’s refining capacity has also been scaled up with its 23 refineries. India is the second largest refiner in Asia (after China) having a total refining capacity of 247.566 MMTPA (million metric tonnes per annum). State-owned companies own and operate 57.39 per cent of the refining capacity (142.066 MMT), whereas the private and joint venture companies own remaining 42.61 per cent (105.5 MMT).34 India plans to raise its oil refining capacity by 77 per cent to 438.65 MMTPA by 2030.35

In June 2017, a formal agreement was signed between the major national oil companies in India (Indian Oil, Bharat Petroleum and Hindustan Petroleum) intending to set up the biggest oil refinery cum petrochemical complex in the state of Maharashtra with Indian Oil holding 50 per cent stake and Bharat Petroleum, Hindustan Petroleum holding 25 per cent stake each. The refinery complex will have a refinery capacity of 60 million tonnes and is expected to be completed by 2022.

1.4.4 Petroleum demand, product-mix and progressive stringent quality norms are reinventing the refining sector. From a product slate perspective, refineries in India are designed to produce large quantities of middle distillates viz. HSD, aviation turbine fuel (ATF) and ultra clean fuels that provide opportunities for reaping higher margins. Robust demand in Asia has led to new trade and opportunities for refineries in India.

1.4.5 India’s domestic petroleum product marketing is dominated by state-owned companies viz. Indian Oil, Bharat Petroleum, Hindustan Petroleum, etc. Over the years, significant marketing infrastructure has been established in the country spanning from product pipelines, retail outlets, terminals, depots and other marketing/distribution networks. Presently, the retail outlet network is over 40,000.

1.4.6 The administered price mechanism for petroleum products was dismantled in 2002. In June 2010, petrol prices, both at the refinery gate and at the retail level, were made market determined, though the government continued to exercise control to an extent. As diesel prices were deregulated with effect from October 2014, the government’s price control over the retail selling price of sensitive petroleum products is now limited to public distribution system (PDS) of kerosene and domestic LPG.

With respect to subsidy on domestic LPG, the government has launched a direct benefit transfer (DBT) scheme instead of subsidizing cylinder prices. Also, a pilot project has been initiated for DBT scheme on kerosene subsidy.

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1.4.7 In case of natural gas, the government has enacted a natural gas pipeline policy to promote competition. Moreover, the erstwhile Planning Commission proposed a roadmap to meet the demand for energy through safe, clean and convenient forms of energy at the least cost in a technically efficient, economically viable and environmentally sustainable manner in its report on Integrated Energy Policy, 2006.

1.4.8 In 2006, the Petroleum and Natural Gas Regulatory Board (PNGRB) was constituted under the Petroleum and Natural Gas Regulatory Board Act, 2006 for providing regulatory oversight to the midstream and downstream sector comprising refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas. PNGRB endeavours to create a vibrant energy market to facilitate growth by encouraging investments into basic infrastructure and protecting consumer interests through promoting fair trade practices and competition amongst the entities.

1.4.9 Over the next few years, India will accelerate to becoming a natural gas based economy, propelled with the discovery and development of offshore gas fields, and the expansion of the LNG terminals on the western and southern coast of India. Natural gas is already powering gas-fired turbines for power generation and feedstock for the fertilizer industry. An increased emphasis on clean and efficient energy has also given thrust to the demand for natural gas. India’s gas market is embarking on the next

phase of accelerated growth, mainly driven by the reform initiatives across the gas value chain.

The Union Minister of Petroleum and Natural Gas has launched the #Gas4India campaign in September 2016 in order to encourage the use of natural gas in India and increase its share in the energy mix from the current 6.5 per cent. By end of FY 2016-17, the demand for gas is estimated to increase to 494 million metric standard cubic metres per day (MMSCMD).

1.4.10 The stage is gradually being set for piped natural gas (PNG) to replace LPG as a fuel for households and for the development of CNG as a preferred fuel over petrol and HSD for city transportation. In order to promote use of natural gas, priority for allocation of domestic gas was accorded to PNG/CNG segments for meeting 100 per cent demand and faster roll out of PNG connections and CNG stations.

There are plans to connect 326 cities with city gas distribution network (CGD) by 2022.37 Over the next few years, it is estimated that city gas distribution networks could require investment of close to €39 billion (US$ 48.11 billion).

1.4.11 The government has been supporting the development of a national gas grid through various incentives such as viability gap funding support. At present, the country’s natural gas pipeline network is spread over 16,470.21 km in 2017 and another 15,000 km pipeline network has been identified, of which government has authorized construction of 14,500 km long pipeline, in order to complete national gas grid

Sector-wise estimates of demand for natural gas (in MMSCMD)36

Sector 2016-17 2017-18 2018-19 2019-20

Power 207 225 243 261

Fertilizer 113 113 113 113

CGD 46 47 50 53

Industrial 27 28 32 35

Petrochemical / Refinery / Internal

Consumption

72 72 76 80

Sponge Iron/ Steel 8 9 9 10

Total 473 494 523 552

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and move towards a gas based economy, which is under various stages of implementation.38

1.4.12 A National Gas Trading Exchange is being planned where both imported natural gas and domestically produced gas will be traded, thereby enabling a market-driven pricing of natural gas. A formal proposal is anticipated to be taken to the Union Cabinet soon. Further, Oil Industry Development Board has been asked to engage a consultant for setting it up.39

1.4.13 IT Act provides for an investment linked deduction of 100 per cent of capital expenditure incurred on laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution including storage facilities, being an integral part of such network. Such a deduction is available in the year of commencement / incurrence of expenditure, as the case may be. This provision was introduced to give impetus for investments in gas pipeline infrastructure.

1.5 Recent Developments – Fiscal Framework

The Finance Minister presented the Union Budget 2018 and the Finance Bill, 2018 in the Parliament of India on February 1, 2018, proposing amendments to the IT Act and indirect tax laws other than GST. During the current financial year, certain amendments have also been made to the GST framework. Key proposals of Finance Bill, 2018 and GST changes, which may impact the oil and gas sector have been discussed below.

Income-tax proposals

1.5.1 Concessional base tax rate of 25 per cent proposed to be extended to domestic companies having reported turnover of `2,500 million (€31.11 million) in FY 2016-17. The reduction in corporate tax rate to be marginally curtailed by proposed introduction of ‘health and education cess’ of 4 per cent replacing the existing ‘education cess’ of 3 per cent. The highest effective corporate tax rate for domestic companies to be 29.12 per cent (as against existing rate of 34.94 per cent).

1.5.2 MAT (minimum alternate tax) provisions are proposed to be not applicable to foreign oilfield service provider companies where total income comprises solely of profits and gains from business referred to in section 44BB of the IT Act and such income has been offered to tax at the rates specified under the said section. The above amendment is a clarificatory amendment and is proposed to apply retrospectively from April 1, 2001.

1.5.3 The definition of term ‘business connection’ of a non-resident proposed to be widened by including the following, in order to align domestic tax law with BEPS (base, erosion profit shifting) recommendations/MLI (multilateral instrument) positions:

a) activities carried on through a person acting on behalf of the non-resident and habitually concluding contracts or habitually playing the principal role leading to conclusion of contracts by the non-resident in the name of the non-resident.

b) ‘significant economic presence’ of a non-resident in India; ‘significant economic presence’ has been defined to mean, inter-alia, transaction in respect of any goods, services or property carried out by a non-resident in India provided the revenue therefrom during the financial year exceeds a monetary threshold as may be prescribed.

1.5.4 Vide Finance Act, 2017, the government had extended an exemption to foreign companies for income from sale of left over stock of crude oil from strategic reserve facility in India on expiry of the agreement/arrangement. The said exemption is now proposed to be extended to such income even where the agreement/arrangement is terminated in accordance with the terms mentioned therein.

1.5.5 To facilitate rehabilitation of stressed companies, it is proposed to grant the following tax reliefs to companies seeking insolvency resolution under the Insolvency and Bankruptcy Code (IBC), 2016:

a) Carry forward and set-off of losses in a closely held company is proposed to be

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allowed even if there is change in beneficial shareholding of the company in excess of 49 per cent, where resolution plan has been approved under the IBC.

b) Presently, deduction is available in respect of lower of brought forward losses or unabsorbed depreciation (as per the books of accounts) for computing ‘book profits’ for the purpose of MAT. Thereby, in a case where brought forward loss or unabsorbed depreciation is ‘nil’, no deduction is allowed. Consequentially, this was leading to tax-payouts for stressed companies. To address such situation, it has been proposed to allow deduction of both, book losses and unabsorbed depreciation, whilst computing book profits for the purposes of MAT.

Indirect tax proposals

1.5.6 Basic excise duty (BED) on branded and unbranded petrol and diesel is proposed to be reduced by `2 per litre (€0.025).

1.5.7 Introduction of levy of social welfare surcharge (SWS) on imported goods:

a) Levy of education cess as well as secondary and higher education cess on importation of goods proposed to be abolished.

b) Further, levy of SWS proposed to be introduced on imported goods at the standard rate of 10 per cent (subject to the exemption on notified products). Import of petrol and HSD liable to SWS at the rate of 3 per cent.

c) SWS to be levied on basic customs duty (BCD). Specific exemption has been provided in respect of levy of SWS on Integrated GST amount on imported goods.

1.5.8 Introduction of road and infrastructure cess on procurement HSD and motor spirits:

a) Additional duty of excise/customs (road cess) of `6 (€0.075) per litre on motor spirit (petrol) and HSD proposed to be abolished upon enactment of the Finance Bill, 2018. Till the enactment of bill, levy of road cess has been exempted on domestically

manufactured and imported petrol and HSD.

b) Introduction of road and infrastructure cess on domestically manufactured and imported petrol and HSD at ̀ 8 (€0.100) per litre.

c) A 50 per cent exemption from payment of road and infrastructure cess, BED and special additional excise duty if petrol and HSD manufactured and cleared from 4 specified refineries located in the Northeast.

d) BED rate for motor spirit and HSD reduced by `2 (€0.025) per litre. Overall duty incidence due to introduction of road and infrastructure cess, reduction of BED and elimination of road cess remains unchanged.

e) Full exemption from levy of road and infrastructure cess on specified categories of ethanol blended petrol and bio diesel provided applicable excise duty is paid on petrol/HSD and GST on ethanol/bio-diesel used for making the blends.

GST changes

1.5.9 Transportation of petro products (i.e. natural gas, petroleum crude, motor spirit, HSD and ATF) through pipeline subject to GST at the rate of 5 per cent subject to non-availment of credit and 12 per cent in other cases.

1.5.10 GST rate in respect of service of exploration, mining or drilling of petroleum crude or natural gas or both has been reduced to 12 per cent (from 18 per cent).

1.5.11 GST at a concessional rate of 5 per cent applicable on notified category of goods (such as equipment, drilling rigs, derrick barges, technical drawings etc.) required for undertaking petroleum operations subject to fulfillment of requisite conditions.

1.5.12 Clarification issued that ‘cost petroleum’ is not a supply and hence, not subject to GST. Further, profit petroleum has specifically been exempted from levy of GST.

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2. KEY ISSUES AND RECOMMENDATIONS

2.1 Under Recovery/High Operating Losses of Private-run Oil Companies

Several private oil companies, including European companies, have invested heavily in marketing infrastructure. While state-owned oil companies are compensated for the under recoveries by the government by way of compensation and subsidy, there is no similar benefit extended to private companies.

Recommendation

The government should provide a level-playing field to private oil companies by way of extending calibrated subsidies/compensation to recoup under-recovery of such private oil companies.

2.2 Rationalization of Tax Holiday Provisions Under Section 80-IB(9) of the IT Act

The government, vide Finance Act, 2016, has phased out tax holiday provisions under section 80-IB(9) of the IT Act for E&P businesses commencing commercial production on or after April 1, 2017. However, there are certain legacy tax issues relating to the tax holiday provisions which need to be resolved by the government, relevant for businesses still eligible for claiming the deduction.

Recommendation

The government should consider the following:

a) Rationalization of the sunset clause for tax holiday: Phasing out the deduction should be with respect to PSCs (or RSCs) entered into on or after April 1, 2017, and not undertakings commencing commercial production after such date. This would suitably address the concerns of businesses which had entered into a PSC with the government on or before the cut-off date for sunset on tax holiday and

after duly taking into consideration the tax holiday provisions.

b) Clarify the meaning of the term ‘mineral oil’ to include natural gas (irrespective of the NELP rounds), eligible for tax holiday, in line with the judicial precedents40 and assurance given by the Finance Minister in Parliament.

c) Clarify that each oil well/cluster of oil wells would be considered as an ‘undertaking’ for the purpose of tax holiday, and not the contract area under the PSC.

2.3 Rationalization of MAT Rate The current MAT rate of 20 per cent on ‘book

profits’ acts as significant deterrent in the overall investment decision-making for high-risk and capital intensive upstream operations. The Finance Act, 2017 has allowed carry forward of MAT credit up to a period of 15 years (from 10 years earlier).

However, given the high rate of MAT, purpose of extending tax incentive to E&P businesses is defeated and therefore, it is recommended that the government should consider a moderate rate of MAT for E&P operations considering long gestation period of the industry.

2.4 Introduce Fiscal Incentives Under the IT Act

Vide the Finance Act 2016, the government had announced phasing out of tax holiday provisions, including the ones for infrastructure sector under section 80-IA and for upstream operations under section 80-IB(9) of the IT Act. At the same time, the Finance Act 2016, extended investment-linked incentive, in the form of 100 per cent deduction of capital expenditure, to businesses in the nature of developing and /or operating and maintaining an infrastructure facility such as roads, highway projects, water supply /treatment projects, port /airport projects, etc. under section 35AD of the IT Act.

The above investment linked tax deduction has not been proposed in respect of E&P

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businesses. While the exploration and drilling costs are allowed to be deducted under section 42 of the IT Act, there is no provision for accelerated write-off of development and production costs.

Domestic E&P is crucial for the energy security of India and therefore, it is imperative to provide for adequate fiscal incentive for stimulating private investments in the oil and gas industry.

Recommendation

It is recommended that 100 per cent deduction for development and production costs should be allowed under section 42 of the IT Act. In this regard, it is relevant to note that the Model RSC published by the DGH has proposed to allow deduction of all expenditure incurred by a contractor on exploration, development and production under section 42 of the IT Act.

Alternatively, E&P projects should be included within the meaning of ‘infrastructure facility’ eligible for investment-linked deduction in respect of development and production costs incurred in E&P operations.

2.5 Encouraging Financing of E&P Projects

Being highly leveraged, the project developers in the oil and gas sector rely on borrowed capital including overseas borrowing to fund their projects.

Vide Finance Act, 2017, the government has extended/provided the benefit of concessional tax withholding base rate of 5 per cent on ECB and masala bonds. On the flip side, the government has also introduced limit on interest deduction in line with recommendations of the Organization for Economic Cooperation and Development (OECD) BEPS Action Plan 4. Such provisions are applicable to an Indian company or a permanent establishment of a foreign company incurring interest expenditure exceeding `10 million (€124,459.69) in respect of debt owed to a non-resident associated enterprise (AE) or to a non-AE (in respect of debt guaranteed by AE). Interest in excess of 30 per cent of earnings before interest, taxes,

depreciation and amortization (EBITDA) or interest paid or payable to non-resident AE or to non-AE (in respect of debt guaranteed by AE), whichever is lower is proposed to be disallowed. Such interest expense to the extent disallowed is henceforth to be carried forward for 8 years for set off against business income of future years, to the extent of maximum allowable interest, i.e. 30 per cent of EBITDA. Considering debt-push down structure is common in oil and gas companies, disallowance of interest cost reckoned with respect to 30 per cent of rule could pose significant challenge for project entities as the effective post-tax cost of debt investments could soar.

Recommendations

Considering that E&P projects are capital intensive and require significant financing, the government should consider the following approaches:

a) Exempting E&P projects from the applicability of thin capitalization rule under the IT Act. Such companies have large capital requirements and are highly leveraged due to commercial imperatives. Any limitation on deductibility of interest cost could significantly inhibit the commercial feasibility of projects in such sectors which are otherwise crucial for a sustained economic growth.

b) Alternately, introducing a much higher ratio (i.e. greater than 30 per cent) for such projects, to ensure the limitation on interest deduction is triggered only in exceptional cases, without rendering debt financing more expensive for the developers.

c) In addition, removing the restrictions on number of years to carry forward interest disallowed under section 94B of the IT Act.

2.6 Inclusion of Petro-products (LNG, HSD, Motor Spirit) under GST Purview

Petroleum products are an input to many industries and commercial activities. GST being applicable on the final product and not

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on the petroleum products which are inputs to the value chain defeats the purpose of GST.

Natural gas being a cleaner fuel and taking into account that loss of tax revenue should not be significant, the government must immediately put natural gas under the GST ambit.

Recommendation

All petroleum products such as petrol, diesel & natural gas should be immediately brought under the ambit of the GST regime. Non-inclusion of the same has pushed up costs for the sector. No input credit is available on goods and services used for petroleum operations. Denial of credits has resulted in massive cascading impact and increased cost of production placing the domestic industry in a competitive disadvantageous position. This has an adverse impact on investments in this sector which is critical for energy self-sufficiency and import substitution.

Alternatively, ensure that incidence of GST flow seamlessly across the value chain by creating a mechanism which allows a refund of the non-creditable input taxes in the hands of the recipient.

2.7 Reversal of Input Credit Relating to Non-GST Supplies be Made Nil

The provisions of the GST law require reversal of input tax credit in respect of exempted/non-taxable supplies. It would be unfair to compel a company to lose common credit merely because it has (non GST) trade turnover which would be more than the service income (regasification charges) for the same unit of measure due to the cost of the traded goods included in non GST trade turnover. However, it is pertinent to note that the cost of traded LNG is not a value add to the trader and therefore, should be excluded from the definition of exempted turnover for reversals. In other words, only trading margin should be considered for reversals.

Recommendation

It is accordingly suggested that trading turnover

pertaining petroleum goods (being taxed separately) be excluded from the purview of exempt and total turnover under the GST laws for the reversal of credit. Alternatively, trading margins pertaining to the petroleum goods should only be included in the exempt and total turnover for reversals.

2.8 Clarification on Non-applicability of GST on Cash Calls Under Existing Regime and GST Regime

Circular No. 179/5/2014-ST dated 24 September 2014 was issued regarding applicability of service tax on cash calls. However, the said circular has kept the issue open for interpretation of service tax authorities. Given this, recently, oil and gas companies are burdened with demand of service tax on cash calls.

Recommendation

Clarification should be issued under GST regime that consortium and parties to consortium (which have executed a sharing agreement with Government of India) are not distinct entities and cash calls are not consideration for services but only a contribution made by contractors. Thus, GST should not apply on such cash calls.

2.9 Exemption from Levy of GST on Transmission Charges Included in Sale Price of Gas

Presently, natural gas is sold to the customer including transportation to customer’s premises as a bundled activity. The transmission charges form part of sale price of such gas and VAT is being paid on the component of transportation charges (as it forms part of sale price of gas). Accordingly, GST should not be chargeable on the component of transmission charges. However, GST on the component of transmission charges is being demanded by local officers resulting in double taxation.

Recommendation

Accordingly, it is suggested that suitable

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clarification should be issued clarifying that GST will not be payable on any activity associated with transaction of sale of petro-products (motor spirit, HSD, ATF, petroleum crude and LNG) where the consideration for such an activity forms a part of the total sale price which attracts VAT/ CST.

2.10 Valuation of Taxable Services for Naturally Evaporating Products Like LNG Should be Clarified in Detail to Apply on the Charges for Conversion of the Delivered Product

Naturally volatile and evaporating products like gasoline or LNG are susceptible to continuous erosion of quantity in their natural state. LNG is liquefied natural gas compressed by 600 times and remaining in liquid form only at temperatures of – 160 degrees centigrade. Exposed to ambient conditions the entire product evaporates on its own.

The usable form of LNG is its re-gasified state as natural gas. The process of regasification of LNG involves the passing of the liquid through heat exchangers, compressors and pipelines in a controlled manner. Any repair to the regasification machinery in the normal course involves the venting of the liquid/gas contained therein to the atmosphere under regulated conditions. Due to the continuous nature of losses of the product that is inherent to its handling and processing, it is the norm worldwide to pre-agree on a percentage of such losses and consumption or usage of LNG/gas while contracting for the regasification of LNG. This is done with a view to allocate the risk of handling the product between parties and bring certainty to the contractually deliverable quantities and the ad valorem price per unit for the same.

Shortfalls and excess of actual losses over pre-agreed norms are compensated by the service provider or taken as part of stock and disposed of as per provisions of Generally Accepted Accounting Principles (GAAP), value-added tax (VAT) and income tax laws.

However, due to misunderstanding of the process there have been claims on taxability of the tolerance norms and any quantities of the product lying in excess over the loss tolerance quantities by both VAT and service tax authorities.

Recommendation

It should be clarified under the GST laws that service charges for the delivered quantity of a volatile product shall be taxable as services in order to avoid double taxation. The value of product lost or consumed during the process of regasification shall not be includible in the charge levied for processing.

2.11 Exemption from GST on Import/ Domestic Procurement of Goods Required for Oil & Gas Exploration (Under Essentiality Certificate)

BCD and customs cess continues to be exempted on import of goods required for oil & gas exploration subject to availability of ‘Essentiality Certificate’ in accordance with Notification No. 50/2017 – Customs dated June 30, 2017.

However, such imports attract IGST (integrated GST) at the rate of 5 per cent (Notification No. 03/2017 IGST (Rate) dated June 28, 2017) on the assessable value of goods subject to Essentiality Certificate being made available to jurisdictional officer of the supplier, unless import is covered vide Notification No. 72/2017 – Customs (exemption from payment of IGST on import if IGST payable on lease charges).

Similar to Notification No. 03/2017 – IGST (Rate) and Notification No. 03/2017 CGST (Rate) dated June 28, 2017, relevant SGST notification provides that GST would be applicable at the rate of 5 per cent on goods subject to the availability of the Essentiality Certificate.

Recommendation

The government should make a suitable

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amendment in Notification No. 03/2017 – IGST (Rate) and Notification No. 03/2017 – CGST (Rate) to provide for complete waiver of GST in line with circumstances that existed in the pre-GST regime such that burden to the oil & gas sector is reduced.

Further, exclusion of services from the exemption notification would be prejudicial to the interests of the oil industry and goes against the basic principle behind levy of GST. It is suggested that the exemption notification in this regard be suitably amended thereby enlarging the scope of the items to all goods and services used for petroleum operations.

3. CONCLUSION Oil and gas industry has been at an inflection

point for couple of years now, marked by a spate of policy and regulatory reforms. Government’s renewed vigour for enhancing domestic production is an encouraging sign and is expected to catalyse large scale private investments for new field discovery and enhanced recovery from already discovered hydrocarbon acreages. Downstream infrastructure is set for a major capacity additions over next five to seven years, and this could well be a new sunrise sector for investors to look at in this space.

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Endnotes

1 World Economic Outlook (October 2017), International Monetary Fund (can be accessed at https://www.imf.org/en/Publications/WEO/Issues/2017/09/19/world-economic-outlook-october-2017

2 Speech of Arun Jaitley, Minister of Finance in the Parliament of India on February 1, 2018 while presenting Budget 2018-19

3 Financial Year 2017-18 means the period from April 1, 2017 to March 31, 2018; year 2017 means calendar year 2017 i.e. period from January 1, 2017 to December 31, 2017

4 Economic Survey 2017-18, Ministry of Finance; speech of Arun Jaitley, Minister of Finance in the Parliament of India on February 1, 2018 while presenting Budget 2018-19

5 BP Statistical Review 2017 (available at https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-india-insights.pdf)

6 Ibid.

7 India Brand Equity Foundation – Oil and Gas (February 2018) (available at https://www.ibef.org/download/Oil-and-Gas-Report-Feb-2018.pdf)

8 BP Statistical Review 2017 (available at https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-india-insights.pdf)

9 BP Energy Outlook 2017 (https://www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2017/bp-energy-outlook-2017-country-insight-india.pdf)

10 India Brand Equity Foundation – Oil and Gas (February 2018) (available at https://www.ibef.org/download/Oil-and-Gas-Report-Feb-2018.pdf)

11 Indian Petroleum and Natural Gas Statistics 2016-17, Ministry of Petroleum and Natural Gas

12 'Energy Statistics 2017' – Ministry of Statistics and Programme Implementation

13 India Brand Equity Foundation – Oil and Gas (February 2018) (available at https://www.ibef.org/download/Oil-and-Gas-Report-Feb-2018.pdf)

14 Indian Petroleum and Natural Gas Statistics 2016-17, Ministry of Petroleum and Natural Gas

15 Snapshot of Oil & Gas data (January 2018), Petroleum Planning and Analysis Cell (available at http://ppac.org.in/ WriteReadData/Reports/201802210303450092423SnapshotofIndiasOil andGasData_Jan18.pdf)

16 Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas

17 Fact sheet on FDI (From April, 2000 to September, 2017) by Department of Industrial Policy and Promotion (available at http://dipp.nic.in/sites/default/files/FDI_FactSheet_Updated_

September2017.pdf)

18 http://www.investindia.gov.in/sector/oil-gas

19 Presentation by Mr Ranajit Banerjee, Head (HELP), Directorate General of Hydrocarbons (accessible at http://online.dghindia.org/oalp/Content/pdf/Keynote_Presentation_RB_India_Event_Abu_Dhabi_Nov_15.pdf)

20 Press release by the Ministry of Petroleum and Natural Gas dated January 18, 2018

21 Appendix K of the Model RSC published by the Directorate General of Hydrocarbons incorporates the proposed royalty rate regime

22 Press release by Ministry of Petroleum & Natural Gas dated February 15, 2017

23 Press release by Ministry of Petroleum & Natural Gas dated February 07, 2018

24 Press release by the Government of India dated March 10, 2016

25 Press release by Cabinet Committee on Economic Affairs dated March 15, 2017

26 Press release by Ministry of Petroleum & Natural Gas dated February 8, 2017

27 Press release by Ministry of Petroleum & Natural Gas dated February 13, 2018

28 Press release by Ministry of Petroleum & Natural Gas dated January 22, 2018

29 Article in Livemint dated December 25, 2017 (http://www.livemint.com/Industry/z5o8skLMqPglw6ttkKQlIM/Indian-Oil-BPCL-keen-to-acquire-GAIL-but-it-wants-merger-wi.html)

30 Press Note no 4 (2006 Series) dated February 10, 2006

31 Press Note 6 (2013 series) dated August 22, 2013

32 Fact sheets on FDI published by the Department of Industrial Policy and Promotion

33 Resolution dated March 8, 2002 by Ministry Of Petroleum & Natural Gas published in the Official Gazette of India

34 Press Release dated December 28, 2017 (Year End Review – 2017: Ministry of Petroleum & Natural Gas)

35 Government report on February 8, 2018

36 Annual report 2016-17, Ministry of Petroleum and Natural Gas

37 http://www.makeinindia.com/sector/oil-and-gas (accessed on February 28, 2018)

38 http://petroleum.nic.in/natural-gas/about-natural-gas (accessed on February 28, 2018)

39 Press Release by Ministry of Petroleum and Natural Gas dated November 2, 2017

40 Niko Resources Ltd vs Union of India [2015] 374 ITR 369 (Guj)

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Notes

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PHARMACEUTICALS Acknowledgements: Ranjit Shahani – Chairman, Pharmaceuticals Sector Committee

Knowledge Partner: Kanchana TK, Dr Ajay Sharma & Nitika Garg – OPPI

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EXECUTIVE SUMMARY

The healthcare industry in India has continued to grow through 2017, despite a slew of challenges, in a turbulent regulatory environment. The market continues to grow at low double digits (13 per cent) led by a growth in volume, an improved case mix and price increases.

The government has released a Draft Pharmaceutical Policy (2017) that is comprehensive and covers all key aspects across the pharmaceutical value chain including research and development (R&D), sourcing and manufacturing plus distribution. With regards to the draft policy and with an objective for India’s healthcare industry, the industry would like to draw the government’s attention to four key areas:

• Access to healthcare: Promote government health reforms that improve patient access to innovative medicines, promote increased public financing, and establish a framework for expansion of private health insurance. With a view to move towards universal health coverage, the Union Budget 2018-19 has been positive for the healthcare sector with the launch of a one-of-its-kind, National Health Protection Scheme (NHPS) that promises to substantially increase provision of secondary and tertiary care services to the poor, through addressing shortage of manpower and availability of healthcare in rural areas. The government is also cognizant of the impact of medical inflation, reflected in an increased coverage amount per family to `5 lakh (€6,222.98) under the NHPS, compared to `30,000 (€373.37) under the Rashtriya Swasthya Bima Yojana (RSBY) scheme, with the increase in the amount exempt from tax for senior citizens for critical illnesses and deduction for medical insurance.

• Intellectual property: Reduce the risk of further negative intellectual property (IP) decisions and secure targeted improvements in India’s IP laws and policies in the near-term, while laying the groundwork for a stable longer-term policy.

• Regulatory: Encourage government reforms to the regulatory regime that promote innovative

clinical research and ensure manufacturing and approval of high quality medicines.

• Ethics: Pharmaceutical companies have been accused of enticements to secure prescriptions from the medical fraternity for a very long time. The government needs to instill confidence in the people by providing a stringent code which removes such unethical practices, if any, from the marketplace.

The promise of an innovative biopharmaceutical industry in India will only be fulfilled if the government, along with all relevant stakeholders, can work to build, sustain and grow a scientific, economic and policy ecosystem that promotes and rewards medical innovation in an environment that encompasses predictability, consistency and sustainability in its policies. Investments in research and innovation are integral to the growth of a nation.

Expansion of drugs under the Drug Price Control Orders (DPCO), price caps on stents and implants, procedure, or service pricing related discussions in West Bengal and Karnataka, and cases of healthcare services licences being cancelled adversely affected the sector during the year. The price-capping policy in medical devices that the government is focusing on is dynamically changing the environment of the industry leading to withdrawal of certain good quality medical devices from the market to lowering the scale of investments from multinational companies in our country.

Uncertainty on manufacturing of pharmaceutical products in third party manufacturing/loan licensing, compulsory licensing are amongst many such issues that have been disrupting the industry dynamically.

While, on one hand, the pharmaceutical industry (called a sunrise industry of the country) has witnessed some significant transformations, lack of predictability continues to remain a concern.

In summary, the need of the hour is for augmenting the regulatory framework and strengthening the infrastructure keeping the patient at the centre of the healthcare ecosystem. That will make the government’s overall healthcare plan successful.

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1. INTRODUCTION

1.1 Opportunities and Challenges The Government of India announced the Draft

National Health Policy in 2015. The overall objectives of the patient-centric policy are:

• Improve access to healthcare for all sections of the population

• Reduce the burden of disease through innovative treatments

• Ensure availability of life saving medicines and devices at all public healthcare facilities

• Enhance the quality of healthcare

Patient

Access

Availability

Innovation

Quality

The pharmaceutical companies that are members of the EBG Federation have lauded the government for the Draft National Health Policy. Members of EBG, through their activities in India, have been working to make these objectives a reality in India. Specific initiatives include:

• Innovative patient assistance programmes from companies such as Novartis, GSK, Novo Nordisk and Roche, to enhance access to state-of-the-art drugs for oncology, diabetes and auto-immune disorders

• In-licensing arrangements from Roche with Curadev, an Indian startup for immunotherapies

• Arogya Parivar initiative from Novartis to make drugs available in rural areas

• Investments by Sanofi Group and GSK in Indian vaccine manufacturing

EBG members reiterate their commitment to work with the government in furthering these initiatives.

The Indian economy is forecast to grow at 7-7.75 per cent per annum. The Government of India has embarked upon an ambitious development agenda with a focus on inclusive growth. The Indian pharmaceutical industry is playing a key role in driving India’s growth agenda.

Economic Growth

Investments

JobsExports

The pharmaceuticals industry has seen over US$ 13 billion (€10.54 billion) of foreign direct investment (FDI) in the period 2000-2015. This constitutes 5 per cent of the total FDI inflows into India. India’s track record in low cost manufacturing is strong, with 276 United States Food and Drug Administration (USFDA) approved formulations manufacturing plants (the largest outside the US). India being the

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world’s largest supplier of vaccines, with 60 per cent of the world’s vaccine production, and the largest provider (60 per cent) of anti-retroviral drugs make the sector an attractive proposition for global pharmaceutical companies.

The pharmaceutical industry is also a large employer with over 2.5 million Indians employed directly and indirectly. The pharmaceutical industry in India has also created 1 million new jobs in R&D and high-end manufacturing, which are key components of the government’s Make in India initiative.

The Indian pharmaceutical industry’s exports reached US$ 15 billion (€12.16 billion) in 2014-15 and this industry has been a key player in reducing India’s trade deficit. The industry has also played a key role in India’s soft power diplomacy in Africa, Asia and Latin America by becoming the ‘Pharmacy of the World’.

While the pharmaceutical industry has contributed significantly in India’s nation-building efforts, it also faces unprecedented challenges. The industry is battling a perfect storm of fierce competition, shorter time-to-market, expiring patents, slowing sales growth, and declining profitability in developed markets together with pressures on cost and a complex regulatory environment. The next level of growth for the Industry lies in sustaining and growing the generics market and promoting the industry to enter the innovative biopharmaceutical space.

However, the promise of an innovative biopharmaceutical industry in India will only be fulfilled if the government, along with all relevant stakeholders, can work to build, sustain and grow a scientific, economic and policy ecosystem that promotes and rewards medical innovation in an environment that encompasses predictability, consistency and sustainability in its policies. Investments in research and innovation are integral to the growth of a nation. The government has also released a Draft Pharmaceutical Policy (2017) which is comprehensive and covers all the key

aspects across the pharmaceutical value chain, key being R&D, sourcing and manufacturing plus distribution. The industry would like to draw the government’s attention to four key areas:

Pharma Industry

Access

Intellectual Property

Regulatory

Ethics

1. Access to healthcare: Promote government health reforms that improve patient access to innovative medicines, promote increased public financing, and establish a framework for expansion of private health insurance.

2. Intellectual property: Reduce the risk of further negative IP decisions and secure targeted improvements in India’s intellectual property laws and policies in the near-term, while laying the groundwork for a stable longer-term policy.

3. Regulatory: Encourage government reforms to the regulatory regime that promote innovative clinical research and ensure manufacturing and approval of high quality medicines.

4. Ethics: Pharmaceutical companies have been accused of enticements to secure prescriptions from the medical fraternity for a very long time. The government needs to instill confidence in the people by providing a stringent code which removes such unethical practices, if any, from the marketplace.

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2. KEY INDUSTRY ISSUES

2.1 Access to Healthcare The Indian government circulated a draft

National Health Policy (NHP) in 2015 that called for greater access for low-income patients. However, India’s public spending on health is still below 1.5 per cent of GDP, one of the lowest expenditures in the world. Within such a limited budget, India spends `5,000 crore (€622.29 million) on medicines (both Centre and state purchases put together) from a total allocated healthcare budget of `36,000 crore (€4.48 billion). Also the overall penetration of health insurance is low. Coverage is limited to

inpatient care and rarely extends to outpatient care or medicines. Of the 29 per cent of Indians covered by health insurance, 85 per cent are covered by social and state health initiatives, such as state-level employee insurance for industrial workers and the central government’s healthcare plan. In addition to the ‘Asks’ below, it would be worthwhile for the government to consider a tiered pricing model on a pilot basis to study the benefits of broadening access. Both central and state governments should allocate reasonable separate budgets for patients suffering from rare and orphan diseases where treatment options are limited and mean all the difference between life and death.

Issue Short Term Asks Medium Term Asks

Budget 2017-18 This year’s Budget announced introduction of a large scale National Health Protection Scheme which aims to cover 500 million people of the country. The scheme envisages a `5 lakh (€6,222.98) health insurance cover for a family to pay for hospitalization and treatment in secondary and tertiary care facilities. While the industry fully supports the government in such an endeavour, it will be imperative to detail out the diseases covered, tie ups with insurance companies to ensure the benefits of the scheme reach the poor and needy

Increase GDP spend on healthcare to 2.5 per cent as envisaged in NHP 2015

Price Controls on Patented Medicines

Industry remains concerned that the threat of the existing recommendation (International Reference Pricing) represents an effort to reduce the benefits of patent protection, which will discriminate against importers and create an unviable government pricing framework and business environment. This recommendation should be scrapped

For government purchases, the industry proposes health technology assessment as a tool to determine prices for patented products

Proposed Drug Price Control Order (DPCO) Amendments

• Specific strength and specific dosages based on essentiality criteria as determined by the National List of Essential Medicines committee should only be the basis of addition or deletion of drugs from Schedule I

• Market-based price control mechanism should continue

• Redressal body to be constituted for all orders passed by the National Pharmaceutical Pricing Authority (NPPA)

• 10 per cent annual growth rate to be continued for non-scheduled drug

• Implementation of pricing order should be prospective batch manufacturing and not retrospective

Government should increase its share of essential medicine purchase rather than relying on price control mechanism alone

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Issue Short Term Asks Medium Term Asks

• Clarifications provided on DPCO by Department of Pharmaceuticals (DoP) in the past (Revision of Schedule I to be done once in five years, any addition or deletion to Schedule I to be done as annexures, etc.) on various issues to be incorporated in DPCO

Impediments to Implementation of Current DPCO 2013 Provisions

Multiple issues exist with NPPA interpretation and implementation of orders passed by DPCO. Key issues are highlighted:

• Delay in Implementation of Review Orders passed by DoP leads to depriving the industry of legitimate revenue and thus results in huge losses

• DPCO para 13 (1) provides for 45 days for implementation of notified prices. However, NPPA takes the view that notified price takes effect immediately. It is illogical to hold the manufacturers to be responsible for implementation of revised prices at 700,000 retail outlets from the very date of notification

• Application for price fixation in Form I is not being attended in time

• Applications made under para 19 for legitimate increase in price for products making huge losses (like Avil Injection 2 ml) are not being attended to

• Prices of formulations which are not really ‘new drug’ under para 2 (u) are being arbitrarily called new drug and price fixed. Companies are forced to reduce the prices and file review application or litigate

• Further show cause notices and demand notices are being raised on the manufacturers for alleged overcharging in such cases, forcing the manufacturers to go for litigation

This highly unstable environment leads to low confidence level to make investments, ultimately affecting consumers and economic activity and job creation. The industry suggests time bound implementation of orders passed by DPCO in addition to a clear time frame on response for applications submitted by the industry

Ban on Fixed Dose Combinations (FDCs)

Action should be taken thoughtfully and in the best interest of patients, with bans only against irrational combinations and drugs that lack approval from the central approving authority.

Industry should be taken into confidence before issuing any blanket ban on FDCs

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Issue Short Term Asks Medium Term Asks

Cap on Margins of Pharmaceutical distribution channels

The DoP has shared a proposal before the Ministry of Chemicals & Fertilizers to cap the trade margins based on the price/unit. The current proposal restricts trade margins to 30 per cent for products with price/ unit below `2 (€0.025) while trade margins range from 35-50 per cent for higher price/unit reducing with increase in price/unit. The move to cap trade margins might negatively impact the patients and industry by increasing the trade margins for higher priced products as against the current practice of 30 per cent leading to higher drug prices. It is advised to do a rigorous impact assessment before moving ahead on the proposal

Manufacturing of Pharmaceutical products in third party manufacturing/ lone licensing

The draft pharmaceuticals policy indicates phase out of third party manufacturing while restricting lone licensing to 10 per cent of production only carried out in WHO’s good manufacturing practice (GMP) compliant manufacturing facilities. This will significantly impact the small to medium enterprises (SMEs) that are engaged in such activity for the pharmaceutical companies along with impacting the agility of the sector that enables faster time to patients for critical medicines. The industry would urge re-consideration of the same and would request the government to take a more balanced view on this

Sourcing Policy for Government orders

The Draft Pharmaceuticals Policy has drafted two guidelines on the sourcing for government:

• Government order procurement to be done only from formulations that are manufactured indigenously end-to-end

• GMP/GLP (good laboratory practice) manufacturing units only to be used for procurement against NHM (National Rural Health Mission) funds

The industry supports the government in its direction towards encouraging the manufacturers to be GMP/GLP compliant. The industry would suggest procurement to be categorized into end-to-end indigenously manufactured and formulated indigenously based on the API (Active Pharmaceutical Ingredient) manufacturing capabilities in India. This will reduce the uncertainty of supply and prevent any possible shortages in government pharmacies

Preventive Healthcare

Include more vaccines for preventive healthcare which should lead to reduction in the overall healthcare costs for government

2.2 Intellectual Property Protection Despite a period of relative calm, there remains

significant unpredictability in intellectual property (IP) in India. The government of Prime Minister Narendra Modi has sought to

address IP related criticisms, including through bilateral dialogue and policy deliberations on a national IP policy, but no progress has been made in terms of meaningful policy changes to address the challenges. The ongoing

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threat of compulsory licences (CL) and the tendency to use Section 92 for CL, the lack of alignment between the Centre and states,

and the continued denial of patent applications under Section 3(d) are potential areas where improvements are possible.

Issue Short Term Asks Medium Term Asks

Compulsory Licences

• Government must give the patentee ample opportunity to meet the requirement of people living below poverty line

• Interpret “reasonably affordable price” in Sec 84(1)

• Recognize and consider efforts taken by companies to provide patient assistance programmes (PAPs)

• Clarify that importation would satisfy working of patent in India

• Amendments in Patent Act 1970 to remove language which creates ambiguity regarding whether importation amounts to working of patent, misuse of Section 84(1) which provides multiple triggers for issuance of CL etc.

• Define phrases like ‘National Emergency’, ‘Extreme Urgency’= etc.

• Provide royalty which reflects true value of the IP contained in the drug

Section 3(d) — ‘enhanced efficacy’

Ensure uniformity in determination of 3(d) by the four patent offices through standardized definitions

Section 3(d) needs more clarity so that incremental innovation is encouraged which in turn will enhance the ‘innovation ecosystem’ in India. Pharmaceutical patent applications, like all other patent applications, should be granted as long as the applicant can demonstrate that the invention is new, involves an inventive step and is capable of industrial application

Patent Decisions and Enforcement

• Currently, there is no legal requirement for the Drug Controller General of India (DCGI) or the state regulatory authorities to verify or consider the status of any existing patents covering the drug. Therefore, an infringer can obtain marketing authorization from the DCGI or state regulator, as the case may be, for a generic version of a patented drug, forcing the patent holder to seek redress in India’s court system to enforce a patent granted by India’s central government

• Specifically, industry proposes that India adopts a patent notification system, which would be an early mechanism whereby all information in respect of market authorization for a drug, new or otherwise, being sought from the Central or the state drug regulators in India will be made available on the CDSCO website in a transparent manner. Such as system is mutually beneficial to innovators, generics companies and patients

• For effective and meaningful enforcement of patents, the Drug and Cosmetics Rules 1945 and corresponding Forms need to be amended to include a requirement for notification of patent status by the originator/new drug applicant and subsequent applicants not be given marketing approval for products covered by such a patent till the expiration of the patent term, unless consented to by the patent owner

• Specialized fast track courts to settle patent related cases

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2.3 Drug Regulation, Clinical Trials and Industrial Relations

Despite having many components to support an ecosystem for drug development, India attracts only 3 per cent of global R&D spending and 2 per cent of global clinical trials (CT). The Central Drugs Standard Control Organization (CDSCO) has issued

the draft Clinical Trials Rules, 2018. It applies to all new drugs, investigational new drugs for human use, clinical trial, bioequivalence study, bioavailability study and Ethics Committee. The industry is reviewing the draft rules and will revert with the suggestions and comments by March 20, 2018.

Issue Short Term Asks Medium Term Asks

Clinical Trial Applications

(AV recording)

• Gazette Notification defining New Chemical Entity has been released

• Guidance document providing further clarity on definition of the term ‘vulnerability’ for AV recording purposes needs to be released

Site Registrations (Registering multiple sites for the same product)

• It should be made clear that documents for registering multiple sites engaged in various steps with the manufacturing of the product is not necessary. Only the final site in product registration needs to accompany all the necessary documents along with a declaration of other sites involved

• Registrar of Companies /import licence modifications in case of change of constitution of firm name/ownership should be further simplified without the need for repeat testing, for already registered product with the same CMC (chemistry, manufacturing and controls), etc

Guidelines on OTC (over the counter)

• CDSCO, Ministry of Health & Family Welfare has initiated drafting of guidelines on defining and regulating the OTC category in India. This will enable greater self-medication while accounting for patient safety. The industry supports such a move towards clarity on OTC category and would suggest that the policy enables greater access to patients without over-regulation in the category that could potentially impact the industry’s interest in promoting this category

Guidelines on Similar Biologics

(Process followed in releasing the guidelines is opaque. Need to involve all stakeholders)

• Phase III and Phase IV spell out minimum 100 and 200 patient requirements: Sample size should be determined based on statistical significance only.

• Adverse drug reactions to be done only to the licensing authority alone: The current practice of reporting drug reactions to the Pharmaco vigilance Programme of India (PvPI) Centre is being removed completely. Licensing authority only is concerned with the compensation, but safety profile of the drug (which is very important in case of biologics) is being monitored only at PvPI

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Issue Short Term Asks Medium Term Asks

• Phramacokinetic/pharmaco dynamics (PK/PD) study can be performed as a parallel study to the Phase III safety and efficacy study: By opting for a non-sequential step-wise approach, the guideline puts at risk, life of Phase III study patients if the PK/PD profile of purported biosimilar product turns out to be different from that of the reference product.

• Proposed revision completely ignores scientific justification for extrapolation of data to other indications: Extrapolation in the draft guidelines is allowed merely on comparability with the reference biologic and no importance is given to the sensitivity of the disease/indication for which it is going to be approved. Should be revised accordingly

• There was a section of prescribing information in the December 2015 draft which has been omitted currently: It is essential for the doctors and the patients to know the data generated with the product being used, and risks and benefits associated with the product. Hence this section needs to be added back

Guidelines on Medical Representative Working Hours

• Traditionally, right from the inception of the pharmaceutical industry, the medical representatives (MRs) are required to call on a stipulated number of customers per day in accordance with their service conditions. Their day to day work is based on the number of customers whom they are supposed to meet in a day as per their terms of appointment and certainly not based on timing unlike other regular office or shift jobs

• The MRs, thus have flexible working time/hours in line with the trade practices prevailing in their respective working areas and the same is in practice and followed in the pharmaceutical industry for over several decades. Hence, there can be no fixed working time/hours for the MRs

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Issue Short Term Asks Medium Term Asks

• In view of the above, any move to restrict the work of the MRs to fixed hours in a day like an office/desk job is not feasible and cannot be implemented. However, MR unions citing The Sales Promotion Employees (Conditions of Service) Act, 1976 make a case for fixed hour working. While the Act does not specify the working timings for the MRs, they take certain provisions of the Act inappropriately and keep representing their concerns with state labour authorities, which many a times results in unnecessary litigations

The industry urges the government issues an order on this matter to obtain clarity

3. Ethics

3.1 Uniform Code for Pharmaceutical Marketing Practices (UCPMP)

The DoP in November 2014 had issued the much awaited UCPMP for a period of six months with effect from January 1, 2015. It was also suggested that it would be up for further review on the basis of the inputs received by the department. As per UCPMP, no gifts, pecuniary advantages or benefits in kind may be supplied, offered or promised to persons qualified to prescribe or supply drugs, by a pharmaceutical company or any of its agents i.e. distributors, wholesalers, retailers, etc. Gifts for the personal benefit of

healthcare professionals and family members (both immediate and extended) (such as tickets to entertainment events) also are not be offered or provided. As per the new UCPMP, free samples of drugs shall not be supplied to any person who is not qualified to prescribe such product. Where samples of products are distributed by a medical representative, the sample must be handed directly to a person qualified to prescribe such product or to a person authorized to receive the sample on their behalf.

Short Term Asks

Before making Uniform Code for Pharmaceutical Practices statutory, all concerns submitted by stakeholders should be taken into consideration and changes to the code be made accordingly.

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4. CONCLUSION The Indian pharmaceutical market size is

expected to grow to US$ 100 billion (€81.06 billion) by 2025. The government and regulators have a key role to play, if the industry needs to realize this goal.

Some of the major initiatives taken by the government to promote the biopharmaceutical sector in India are as follows:

• The Government of India plans to provide incentives to bulk drug manufacturers, including both state-run and private companies, to encourage the Make in India programme and reduce dependence on imports of active pharmaceutical ingredients (API), nearly 85 per cent of which come from China.

• The DoP has set up an inter-ministerial co-ordination committee, which would periodically review, coordinate and facilitate the resolution of the issues and constraints faced by the Indian pharmaceutical companies.

• The DoP has planned to launch a venture capital fund of `1,000 crore (€124.45 million) to support startups in the research

and development in the pharmaceutical and biotech industry.

• Telangana has proposed to set up India’s largest integrated pharmaceutical city spread over 11,000 acres near Hyderabad, complete with effluent treatment plants and a township for employees, in a bid to attract investment of `30,000 crore (€3.73 billion) in phases. Hyderabad, which is known as the bulk drug capital of India, accounts for nearly a fifth of India’s exports of drugs, which stood at `95,000 crore (€11.82 billion) in 2014-15.

• At the launch of Cluster Development Programme of the pharmaceutical sector, Ananth Kumar, Minister of Chemicals and Fertilizers, announced that six pharmaceutical parks will be approved and established this year which will have sufficient infrastructure and facilities for testing and treatment of drugs and also for imparting training to industry professionals.

A lot more still needs to be done. Transparency and predictability in policies will be key to making India the innovation hub for biopharmaceuticals, moving forward.

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POWERKnowledge Partner: Gokul Chaudhri, Shubhranshu Patnaik & Sumit Singhania – Deloitte Touche Tohmatsu India LLP

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EXECUTIVE SUMMARY

India is the third largest producer of electricity in the world after China and the United States, with an electricity generation of 1,236.39 billion units (BU) during 2016-17. Sustained economic growth has continued to drive electricity demand in India; with the demand for electricity being 1,142,928 million units (MU) in 2016-17 vis-à-vis 1,114,408 MU in 2015-16. The Indian power sector has also emerged as one of the leading sectors attracting substantial foreign direct investments (FDI); during 2016-17 the sector received US$ 1.113 billion (€902.24 million) as FDI.

Arguably, the Indian power sector has witnessed reasonable progress both in terms of policy evolution as well as capacity addition; the sector also reflects tremendous potential for further growth, given the government’s macro-economic objectives of achieving rapid infrastructure development, increasing urbanization and rural electrification. Amongst various incentives introduced by the government, introduction of competitive bidding, auctioning of stressed power projects, improvement in financing of electricity distribution companies (Discoms), coal linkage policy, are select key initiatives that have fared well with the investors.

Earlier, the government had revised its targets for installed renewable energy capacity to 175 gigawatt (GW) by 2022. Currently, the installed capacity in 2017-2018 (as on December 31, 2017) has reached 62.85 GW, comprising 17.05 GW from solar power, 32.85 GW from wind power, 8.41 GW from bio-power and 4.42 GW from small hydro power. India’s installed generation capacity stands at 333.55 GW as of December 31, 2017. Out of such installed capacity, thermal based power plants account for 65.65 per cent of the total installed generation capacity. Of this, coal based generation capacity accounts for 57.85 per cent, gas 7.54 per cent and oil 0.25 per cent. Hydro based generation accounts for 13.48 per cent and nuclear for 2.03 per cent of the total installed generation capacity. Other renewable energy sources account for 18.84 per cent of the total installed generation capacity.

Key recommendations for the sector

1. In line with India’s commitment to reduce its carbon emissions (as ratified in the UN Climate

Change Conference held in Paris), India’s Ministry of Environment, Forests and Climate Change had introduced specific measurable emissions norms for SOX/NOX/mercury from coal fired utilities. Innovative new technologies such as super-critical, ultra-supercritical, and even solar-thermal in the thermal power sector and high concrete dams, special tunnels, tidal power and offshore wind power projects in the renewable sector, followed by their proper implementation is vital in achieving the maximum efficiency from the project.

2. In view of the government’s target of ‘Power for All’ by 2019, accelerated depreciation rate of 80 per cent should be continued for specified block of assets. Alternatively, the government may consider including generation and distribution operations within the definition of ‘infrastructure facility’ eligible for investment-linked deduction in respect of capital costs incurred under section 35AD of the IT Act. In addition, the government may consider extending benefit of investment allowance to taxpayers engaged in generation or generation and distribution of power as well.

3. To facilitate growth for power companies, multiple special-purpose vehicles (SPVs) held under the same ownership structure should be allowed to file a consolidated group tax return, thereby, leveraging group level synergies for an improved tax outcome. This will enable cash flow efficiencies amongst multiple projects and thus, encourage ploughing back of surplus resources.

4. Considering power projects are capital intensive and require significant financing, infrastructure projects (including the power generation and/or distribution projects) should be exempted from the applicability of thin capitalization rule under the IT Act. Alternately, a much higher ratio (i.e. greater than 30 per cent) may be introduced for such projects to ensure that the limitation on interest deduction is triggered only in exceptional cases, without

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rendering debt financing more expensive for the developers.

5. To ensure incidence of indirect taxes flows seamlessly across the value chain, a mechanism should be created allowing refund of all non-creditable indirect taxes in the hands of the power project owner, particularly to mitigate the cascading effect of indirect taxes for project owner in the absence of indirect tax liability on output side, i.e. sale/supply of electricity. Likewise, basic customs duty (BCD) and integrated goosds and services tax (IGST) on imported coal used in thermal power plants may be reduced to nil or reduced to a lower rate.

6. To review levy of GST compensation cess on coal. The removal or at least reduction in this cess will provide big support to power intensive industries and will help them retain competitiveness.

7. Appropriate clarity that supply and installation of solar roof-top shall be construed as supply of solar power generating system, liable to tax @ 5 per cent under the GST regime, should be provided.

The progressive policy-level changes and effective implementation of directives by the government have been well appreciated by the industry and investors. Besides, the government’s unstinted commitment to scaling up power generation using non-fossil fuel resources, reducing carbon footprints, and ensuring 24X7 power for all, will enable this sector gain more investments in medium to long run. To further incentivize large scale investments in electricity generation projects as well as transmission infrastructures, it is imperatives that the government pays heed to concerns of the industry (as highlighted in this paper), and responds in a timely manner.

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1. INTRODUCTION

1.1 Market Description1.1.1 Electricity is one of the critical infrastructures for

socio-economic development of any country. India is one of the fastest growing economy in the world and is expected to grow at a steady rate of more than 7 per cent in coming years1. The Government of India has set a target of 24x7 power for all by 2019. The country will require an exponential rise from present levels to support the growth momentum and reliable power supply. The Indian power sector added 127 gigawatt (GW)2 during the 12th Plan period 2012-173 and is projected to add around 200 GW during 13th Plan period 2017-20224. The sector surpassed 12th Plan periods target of 88.5 GW.

1.1.2 India is the third largest producer of electricity in the world after China and USA5. The electricity generation during the year 2016-17 was 1,236.39 billion units (BU)6.

India’s electricity consumption increased from 1,001,191 gigawatt hour (GWh) in the year 2015-16 to 1,066,268 GWh in the year 2016-17, an increase of around 6.5 per cent. However, due to India’s high population base and low power consumption in rural areas, per capita consumption of electricity was around 1,122 kilowatt hour during the year 2016-17. The per capita consumption is lower than the global average signifying potential opportunities for migrating to an electricity intense ecosystem7.

1.1.3 Power sector has emerged as one of the leading sectors attracting substantial foreign direct investment (FDI). The sector received US$ 1.113 billion (€902.23 million) in the year 2016-17. Cumulative FDI inflows since 2000 up to March 2017 have been around US$ 11.59 billion (€9.4 billion, 3.5 per cent of the total FDI inflows)8. Although the power sector is not a major contributor to the exchequer by way of taxes, this industry is a major employment generator both in the public and private sector, directly and indirectly.

1.1.4 The government had revised its targets for installed renewable energy capacity to 175

GW by 2022, comprising 100 GW from solar, 60 GW from wind, 10 GW from biomass and 5 GW from small hydro power. Currently, the renewable installed capacity in 2017-2018 (as on December 31, 2017) has reached 62.85 GW, comprising 17.05 GW from solar power, 32.85 GW from wind power, 8.41 GW from bio-power and 4.42 GW from small hydro power9.

1.1.5 Nuclear power for civilian use is well established in India and has been a priority since independence. The Indian nuclear programme for production of power has been an indigenous effort. It is strategically important to develop core capabilities in critical areas to reduce vulnerabilities to external pressures. India is the only country in the world that has accorded high priority to the use of all three main fissionable materials, U-235, plutonium and U-233 in order to meet the challenge of reaching independence through deployment of domestic nuclear resource. Presently, the installed capacity in 2017-18 (as on December 31, 2017) has reached 6.78 GW from nuclear power.

1.2 Generation1.2.1 India’s installed generation capacity stands at

333.55 GW as of December 31, 2017. Out of such installed capacity, thermal based power plants account for 65.65 per cent of the total installed generation capacity. Of this, coal-based generation capacity accounts for 57.85 per cent, gas 7.54 per cent and oil 0.25 per cent. Hydro-based generation accounts for 13.48 per cent and nuclear for 2.03 per cent of the total installed generation capacity. Other renewable energy sources account for 18.84 per cent of the total installed generation capacity. Approximately, 45 per cent of the installed capacity is owned by the private sector and balance 55 per cent by central and state government utilities.10 The private sector interest in the sector has grown exponentially on the power generation and transmission sector aided by the migration to a competitive bidding framework from the negotiated PPA (power-purchase agreement) model.

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1.2.2 Demand for electricity was 1,114,408 million units (MU) during the year 2015-16, whereas during the year 2016-17 was 1,142,928 MU. On the other hand, availability during the year 2015-16 was 1,090,850 MU whereas during the year 2016-17 availability was 1,135,332 MU. Whilst the deficit has decreased from 2.1 per cent in 2015-16 to 0.7 per cent in 2016-17, the supply needs to increase further at a greater pace to match the growing demand from economic growth, increasing urbanization and rural electrification.

Peak demand for power has increased from 153,366 megawatt (MW) during the year 2015-16 to 159,542 MW during 2016-17; peak deficit was at 1.6 per cent in the year 2016-17.11 The overall GDP composition of India has been skewing towards the services sector and this has resulted in lowering of the electricity intensity of GDP consumption from 1.1 to around 0.8.

1.3 Transmission and distribution1.3.1 India’s capacity of transmission system of

220 kilovolt (KV) and above voltage levels as on November 30, 2017 was 381,671 circuit kilometre (ckm) of transmission lines and 791,570 mega volt amp of transformation capacity of substations. Further, as on the said date, the total transmission capacity of inter-regional links is 78,050 MW.12 Almost 100 per cent of transmission facility and 85 per cent of distribution facility in India is owned by the public sector. In order to enable greater private participation, in recent years a number of transmission projects in different regions have been awarded to private bidders under a competitive bidding model. Also, privatization of distribution is being attempted by way of sale of government owned distribution licensees and through appointment of private distribution franchisees in select states.

1.4 Recent Developments1.4.1 Indian power sector has seen significant

developments with progressive policy-level changes and effective implementation

of directives. Renewable energy capacity addition surpassing thermal capacity additions, introducing procurement of wind energy through bidding, renewable energy achieving grid parity, auctioning of stressed power projects, supporting the financial revival of electricity distribution companies (discoms) through the UDAY (Ujwal DISCOM Assurance Yojana) scheme with a time-bound program, coal linkage policy, waiver on inter-state transmission charges for wind and solar power projects, Saubhagya scheme, are select key initiatives in last 1 year amongst various incentives to boost the Indian power sector.

1.4.2 Renewable energy capacity additions surpassed thermal capacity additions for the first time in 2016-2017. Renewable energy added around 11.5 GW versus thermal capacity additions of around 7.5 GW. The trend is expected to continue in future as draft National Electricity Plan does not consider any thermal capacity additions for the period 2022-27, whereas it assumes 100 GW of renewable energy capacity additions during the same period.

1.4.3 The Solar Energy Corporation of India (SECI) bid out first inter-state wind energy bid in February 2017, till then wind energy was procured through feed-in-tariff (FIT) route. The first wind bid saw tariff failing to `3.46 (€0.043)/kWh, around 17 per cent lower than the than prevailing lowest FIT across all the states in India. The success of first wind bid have completely stopped procurement through FIT. Later SECI and states like Tamil Nadu and Gujarat invited bids for wind energy which saw a record low tariff of `2.43 (€0.030)/kWh.

1.4.4 For the first time renewable energy tariffs fell below `3 (€0.037)/kWh, when the tariff for the first year discovered in REWA bid was `2.97 (€0.037)/kWh. Later in all the bids the tariff discovered was lower than `3 (€0.037)/kWh without any viability gap funding or subsidy. The lowest tariff discovered for solar and wind energy was `2.44 (€0.030) /kWh and `2.43 (€0.030)/kWh respectively.

1.4.5 India has around 40 GW of stressed thermal power projects (commissioned or near

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completion) not able to service the debt. A number of these projects were conceptualized on merchant operation model buoyed by high trading market prices on the power exchanges. The projects are currently stressed due to non-availability of fuel, untied capacity and partial sales aggressive bids, legal issues, etc. leading to debt servicing challenges. In order to resolve the stress Government of India has taken several initiatives like:

• Shakti Scheme: New coal linkage policy to provide assured supply of coal through allocation and auctioning. Under the scheme, fuel supply Agreement (FSA) may be signed with the pending LoA (letter of authorization) holders after ensuring all the milestones as per LoA are met. Actual coal supply shall be to the extent of long-term/medium-term PPAs with discoms.

• Auctioning of stressed power assets by lenders: Indian government notified an ordinance in May 2018 through the Insolvency and Bankruptcy Code (IBC), 2016 empowering Reserve Bank of India (RBI) to intervene directly to coax banks into resolving bad-loan cases. Many banks have taken this route to auction the stressed assets and reduce the non-performing assets (NPAs).

1.4.6 31 states/union territories have signed up for UDAY scheme. Around `2.32 trillion (€28.87 billion) of bonds have been issued accounting to around 86 per cent of the debt to be restructured. The estimated savings in interest cost is around `120 billion (€1.49 billion). The scheme has helped in reducing the discom losses by 25 per cent in the last 1 year.

1.4.7 As per the National Tariff Policy, waiver on inter-state transmission charges and losses for solar and wind energy projects expired in June 2017. This is further extended to projects commissioned till March 31, 2022.

1.4.8 The Government of India introduced the Saubhagya scheme in October 2017 with an objective of ‘Electricity for All’ and enhancing the current state of the transmission and distribution (T&D) infrastructure. The objective

of the scheme is to achieve universal household electrification by providing last mile connectively and electricity connections to all households. The scheme is estimated to cost `163.2 billion (€2.03 billion), including a gross budgetary support of `123.2 billion (€1.53 billion).

1.4.9 On income-tax front, following proposals have been made in the Finance Bill, 2018:

• Concessional corporate base tax rate of 25 per cent has been extended to domestic companies having reported turnover of `2,500 million (€31.11 million) in FY 2016-17. This reduction in corporate tax rates has been marginally curtailed by introduction of ‘health and education cess’ of 4 per cent replacing the existing ‘education cess’ of 3 per cent; thus, the highest effective corporate tax rate for domestic companies becomes 29.12 per cent (as against existing rate of 34.94 per cent). Reduced base tax rate for domestic companies may provide certain reprieve to special purpose vehicles (SPVs), especially in renewable energy space.

• Long-term capital gains tax exemption on sale of listed equity shares (including units of equity oriented mutual funds and business trusts) has been withdrawn with effect from April 1, 2018. Under the proposed new regime, long-term gains in excess of `100,000 (€1,244.60) would be taxed at the base rate of 10 per cent, without providing for any benefit on account of cost indexation or adjustment on account of currency fluctuation. Limited grandfathering in the form of cost step-up has been provided for acquisitions made before February 1, 2018. This might have a negative rollover effect on promoters of power companies who are contemplating to list their companies.

• To facilitate rehabilitation of stressed companies, following tax reliefs have been provided to companies seeking insolvency resolution under IBC:

a) At present, companies are allowed to

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carry forward and set off the losses if the change in management does not exceed 49 per cent. It has been proposed to relax the rigors of such provision for companies whose resolution plan has been approved under IBC.

b) Presently, deduction is available in respect of lower of brought forward losses or unabsorbed depreciation (as per the books of accounts) for computing ‘book profits’ for the purpose of minimum alternate tax (MAT). Thereby, in a case where brought forward loss or unabsorbed depreciation is nil, no deduction is allowed. Consequentially, this was leading to tax-payouts for stressed companies. To address such situation, it has been proposed to allow deduction of both, book losses and unabsorbed depreciation, whilst computing book profits for the purposes of MAT.

1.4.10 On indirect-tax front, following proposals have been made in the Finance Bill 2018:

• Main focus of the Union Budget 2018 was on strengthening the economy, development of infrastructure, improvement of education quality and incentivizing Make in India. Accordingly, customs duty rates are proposed to be revamped in order to increase the duty incidence on imports of finished goods and reduce the same for inputs/ raw materials used in certain industries (such as rate on solar tempered glass used in manufacture of solar cells/ panels/ modules reduced from 5 per cent to nil). Other tariff changes include the following:

a) Education cess and secondary and higher education cess on import of goods abolished in lieu of new cess, social welfare Surcharge (SWS)

b) SWS to be levied @ 10 per cent on the aggregate of import duties (excluding IGST and compensation cess) on majority of items

• Further, several customs legislative changes have been proposed to expand the applicability of provisions of Customs Act and promoting Ease of Doing Business:

a) Separate advance ruling authority to be formed for customs. Scope of advance ruling expanded to cover subjects beyond mere determination of duty and scope of ‘applicant’ also broadened. Time frame to issue advance ruling proposed to be reduced to 3 months and provisions for appeal against advance ruling provided

b) In order to rationalize adjudication procedures the following measures proposed:

• Pre-notice consultation required before issuance of show cause notice (SCN) in matters not involving fraud, misrepresentation etc.

• Provision inserted for issuance of supplementary SCN in circumstances to be notified

• Time-frame defined for completion of adjudication proceeding

• If adjudication proceeding not completed within prescribed time, it shall be deemed as if no notice issued

c) Other relevant legislative changes include the following :

• Provisions inserted for audit under customs

• Commissioner (Appeals) granted power to remand back cases to adjudicating authority

• Provisions introduced to provide legal backing for risk based selection of self-assessed shipping bill or bill of entry through customs automated portal

2. GENERIC INDUSTRY ISSUES2.1 Although various significant steps have been

taken in this direction, there are several areas

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such as reducing plant load factors (PLFs) of coal-based plants, discoms refraining from signing fresh thermal PPAs, management of cross-subsidies, cross subsidy surcharges, open access, imposition of additional surcharge, commercial revival of the state electricity boards and proper management of grids where more policy thrust is needed.

2.2 Challenges for power institutions like political interference and structure of institutions, power theft and inability of distribution companies to collect revenues also add burden on the power sector.

2.3 Financing power projects is presently a challenge for developers given the high financial stakes involved in power projects. As a result, this sector continues to be affected by way of shortfalls – both in generation and transmission capacity.

The Indian power sector is highly leveraged – as high as 70-80 per cent and continues to struggle for funds. As mentioned earlier, financing power projects has been perennially constrained for developers given the long-gestation period of projects and high financial stakes. Given the high exposure of banks in this sector and sectorial cap on lending by domestic financial institutions, financing power projects has been an impediment. Indian power companies have been exploring opportunities of borrowing overseas funds for their projects.

2.4 Nearly 60 per cent of the corporate debt owed by the private power producers is with companies having interest coverage ratio of sub 1 (hereinafter referred to as ‘IC sub1 companies’). Cash flows of said ‘IC sub1 companies’ are on a declining trend, thereby, leading to increased borrowings. These issues have led to cost overruns. Coupled with high cost pressures, falling plant load factors and tariff rates aren’t helping much:

• PLFs are exceptionally low and tumbled to about 60 per cent from 75 per cent levels over the last 5 years.

• Merchant tariffs for electricity purchased in the spot market have slid to around

`3 (€0.037)/kwh, far below the breakeven rate of `4(€0.050)/kwh needed for most plants.

As a result, cash flow for most private power generation companies falls short of what is needed to service interest obligations. This has led to about 40 GW of stressed assets mostly in coal and gas based generation segments.

3. KEY ISSUES AND RECOMMENDATIONS

3.1 Implementation of New Technologies

While CO2 emissions are unavoidable when using coal-fired power generation for electricity due to its nature as a fossil fuel, it is imperative to use and adopt new environmentally sensitive technologies in India that will lead to maximum efficiency and reduce emission of harmful gases and toxics, including mercury emissions. India has committed to reduce its carbon emissions at the UN Climate Change Conference held in Paris in 2015 as a part of its INDC (intended nationally determined contributions) goals which were subsequently ratified in 2016. The Ministry of Environment, Forest and Climate Change has introduced clear guidelines into the law on allowable emission standards for sulphur oxide/nitrogen oxide/mercury from coal fired utilities.

The guidelines provide for specific measurable emissions norms for all super-critical and sub-critical power plants going into generation from 2017 onwards, in line with MATS (mercury and air toxic standards) in the US and norms being promulgated in China. For all fossil fuel burning electricity generating plants, incentives are provided to encourage use of emission capturing equipment and processes including use of activated carbon to reduce mercury and other toxic emission.

European companies are well equipped to provide cutting edge know-how to electricity generation businesses in India to meet this critical objective.

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Recommendation

Innovative new technologies such as super-critical, ultra-supercritical, and even solar-thermal in the thermal power sector and high concrete dams, special tunnels, tidal power and offshore wind power projects in the renewable sector have demonstrated high efficiencies worldwide and their proper implementation is vital in achieving the maximum efficiency from the project.

3.2 Introduce Investment-linked Incentive Under the Income-tax Act, 1961 (IT Act)

The government’s stated policy intent for gradually phasing out tax incentives has led to a sunset on income-linked tax holiday13 for power generation and distribution, with effect from April 1, 2017. Further, accelerated tax depreciation for power businesses in respect of certain block of assets, earlier allowed at the rate of 80 per cent, has been capped to 40 per cent with effect from April 1, 2017.

At the same time to encourage capital investments in large infrastructure projects, Finance Act 2016 had extended the benefit of investment-linked incentive to business of developing and/or operating and maintaining an infrastructure facility including roads, highway projects, water supply /treatment projects, port/airport projects, etc. However, such investment-linked deduction has not yet been introduced in respect of capital costs incurred by power businesses.

Further, investment allowance of 15 per cent is allowed on cost of new plant and machinery acquired by taxpayers which set up an undertaking/enterprise for manufacturing or production of an article or thing on or after April 1, 2015 in any notified backward areas in specified states14, if such asset is acquired and installed on or before March 31, 2020, under section 32AD of the IT Act. Such incentive is not available to taxpayers engaged in generation and/or distribution and transmission of power.

It is imperative to provide for adequate fiscal incentive for stimulating private investments in the power industry.

Recommendations

In view of the government’s target of ‘Power for All’ by 2019, it is recommended that accelerated depreciation rate of 80 per cent should be continued for specified block of assets. Alternatively, the government may consider including generation and distribution operations within the definition of ‘infrastructure facility’ eligible for investment-linked deduction in respect of capital costs incurred under section 35AD of the IT Act. In addition, the government may consider extending benefit of investment allowance to taxpayers engaged in generation or generation and distribution of power as well.

3.3 Rationalization of MAT Rate and MAT Adjustments

The current MAT rate of 20 per cent on ‘book profits’ acts as a significant deterrent in the overall investment decision-making for high-risk and capital intensive operations. Vide the Finance Act, 2017, carry forward of MAT credit has been allowed for a period up to 15 years (from 10 years).

Recommendations

Given the high rate of MAT, purpose of extending tax incentive to power generation businesses is defeated by levy of MAT and therefore, it is recommended that the government may consider a moderate rate of MAT for power generation businesses to incentivize power generation in the country. In addition, under current MAT provisions, inclusion of MAT adjustments on transition to Indian Accounting Standard is leading companies to pay taxes on notional income/gains. Such adjustments are putting undue tax burden on companies and need to be suitably amended.

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3.4 Aligning Provisions of the IT Act with Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014

In the recent years, investors have begun to actively evaluate feasibility of infrastructure investment trusts (InvITs) as the preferred structure for large-scale operations of power assets, primarily due to factors such as, tax exemptions/ pass through status accorded to InvITs; public participation through listed units; structural simplicity and ability to hold multiple infra assets under one pooling vehicle, etc. As investments through InvITs structure is gaining momentum, it is imperative that provisions of the IT Act be aligned with Securities and Exchange Board of India (SEBI) regulations, to do away with any anomalous scenario.

Presently, provisions of the IT Act provide for following exemptions:

• Exemption from dividend distribution tax (DDT) on dividends distributed by SPV to InvITs. Also, dividend received by unitholders from InvITs is exempt from income tax; and

• Exemption in respect of interest income received by an InvITs from SPV, being an Indian company.

Recently, through amendment in InvITs regulations, SEBI has permitted two-tier holding structure i.e. investment in SPV through another SPV/ holding company (Hold Co) subject to fulfilment of specified conditions.

In the now permitted two-tier asset holding structure through InVITs, presently, IT Act limits the benefit of exemption from DDT only in respect of dividends distributed by Hold Co to InVITs. DDT exemption is thus, presently not available on dividends distributed by downstream SPVs held by such Hold Co.

Also, considering that the tax exemption is limited to interest received by an InVIT from an SPV being a company, such exemption would not be available in case the SPV is set-up as an LLP. Such aspects may act as a roadblock for a

complete pass through status for investments in power assets through the InvIT structure.

Recommendations

To do away with the anomalous tax outcome in a two-tier holding structure, it is imperative that a complete pass-through status is accorded to the InvIT structures by granting the benefit of DDT exemption with respect to dividends distributed by SPVs to Hold Co, which in turn is held by InVIT. Also, the tax pass through should be allowed in case of interest payment by an SPV being an LLP, to InVIT.

Above rationalization measures will align the provision of the IT Act effectively with the SEBI regulations for InVITs, and will thus, encourage a more holistic evaluation of InVITs as preferred investment structure.

3.5 Need for tax consolidation structure

Presently, owing to the power purchase agreement or financing requirements, power business end up creating a whole web of companies under a holding company. A power company on an average operates 20-100 SPVs, of which early stage companies incur losses while the advanced stage companies show profits. However, in the absence of explicit provisions under the IT Act, setting off of losses against the profits of entities is not permissible leading to unnecessary tax payouts for the group as a whole.

Recommendations

To facilitate growth for power companies, government may consider allowing multiple SPVs held under the same ownership structure to file a consolidated group tax return, thereby, leveraging group level synergies for an improved tax outcome. This will also enable cash flow efficiencies amongst multiple projects and thus, encourage ploughing back of surplus resources.

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3.6 Need for Adequate Fiscal Incentives for Encouraging Financing of Power Projects

The government has announced significant capacity addition in power sector, especially in renewable space (175GW). One key challenge for the sector, however, shall be to achieve required financing for new projects. Whilst the Indian power sector is highly leveraged, project developers continue to explore opportunities of borrowing overseas funds for the projects.

Vide Finance Act, 2017, the government has extended/ provided the benefit of concessional tax withholding base rate of 5 per cent on ECB and Masala bonds. On the flip side, the government has also introduced limit on interest deduction in line with recommendations of the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting Action Plan 4. Such provisions are applicable to an Indian company or a permanent establishment of a foreign company incurring interest expenditure exceeding ̀ 10 million (€124,459.68) in respect of debt owed to a non-resident associated enterprise (AE) or to a non-AE (in respect of debt guaranteed by AE).

Interest in excess of 30 per cent of earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to non-resident AE or to non-AE (in respect of debt guaranteed by AE), whichever is lower is proposed to be disallowed. Such interest expense to the extent disallowed is henceforth to be carried forward for 8 years for set off against business income of future years, to the extent of maximum allowable interest, i.e. 30 per cent of EBITDA. Considering debt-push down structure is common in power companies, disallowance of interest cost reckoned with respect to 30 per cent of rule could pose significant challenge for project entities as the effective post-tax cost of debt investments could soar.

Recommendations

Considering that power projects are capital

intensive and require significant financing, the government should consider the following approaches:

• Exempting infrastructure projects, including the power generation and /or distribution projects from the applicability of thin capitalization rule under the IT Act. Such companies have large capital requirements and are highly leveraged due to commercial imperatives. Any limitation on deductibility of interest cost could significantly inhibit the commercial feasibility of projects in such sectors which are otherwise crucial for a sustained economic growth.

• Alternately, introducing a much higher ratio (i.e. greater than 30 per cent) for such projects, to ensure the limitation on interest deduction is triggered only in exceptional cases, without rendering debt financing more expensive for the developers.

• In addition, removing the restrictions on number of years to carry forward interest disallowed under section 94B of the IT Act.

3.7 Goods and Services Tax (GST)• Under GST, Electrical Energy is NIL rated

goods covered under Chapter Heading 2716 00 00 under Schedule I. As per section 17 of the CGST Act, amount of GST paid on inputs shall not be allowed as credit wherein such inputs are used for effecting exempt supplies. Due to this, entire GST suffered on inputs by the power companies is not eligible for credit and results in to cost of generation of electricity

• Also, the industry has made substantial investments in setting up captive power plants (CPPs) to meet its production needs. However, State governments have been imposing electricity duties and cesses on captive power generation which has the effect of largely negating the advantage in setting up CPPs.

Recommendations

The government should consider including

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electricity in GST ambit to ensure flow of credit across the value chain. The reduction in revenue to the government will be largely offset by higher revenue due to higher competitiveness, increased production/output. The government may also consider providing for lower rate of taxes on inputs, services and capital goods so as to avoid increase in current cost and maintain status quo.

Specifically, transmission and distribution companies should be allowed to be procure capital goods at a concessional rate since the outlay and the GST cost on the equipment is expected to be substantially high.

Alternatively, ensure that incidence of GST flow seamlessly across the value chain by creating a mechanism which allows a refund of the non-creditable input taxes in the hands of the power project owner, particularly to mitigate the cascading effect of indirect taxes for project owner in the absence of indirect tax liability on output side, ie sale/supply of electricity.

• At present, coal imports are subject to basic customs duty (BCD) of 2.5 per cent and IGST of 5 per cent. Since there is shortage of domestic coal in India, power plants are compelled to meet the requirement through imports. Since there is no duty on electricity on the output side, any duty imposed on procurement of coal would be a cost for power companies. The present duty structure is unintentionally increasing the cost of power generation and thereby increasing the cost of power, which is directly impacting the common man

Recommendations

It is recommended that BCD and IGST on coal imported for the usage in thermal power plants should be NIL. Without prejudice to the above, IGST @5 per cent on coal shall be reduced to 2 per cent to bring it in line with levy of countervailing duty (CVD) being levied on the same goods under erstwhile indirect tax regime

• Under GST regime, clean environment cess on coal [`400(€4.978)/MT] has been replaced with GST compensation cess of equivalent value. This cess was introduced as clean energy cess in 2010 with levy of `50(€0.622)/MT on coal and there has been repeated hike in this cess over the last few years from `50(€0.622/MT, to `200(€2.489)/MT up to 2015-2016 which was further increased to `400(€4.978)/MT through Union Budget 2016-2017. The increase in cess had an adverse impact on the power intensive industries and thus rendering industry operations economically unviable, operating at reduced capacities with risk of plant closure.

Recommendations

It is emphasized that levy of GST compensation cess on coal needs to be reviewed. The removal or at least reduction in this cess will provide big support to power intensive industries and will help them retain competitiveness.

• The supply and installation of solar roof top, supply of solar power project and installation of the same is considered as works contract service (in relation to immovable property) attracting 18 per cent GST. However, renewable energy devices and parts for their manufacture are subject to GST @ 5 per cent classified under Chapter 84 and 85. The composite supply of works contract is also subject to tax at the rate of 18 per cent under the GST regime. Tax at the rate of 18 per cent under the GST regime on the supply and installation of solar roof-top and solar power project would lead to additional burden of tax.

Recommendations

It is suggested that appropriate clarity be provided that supply and installation of solar roof-top shall be construed as supply of solar power generating system liable to tax @ 5 per cent under the GST regime. Appropriate clarity be also provided on whether solar power generating system mentioned under chapters 84 & 85 are for all projects irrespective of the capacity size.

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4. CONCLUSION Arguably, the power sector has witnessed

reasonable progress both in terms of policy evolution as well as capacity addition; the sector has certainly tremendous potential for accelerated growth, given the government’s macroeconomic objectives of achieving rapid infrastructure development, increasing urbanization and rural electrification.

The progressive policy-level changes and effective implementation of directives by the government have been well appreciated by the industry and investors. Renewable energy achieving grid parity after introducing competitive bidding, auctioning of stressed power projects, improvement in financial of electricity distribution companies (discoms), coal linkage policy, are select key initiatives

amongst various incentives introduced by the government that have fared well with the investors. Besides, the government’s unstinted commitment to scaling up power generation using non-fossil fuel resources, reducing carbon footprints, and ensuring 24X7 power for all, will enable this sector gain more investments in medium to long run.

To further incentivize large scale investments in electricity generation projects as well as transmission infrastructures, it is imperatives that the government pays heed to concerns of the industry as highlighted in this paper, and responds in a timely manner. Amongst wish-list identified, resolution of GST stalemate for ‘electricity’ will be an important tax policy reform that the industry is hoping to witness in the coming year.

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Endnotes

1 World Bank: The 2018 Global Economics Prospect (GEP)

2 Central Electricity Authority (CEA) monthly report March 2017

3 India follows April-March financial year. 2012-2017 mean period from 1 April 2012 to 31 March 2017

4 Draft National Electricity Plan

5 BP Statistical Review of World Energy 2017

6 CEA: Growth of Electricity Sector in India from 1947-2017

7 Growth of Electricity Sector in India from 1947-2017, CEA, Ministry of Power – May 2017

8 Department of Industrial Policy & Promotion, India: FDI Quarterly Factsheet, January 2017 to March 2017

9 MNRE physical progress overview

10 CEA: All India Installed Capacity, December 2017 monthly report

11 CEA monthly executive summary reports

12 Overview of Transmission, website of Ministry of Power

13 Under Section 80-IA of the IT Act

14 Andhra Pradesh, Bihar, Telangana and West Bengal

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RETAILAcknowledgements: Patrik Antoni (IKEA), Chairman, Retail Sector Committee & its Members

Knowledge Partner: Gaurav Karnik & Akshay Anand – EY

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EXECUTIVE SUMMARY

India’s retail market is a dynamic and fast growing sector since the last few decades with strong fundamentals, increasing urbanization and consumerism. Purchasing power of the consumer is expected to increase and with a growing economy, the retail sector is set to grow further and faster, both horizontally and vertically.

The government has shown interest in addressing the challenges in this sector and has been consistently making efforts to liberalize investments in this sector – such as relaxation in foreign direct investment (FDI) regulations, rolling out Model Shops and Establishments Act, 2016, model guidelines on direct selling, the goods and sales tax (GST) law and changes in the Legal Metrology Act in 2017, etc.

Considering the initiatives taken, few concerns of multinational retailers, still exist. Addressing these would help in Ease of Doing Business in India and will open up more opportunities in the retail sector while achieving the make in India initiative. Some key expectations on retail players are noted below:

• Allow self-certification by the single brand retail trading (SBRT) entity for global group sourcing during the first 5 years and reduce the same sourcing limit to 10 per cent.

• Allow global sourcing by group companies from India to be counted for domestic sourcing limits beyond first 5 years and also clarify that purchases by the SBRT entity from India after the first 5 years and exported to be counted for domestic sourcing norms

• Increase FDI limit for multi-brand retail trade (MBRT) up to 100 per cent and relaxation in domestic sourcing norms akin to SBRT.

• Remove 25 per cent turnover limit for group sales made by wholesale trading entity

• FDI in business to consumer (B2C) e-commerce to be allowed under automatic route.

• External commercial borrowings (ECBs) be allowed in retail sector and the foreign portfolio investor (FPI) route to be opened for this sector.

• Mandatory requirement of putting maximum retail price (MRP) be done away with and pricing system in line with international practices to be adopted.

• Grant industry status to retail sector to facilitate organized financing and fiscal incentives.

• GST law be amended to allow input tax credit in case of promotional measures such as offers like one plus one free, etc.

• GST law be amended to allow for input tax credit in case of goods or services or works contract used for building/construction of retail stores/outlets.

India’s retail market presents a significant opportunity for global retail businesses. However, challenges as mentioned above, have caused foreign investors to alter regular operating business models, adding to cost of business which in turn makes products expensive for the ultimate customer. Adopting global best practices in areas identified in this paper will augur well in facilitating investment, trade and above all be in the best interests of the Indian customer. The suggestions in this paper are made with this objective and may be further discussed with the government as desired.

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1. INTRODUCTION The 2017 Global Retail Development Index

(GRDI) study1 ranked India as most dynamic retail market in the world (among 30 developing countries). While the strong growth fundamentals coupled with the increased urbanization and consumerism offer immense scope for expansion, there are certain trade challenges that need to be addressed. This paper provides a brief overview of the retail sector in India, key investor challenges and recommendations.

1.1 Market Description1.1.1 Indian retail sector, comprising both organized

and unorganized retail, has emerged as a dynamic and fast growing sector over the last decade. From a history of traditional/ unorganized retailing, the Indian retail sector has come off age and has gone through major transformation over the last decade with a noticeable shift towards organized retailing. Large international and domestic players are attempting to continuously increase their India presence.

1.1.2 India’s number 1 ranking (as stated supra) is an improvement from number 2 position in 2016 due to improved Ease of Doing Business, clarity and liberalization of FDI regulations in India, increased consumer spending, introduction of GST, etc.

1.1.3 Also, as per the India Brand Equity Foundation’s (IBEF) sectorial report2, the retail sector in India accounts for over 10 per cent of the country’s gross domestic product (GDP) and around 8 per cent of the total employment. As per IBEF, India is the 5th largest global destination for retail worldwide and the retail sector in India is poised to grow at a compound annual growth rate (CAGR) of 10 per cent and in year 20263 the market size is expected to touch US$ 1.6 trillion or €1.29 trillion (from US$ 641 billion or €519.61 billion in the year 2016).

1.1.4 As per IBEF, the online retail business (ie, e-commerce) sector in India is expected to touch US$ 120 billion (€97.27 billion) by the year 2020 from US$ 30 billion (€24.32 billion)

in the year 2016. India’s total potential of B2C trade is estimated to be US$ 26 billion (€21.07 billion), of which $3 billion (€2.43 billion) can be achieved in the next three years from 16 product categories, according to a study by Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Institute of Foreign Trade (IIFT).

1.1.5 India’s direct selling industry is expected to reach a size US$ 3.54 billion (€2.87 billion) by FY 2019-20, as per a joint report by India Direct Selling Association (IDSA) and PHD Chamber of Commerce. This industry has also significantly contributed to growth and development of small and medium enterprises (SMEs) and allied services like transportation, distribution/logistics, etc.

1.2 Regulatory Framework The retail sector is governed by multiple

legislations at the central and state levels, and also by sector-specific regulatory bodies. These include state-wise Shops and Establishments Acts, labour laws, Legal Metrology Act, sector-specific labelling regulations, FDI policy, local/municipal laws etc. In this regard, a brief overview of some of the regulations has been provided below

1.2.1 The enactment of shops and establishments act is a state subject and hence different states have different legislations relating to shops and establishments. The state acts regulate the conditions of work of employees/workers in shops and commercial establishments.

1.2.2. The legal metrology law4 seeks to establish standards of weights and measures, regulate the trade in weights and other goods which are sold or distributed by weight, measure or number. It is also used as a measure to ensure consumer protection by making the originator of goods (manufacturer/packer/importer) accountable for such goods.

1.2.3. Sector-specific labelling regulations are used as a measure to provide needed information and/or to ensure the health and safety of consumers. These regulations are required to protect customers and businesses from

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unfair competition from false representations of product content, origin and quality.

1.2.4. India’s FDI policy in retail identifies following broad categories within retail – SBRT, MBRT, wholesale trading, e-commerce and food product retail trading (FPRT).

1.3 Recent Developments The current government has taken a number of

welcome steps to liberalize the organized retail sector. Some of the key steps are as follows:

1.3.1 Approval for 100 per cent FDI in SBRT under automatic route and relaxation in 30 per cent local sourcing requirement

Recently, the Cabinet has introduced following changes in FDI regime relating to SBRT:

(a) As per existing FDI policy 2017, FDI up to 49 per cent was permitted under the automatic route and beyond that, approval from government was required. Now 100 per cent FDI in SBRT sector will be permitted under automatic route.

(b) As per existing FDI Policy 2017, there is mandatory sourcing requirement of 30 per cent of purchases from India, where the FDI is in excess of 51 per cent. Now, it has been decided that sourcing of that single brand from India either directly or through group companies, for global operations during initial 5 years starting with the year in which the first store is established, to be counted towards the local 30 per cent sourcing requirements to be met by the SBRT entity.

(c) As per earlier FDI policy 2017, where a non-resident entity who is not the owner of the brand wishes to undertake SBRT, it was required to enter into a legally tenable agreement with the brand owner. Now, such an agreement can be entered between the brand owner and the Indian entity which is proposing to undertake single brand retail trading.

1.3.2 Introduction of mechanism for determining ‘state-of-the-art’ and ‘cutting-edge technology’

As mentioned earlier, FDI beyond 51 per cent in SBRT entities requires local sourcing of 30 per cent of the value of goods to be purchased from India. However, in case of products that have ‘state-of-the-art’ and ‘cutting-edge technology’ and where local sourcing is not possible, this requirement is relaxed for the initial 3 years from the commencement of business, i.e., opening of the first store. What constitutes ‘state-of-the-art’ and ‘cutting edge technology’ was not defined and was creating challenge. During 2017, in a welcome step it has been decided that a committee under the chairmanship of the secretary, Department of Industrial Policy and Promotion (DIPP), with representatives from NITI Aayog, concerned administrative ministry and independent technical expert(s) on the subject, will examine the claim and determine the products getting qualified under ‘state-of-the-art’ and ‘cutting edge’ technology and cases where local sourcing is not possible and proposals would be decided on the basis of their recommendations. This will help in removing the ambiguities in the minds of the investors and will ultimately boost the Ease of Doing Business initiative of the Government of India.

1.3.3 Phasing out Foreign Investment Promotion Board (FIPB)

FIPB has been abolished and now government approval for foreign investments in relation to the sectors/activities falling under approval route are considered by the respective administrative ministries/departments.

1.3.4 Clarity on FDI in e-commerce

In terms of the extant FDI policy for e-commerce, an e-commerce entity is not permitted to sell more than 25 per cent of the sales effected through its marketplace from a single vendor or their group companies. In this regard, it has been clarified that 25 per cent of the sale value will be calculated on a financial year basis. The said clarification has removed the ambiguity in respect of the period to be taken into account for 25 per cent calculation purposes.

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1.3.5 FDI regulations in retail trading of food products manufactured and/or produced in India

In addition to permissibility of FDI in SBRT and MBRT subject to certain conditions, government has permitted 100 per cent FDI in FPRT under approval route in respect of trading of food products manufactured and/ or produced in India.

1.3.6 Model Shops and Establishments Act rolled out

The Ministry of Labour & Employment passed the Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill, in July 2016 which may be adopted by the states as per their discretion. Since then the state of Maharashtra has replaced their existing Shop and Establishment Act in line with the Model Shop and Establishment Act as passed by the ministry while other states such as Kerala are in the process for adopting the same.

1.3.7 Model guidelines on direct selling rolled out

The Ministry of Consumer Affairs has formulated model on direct selling which may be adopted by different states at their discretion. Since then the states of Sikkim, Chhattisgarh, Telangana, Andhra Pradesh etc. have adopted the same while other states like Karnataka, Maharashtra and Tamil Nadu are in the process of adopting the same.

1.3.8 Legal Metrology Act, 2009

The Department of Consumer Affairs vide order dated December 4, 2017 relaxed the manner of declaration of the retail sale price for SBRT entities for a period of 1 year. Now:

(a) Retail sale price of the products displayed for sale on the racks in a store must be made through labels affixed to the racks;

(b) Pre-packaged commodities offered for sale shall contain bar codes on the principal display panel, which should show the retail sale price by using the scanners available across the store;

(c) Once a pre-packaged commodity is imported into the country or manufactured/

packaged within the country, the retail sale price of the same shall not be increased during the product’s lifecycle.

However, to ensure compliance of the aforesaid requirement and consistency of pricing, the single brand retailing entity must take the below steps, at its own cost:

(a) Make the retail sale price information available on its website;

(b) Print a catalogue of retail sale prices and make the same available to the concerned authority; and

(c) Deposit the retail sale price information with a third party repository who shall provide such information to consumers, through a consumer friendly web based app and a call centre with toll free number. Information regarding the aforementioned facility must be prominently displayed on the single brand retailing entity’s website as well as near the billing counter of the store.

1.3.9 Goods and services tax (GST)

The Indian government has introduced the GST law with effect from July 1, 2017.

2. KEY ISSUES AND RECOMMENDATIONS

2.1 FDI and Exchange Control Laws

(A) FDI in SBRT

1. Issues related to local sourcing:

1.1. Global sourcing to be counted even after initial 5 year period

It is also recommended that global sourcing from India should continue to be counted for the limit of 30 per cent even after the end of the five year period. This will support the government’s intention of increasing manufacturing etc in India and will boost foreign exchange reserves.

1.2. Self-certification for group sourcing

In relation to the local sourcing requirement, sourcing for the purpose of global

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operations by group entities has been permitted to be counted towards the 30 per cent sourcing requirements in the first 5 years. In this connection, the requirement for certification by statutory auditor of the SBRT entity should be done away with. This is because the Indian auditor of the SBRT entity may not be in a position to certify the sourcing which is done by the group companies or affiliates or parent company. It is also recommended that self-certification by the SBRT entity should be considered as sufficient.

1.3. Sourcing undertaken prior to establishing the SBRT store to be included for local sourcing

As per the proposed amendment, there exists ambiguity on whether the group that has been sourcing from India in past before setting up the SBRT store, will be allowed to adjust past sourcing (assuming it is in relation to the same brand) for the 30 per cent rule for the first 5 years. Thus, it should be clarified that the sourcing which has been made prior to set up of any store in India will be allowed to be adjusted for computing the threshold limit.

1.4. Meet 30 per cent local sourcing in fifth year

As per the current law 30 per cent local sourcing has to be met on an average basis in the first five years. It is recommended that instead of average, 30 per cent local sourcing requirement should be complied with in the fifth year.

1.5. All raw material sourced from India to be included for local sourcing compliance

It is pertinent to note that in some cases multinational single brand retail entities which own several brands may be sourcing raw material from India which may be utilized for one of the brands which is not sold in India and this fact is not known at the time of sourcing. Accordingly, it should be clarified that raw material sourcing for the group from India should be covered in mandatory local sourcing requirements.

1.6. Clarification that goods sourced for exports by SBRT entity will be counted within local sourcing requirements

As per the amended FDI policy it has been provided that subsequent to 5 years the SBRT entity shall be required to meet the 30 per cent sourcing norms directly towards its Indian operations on annual basis. There exists ambiguity on whether domestic procurement by the SBRT entity inter alia for exports will be considered while testing the local sourcing conditions or whether only domestic sourcing by the SBRT entity for domestic sales will be considered. Thus, it should be clarified that post 5 years, domestic procurement for exports by the SBRT entity will also be considered for the 30 per cent sourcing requirement. This is in accordance with the intent of the policy as such an interpretation supports the Make in India programme and at the same time result in earning of additional foreign exchange for the country.

2. Issues relating to brand:

2.1. Need to mention umbrella brand to be removed

SBRT players are permitted to market sub-brands in Indian stores subject to the condition that umbrella brand clearly appears alongside the ‘sub-brand’. This requirement is unlike in any other country and necessitates development of separate branding elements that are otherwise not made, resulting in increased costs, inconsistency and inefficiency. It is therefore recommended that the requirement of mentioning the umbrella brand be removed.

2.2. Multiple brands under a SBRT entity to be considered under SBRT FDI policy

In terms of the extant FDI Policy, FDI in a company engaged in trading of multiple brands of the same product are considered as MBRT. In some cases, multinationals dealing in a similar product prefer to have different brands under single entity, without any mention of the umbrella brand.

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In such cases, in order to promote FDI in retail trading sector, it is recommended that multiple brands under a SBRT entity should be permitted to receive FDI in terms of the extant SBRT guidelines rather than the extant MBRT guidelines.

(B) FDI in MBRT

1. Allow 100 per cent FDI in MBRT

In terms of extant FDI policy 2017, in MBRT, FDI only up to 51 per cent is allowed under government approval route. To boost the confidence of foreign investors in Indian markets and help in development of this sector in India, it is recommended that 100 per cent FDI should be allowed. To protect the interest of micro, small and medium enterprises (MSMEs), FDI beyond 51 per cent be kept under government route.

2. 30 per cent sourcing condition for MBRT to be made consistent with those for SBRT

As per existing FDI Policy 2017, there is mandatory 30% local sourcing requirement in MBRT. It is recommended that similar relaxation as in SBRT may be allowed in this sector as well.

(C) FDI in FPRT:

1. Allow trading in food products produced outside India

In terms of the extant FDI Policy, FDI up to 100 per cent under approval route is permitted in respect of trading of food products manufactured and/ or produced in India. However, various global players have shown resistance taking advantage of the liberalization, as the same is restricted only for trading in ‘food’ products manufactured/ processed in India. Therefore, it is suggested to permit such companies that invest in India to also sell other food products produced outside India. This relaxation may be permitted with conditions such as a cap or proportion to the total turnover for e.g. 30 per cent of the total turnover.

(D) FDI in wholesale trading:

1. Removal of limit of 25 per cent of turnover for trading with group companies

As per extant FDI policy on wholesale trading, wholesale trading of goods would be permitted amongst companies of the same group. However such wholesale trading to group companies taken together should not exceed 25 per cent of the total turnover of the wholesale venture. Considering that the government vide Press Note 12 of 2015 dated November 24, 2015 has allowed a company undertaking wholesale trading to also undertake single brand retail trading provided separate books of accounts for these two arms of business are maintained and duly audited by the statutory auditor, it is recommended that the condition which limits wholesale trading between group companies to 25 per cent of the turnover of the wholesale venture be removed This will help in Ease of Doing Business in India.

(E) FEMA

1. FEMA restrictions on overseas debt funding in the retail sector to be removed

At present ECB is not permitted in the retail sector. Further, FPI are not permitted to invest in the corporate debt of retail entities. Thus, retail entities are forced to borrow from local banks which may be at a higher cost as compared to overseas debt. Given the above, it is recommended that ECBs be allowed in the retail sector and FPI are permitted to subscribe to debt paper issued by retail entities.

2.2 Issues in Relation to Labelling Requirements and Recommendations

2.2.1 Multiple regulations

Various laws govern the sector specific labelling requirement leading to multiplicity of compliances. For eg for food products- Prevention of Food Adulteration Act, cosmetics governed by Cosmetic Regulation 1223/2009 etc, are applicable. A comprehensive law for all goods/ items would help in simplifying

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regulations, bringing efficiencies, and cross pollinating best practices.

2.2.2. Pre-conditions to re-labelling and repackaging

The provisions contained in legal metrology act requires that no commodity in packaged form may be sold until it contains a label giving the prescribed declarations. Further, law casts responsibility on the manufacturer/ packer to re-pack/ re-label as and when required. In retail business, relabeling is common as goods are required to be packed/repacked for transportation and delivery purposes. Given the complexities involved in fulfilling the conditions for relabeling, it is recommended to streamline the entire process and make the same simpler by removing the requirement of relabeling for repacking.

2.2.3. Pre-requisite of all declarations on principal display panel

The provisions of Legal Metrology Act in India requires the declarations to be made and pre-printed information to be grouped together and given at one place. Though as per international standards the declarations are made on the product, However, the requirement of grouping them at one place is not economically feasible as businesses manufacture products in many locations as per requirements and changing the supply chain for a single market on stand-alone basis is not economically feasible. It is therefore recommended to relax this requirement with specific conditions, if required.

2.2.4. Impossibility of few excessive declaration requirements

Every package is required to contain certain declarations for example in case of imported goods, a product label must include importer information like month and year of import, name and address of importer, etc. This information may not be available with the manufacturer before or during the manufacturing process (since manufacture happens globally for different markets). Further, in many instances, products or their parts are produced in different countries

and then combined in countries other than where the final product would ultimately be sold. Under such supply chain networks, the destination market for each product is not pre-defined and stock is kept at various regional distribution centers and supplied on demand by markets. Such requirements puts undue burden on stakeholders and consequently increases costs, which would ultimately need to be borne by consumers. Therefore, an objective-based impact assessment exercise should be undertaken on labelling regulations so that onerous statutory requirements can be done away with.

2.2.5. Retailers of unpackaged goods

The Legal Metrology Act intends to cover the declarations on ‘packaged commodities’ only. However, practical challenges are involved with respect to classification of products as ‘packaged commodities’. Given the significant litigations around this issue, it is recommended to bring appropriate clarifications to enable speedy redressal of pending litigations.

2.2.6. Removal of MRP

The government in SBRT has relaxed the provisions for MRP wherein MRP for products displayed for sale on racks is required to be affixed on racks and in case of pre-packaged commodity by way of a bar code on the commodity. In addition, details with regard to MRP is to be made available on website, catalogues etc. However, in SBRT, this requirement is redundant as the retailer produces, affixes the price and sells the product itself and hence there is no pricing differentiation. Also, putting MRP poses a challenge in global supply chain since displaying prices in foreign currencies is not permitted in some countries such as Indonesia. Further, at the point of production, the final sales price may not be accurately determined as price is determined at the country level. Given the above, it is recommended that the requirement of putting MRP should be done away with and an advanced pricing system in line with international best practices may be implemented.

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2.3 Issues in Relation to Product Certification Requirement and Recommendation

2.3.1. Relaxation in product certification requirement

Most of the imports made are already internationally certified and adhere to international standards of testing and quality. When the same are imported in India, they are subject to various additional certification/ testing by various departments. Thus, it is recommended that already internationally certified products should not be subject to same testing requirements again. In case any unique parameter is required to be tested, that may be tested on a fast track basis with modernized procedures.

2.4 Issues in relation to GST and recommendations

2.4.1. Transition credit

As per GST transition provisions, transitional credit for stock held on GST transition date (30 June) was allowed to unregistered persons, subject to certain conditions. One of the conditions for availment of such credit was that duty paying document (i.e. excise invoice) should be available to avail the credit.

If excise invoice was not available, then eligible credit was required to be computed based on a specified formula (i.e. 40 per cent/60 per cent of CGST payable on supply of such goods). Essential condition to avail credit in such case was that the goods should be sold within a period of 6 months from transition date, i.e. goods should have been sold by end of December 2017. Thus, it is recommended to increase the time limit of 6 months (which has already expired), to be extended to allow transitional credits for longer period of one year.

2.4.2. Anti-profiteering

The central government has set up the Anti-Profiteering Committee to monitor that reduction in rate of tax on any supply of goods or services i.e. the benefit of input tax credit passes on to the

recipient by way of commensurate reduction in prices. Recently, notices have been issued by the Anti-Profiteering Committee to few retailers, however there is ambiguity whether the benefit needs to be seen at company level or product level. Thus, it is recommended that clear methodology and procedure be laid down to avoid ambiguities and litigation.

2.4.3. Promotional measures

Many times it is seen that the retail sectors promote their products by giving offers such as buy one and get one free. There is lot of ambiguity involved in these transaction as to whether the input tax credit in respect of the free product will be available. Few industry players are treating it as free supply and are not taking the credit, while others are arguing that the price of free product is already included in the price of chargeable products, therefore GST on free product will be eligible for input tax credit. This clause is requiring retailers to re-visit their promotional activities. Thus, it is recommended that section 17(5) of CGST Act should be amended to specifically allow input tax credit with respect to above-mentioned transactions.

2.4.4. Time limit for applicability of tax rate amendment notifications

Generally, whenever there is rate change under GST, it is applicable with effect from the date when the notification is published in the official gazette. However, practically it becomes challenging to make changes in the IT system and the process takes about 2-3 days. Therefore, it is recommended that the applicability of rate change notifications should be made effective after couple of days after the notification is published in the official gazette.

2.4.5. Linking of credit notes with original invoice

Under GST law, one of the pre-conditions for issuance of credit note is one-to-one linkage of credit notes to original invoices. Such linking of credit note with the original invoice is a tedious task, especially in case of transactions, such as post sales discount. To avoid litigation, the industry is going ahead with the option of commercial credit notes without GST, instead

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of GST credit notes. The same is leading to heavy loss of input tax credit. Thus, it is recommended that the condition of linking of credit note with original invoice should be done away with and a single credit note should be allowed against multiple invoices.

2.4.6. Mentioning HSN on invoice

In GST Tax invoice, it is mandatory to mention HSN (harmonized system of nomenclature) code of products sold. Many times, it is seen that a large number of products are sold in a single invoice. It sometimes become difficult to mention all the HSN in an invoice as there are many other mandatory particulars also which needs to be mentioned in an invoice.

Therefore, it is recommended that retail sector should be covered under Rule 46 (ii) of CGST rules which empowers the government to cover certain class of registered persons, who would not be required to mention HSN for goods or services on a tax invoice.

2.4.7. Distribution of credit by input service distributor (ISD) in the same month

As per Rule 39(a) of the CGST Rules, the input tax credit available for distribution in a month is required to be distributed in the same month. There does not appear to be any apparent reason for restricting the time within which credit should be distributed. Therefore, it is recommended that there should not be any timeline for distribution of GST credit similar to provision in cenvat credit rules in pre-GST regime or a reasonable time limit should be available for distribution of the credit.

2.4.8. Relaxation of particulars on GST tax invoice to avail input tax credit

As per section 16 of CGST Act, one of the condition for availing input tax credit is that the recipient should be in possession of tax invoice or debit note. The particulars that are required to be mentioned on tax invoice and debit note are provided under rule 46 and 53 of CGST Rules respectively. Thus, if tax invoice/debit note does not contain all the particulars as required under rules, then input tax credit of recipient may be subject to litigation.

Therefore, recipient is required to ensure that all particulars required to be mentioned on tax invoice have been correctly mentioned by the supplier. This is an onerous requirement on part of recipient of goods/ services.

In this regard, a reference may be made to proviso of Rule 9(2) of erstwhile Cenvat Credit Rules, 2004 under excise law. In terms of this rule, cenvat credit was allowed on the basis of a document which even though does not contain all the particulars prescribed under Central Excise Rules, 2002 or Service Tax Rules, 1994 but contains certain specified details.

Therefore, it is recommended that section 16 of the CGST act should be amended in order to provide that credit can be availed on the basis of a document that even though does not contain all the particulars prescribed under CGST Rules, but contains certain specified critical details, such as details of tax amount; and name, address and GSTIN of the supplier and recipient/ distributor of credit and recipient of credit.

2.4.9. Input tax credit for retail store construction

As per Section 17(5) of CGST Act, input tax credit is not allowed on goods or services received for construction of an immovable property (other than plant and machinery) or works contract service when supplied for construction of an immovable property (other than plant and machinery). The retail industry invests significant amounts in building constructing retail stores but is not allowed to take input credit on cost incurred in construction of stores. Due to this, the cost base is significantly higher. Thus, it is recommended that GST law be amended to allow input tax credit for goods or services or works contract used for building construction of retail stores/ outlets.

2.4.10. Sales return to be eased

According to the GST law, returned goods necessarily should go to the destination from where goods were delivered originally. However, in case of multi-channel retailers it implies that goods returned by customer should be returned to central/regional warehouse which in most cases are across various states. The

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costs for such transportation is substantially high and many a times even higher than the actual value of the returned product. Thus, it is recommended to ease GST law to allow return of goods to the nearby store or company outlet.

2.5 Direct Tax Recommendations2.5.1. Relaxation in provisions of section 80JJAA

of the Income Tax Act

Section 80JJAA allows deduction for 30 per cent of additional employee cost subject to fulfillment of certain conditions like the total emoluments to the additional employee should not exceed `25,000 (€311.14) per month. The existing law should be relaxed and the emoluments per month should be increased to `40,000 (€497.83) per month.

2.5.2. Incentive to claim additional depreciation under section 32(1)(iia)

Generally in retail sector, companies do not invest much in plant and machinery and are hence deprived of the benefit of additional depreciation under section 32(1)(iia) of Income Tax Act as it is only restricted to plant and machinery. Considering the huge investment involved in furniture and fixtures in setting up the infrastructure in the stores and high maintenance cost incurred, it is recommended to allow additional depreciation on investment made in furniture and fixtures under section 32(1)(iia) of the Act.

3. GENERIC ISSUES AND RECOMMENDATIONS

3.1 Lack of Industry Status to Retail Due to lack of industry status, the retail sector

faces difficulties in procuring organized financing and fiscal incentives. The government should grant industry status to the sector with a clear articulated policy framework. Further, attempts must be made to ensure that there should be a single, nationwide retail sector policy. The same will ensure larger investments,

infrastructure creation for customer shopping experience, job creation, skill building and competence development in the sector.

3.2 Inflexible Labour Laws Few foreign investors view labour laws as

an obstacle in doing business in India. After agriculture, retail sector is a major source of direct employment and lack of investments in the retail sector may have an unfavourable impact on the unemployment conditions in India. These regulations vary from state to state and some of the contained in Shop and Establishment Act (SEA). The inflexible labour laws should be made flexible considering the demands of the industry and the same should be relaxed. In addition, the specified duration for which a store can operate (not for customers) should be made flexible considering the backend working involved which impacts the overall efficiency. Also, there is a need to allow female employees working till midnight after taking appropriate steps to ensure the safety of these employees.

3.3 Increase in Custom Duty Rate The finance minister vide Budget 2018-19

has proposed to increase the custom duty rate on various products like mobile phones, watches, perfumes, toiletry preparations etc. to incentivize domestic value addition. This is likely to lead to increase in prices of various products like perfumes, toiletries, sunglasses, footwear and toys etc.

Keeping in mind that India has large potential for these sectors, to boost these sectors, it is recommended that the custom duty be restored back at reduced rates so as to meet the demand. It is important to consider that in view of supply chain considerations, all goods cannot be manufactured in India and imports are essential to strike the balance between demand and supply ensuring good quality products at the same time.

Further increase in custom duty could lead to other countries effecting reciprocal increase in custom duty thereby impacting competiveness

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of Indian exports and have a detrimental impact on the Make in India programme.

3.4 Direct Selling The Ministry of Consumer Affairs has issued

an advisory to state government on the Model Direct Selling Guidelines on September 9, 2016. Since then, some of the states have adopted the same. However, these guidelines do not have any force of law. Thus, it is recommend to legally notify the guidelines to protect the interest of direct selling industry in India.

Further, the government has introduced the New Consumer Protection Bill in Lok Sabha on January 5, 2018 to provide for strict punishment and hefty fines for misleading advertisements and food adulteration. To provide relief to industry, it is recommended that Ministry of Consumer affairs to incorporate the following commercial practice as unfair in all circumstances, as adopted by the European Parliament in Unfair Commercial Practices (UCP Directive) 2005:.

“Establishing, operating, or promoting a pyramid promotional scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products”

3.5 Policy Induced Barriers Organized retail is regulated by Ministry

of Commerce & Industry and Ministry of Consumer Affairs, while the former administers the retail policy, the latter regulates retailing in terms of licensing and approvals. The sector is subject to complex regulations due to multiple ministries/ regulators. The development of the retail sector can take place at a faster pace if a comprehensive regulation is enacted. It is therefore recommended that central and state level consolidation of trade act must be effected by a single trade policy so that multiple acts and legislation can be unified. All trade related acts should be a part of a single trade policy.

3.6 Poor Supply Chain Infrastructure Lack of storage and transport logistics

often leads to wastage. Lack of cold chain infrastructure hampers development of food retail. Further, low internet penetration in rural areas is an obstructing factor for online retail industry. Thus, poor quality and irregular supply of infrastructure and intermediate services act as a major impediment for retail sector in India. There is therefore a need for growing allied infrastructure in the country.

3.7 Real estate concerns Escalating real estate prices and rentals in

large cities severely impacts profitability of retail companies. Further, lacking sophisticated retail planning is another major challenge since it is difficult to find suitable properties in central locations for retail, primarily due to fragmented private holdings, infrequent auctioning of large government owned vacant lands and litigation disputes between owners. It is therefore recommended that auctions sales even to a single bidder should be allowed, zoning laws be introduced to create ‘property banks’ suitable for the retail sector. Commercial zones could be split into retail with low floor space index (FSI) having high ground coverage and office, hotels with high FSI having low ground coverage. Excess FSI could be transferred to nearby plots for office, hotels and other adjacent components. Big box developments should be allowed in areas with lower FSI. This would help in investment in land or reducing rental costs providing a good mix of housing, workplaces and shopping on convenient walking distance.

3.8 Ease of Doing Business A major impediment for new entrants is coping

with procedures associated with starting and carrying on a business in India. According to the World Bank's Doing Business 2017 report, starting a business in India requires considerable time to get many licences and statutory approvals. While the government has taken various initiatives, it is recommended that

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a single window clearance for all licences and approvals be introduced for retailers to ease and accelerate the pace for doing business in India.

3.9 Municipal Laws Each municipal authority has their own laws

which are not transparent and not published. Therefore, there is an inconsistency in these laws across the country leading to difficulties for the retailers such as compliance requirements for trade licence, signage/name board licence/advertising permission etc. It is recommended that there should be consistency among laws of the different municipal authorities and clear guidelines should be provided.

4. CONCLUSION With tremendous potential, huge population

and high domestic consumption, the macro trends for the retail sector look favourable. Although the growth potential in the retail sector is immense, there are obstacles too, that could slow the pace of growth for new entrants and investment in the retail sector which are outlined in para 4.

In particular following issues that demand immediate attention of the Government of India are:

1. Clarity in local sourcing rules for FDI

2. Industry status for retail

3. Flexibility in labour law

4. Issues relating to labelling

5. Allowing foreign debt in the retail sector

We look forward to early implementation of the recommendations proposed in the position paper.

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Endnotes

1. https://www.atkearney.com/consumer-products-retail/global-retail-development-index by AT Kearney

2. http://www.ibef.org/industry/retail-india.aspx by IBEF

3. http://www.ibef.org/download/Retail-January-2017.pdf by IBEF

4. The Legal Metrology Act, 2009 read with the Legal Metrology (Packed Commodities) Rules, 2011

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TELECOMMUNICATIONS Acknowledgements: T V Ramachandran – Chairman, Satyen Gupta (Blue Town) – Vice Chair, Telecom Sector Committee & its Members

Draft by – Arun Mukarji

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EXECUTIVE SUMMARY

and in September we had a formal meeting with the additional secretary, telecom, Ministry of Electronics and Information Technology (MEIT) and his team for providing EBG’s inputs towards the National Telecom Policy (NTP) 2018.

As in 1999, India is today poised at a very critical juncture and the nation’s socio-economic progress will depend on some crucial decisions regarding the way forward in telecom, which needs to be made through NTP 2018. Only a new policy can bring the changes that can propel our country to a leadership position in the new digital economy. NTP 2018 assumes far higher importance than NTP 1999, which was the main reason for catapulting Indian mobile telecommunications from about 1 million connections to today’s level of about 1,200 million connections, the second highest in the world.

The key concerns that the policy could address for the sector’s growth and sustainability are as follows:

1. Spectrum Pricing: The telecom sector has a large debt burden of several lakhs of crores of rupees. The inter-ministerial group (IMG) has recognized this and a longer payment term for spectrum bought in auctions is being considered. However, over two-thirds of the debt of the industry is on account of payments for spectrum and unless this addressed, the sector would not improve in viability or sustainability. For correction of this aspect, the methodology of fixing reserve prices for auctions should be amended to be such as to relate to the market revenue potential and be reasonable enough

2017 has been a mixed year for the Indian telecom market with the entry of a new service provider with 4G technology for the first time leading to disruption of the market. The offering of freebies by the new player resulted in five times lower rates being offered for voice and data packages by the market than prior to their launch. The steep drop in tariffs led to consolidations in the sector which is a welcome result.

The Telecom Regulatory Authority of India (TRAI) has made a number of recommendations through 2017 on issues including ‘net neutrality’, interconnect usage charges (IUC), virtual network operators (VNO) policy, Ease of Doing Business, provisioning of free data, internet telephony, machine to machine (M2M) communications, cloud services, etc.

Sixteen telecom related consultations were published, eight of which were of interest to the group. Relevant ones answered were: net neutrality, VNO policy on Cat-B VNOs under unified licensing, privacy, security and ownership of data in telecom, spectrum auctions, local telecom equipment manufacturing, Ease of Doing Business and draft recommendations on Ease of Doing Business, data speed under wireless broadband plans.

As part of the effort to address member issues we have submitted our point of view on remote access to the Department of Industrial Policy and Promotion (DIPP) and Department of Telecommunications (DoT) and a meeting was scheduled in the first week of February 2018 by DIPP in response to our submission.

Committee meetings were held in the months of April, September, November and December through 2017

Telecom Sector 2017 at a Glance

2017 Gross Revenue Adjusted Gross Revenue

Licence Fee Spectrum Usage Charges

January – March `63,315 (€7.88 b) `40,831 (€5.08 b) `3,361 (€418.30 m) `2,148 (€267.33 m)

April – June `64,889 (€8.07 b) `39,788 (€4.95 b) `3,261 (€405.86 m) `1,309 (€162.91 m)

July – September `66,362 (€8.25 b) `41,669 (€5.19 b) `3,249 (€404.36 m) `1,256 (€156.32 m)

July – September Y-O-Y % Change

-7.03 -17.55 -20.57 -32.74

Note: ` in crore, b = billion, m = million

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to result in vibrant market discovery of the true price of the spectrum. In auctions so far about 40 per cent of the spectrum remained unsold and most of what sold went at the very high reserve prices fixed, with very little rise over the RPs. Unsold spectrum is also an irreparable loss to the nation in terms of missed socio-economic benefits.

2. Spectrum Usage Charge: Currently the recurring spectrum usage charge (SUC) payable are also very high and anomalous. Once spectrum is paid for through the price discovered in auction, it puts a double burden on the sector through levy of high SUC. Such a practice is not followed anywhere else. When spectrum is obtained through auction, the SUC levied should be just enough to cover the cost of administering and regulating spectrum.

3. Licence Fee Levies: It is anomalous to levy high licence fee recurring charges as percentage of adjusted gross revenue (AGR). As suggested for SUC, these could also be considered by policy to be just adequate to cover all costs of regulating and administering the licence.

4. Ease of Doing Business in Telecom: There are many opportunities to significantly improve the Ease of Doing Business through specific measures.

5. Migration to the New Policy: To achieve sustainability and vibrant growth of the sector, existing players need to be offered the option of migrating to the new policy under suitable terms and conditions. Without this correctly done, the existing players would be disadvantaged and, quite possibly, become further unviable. Government could aim to do this as a two-way settlement so that the migration package is not viewed as a sop to the industry, as it was done excellently in the case of NTP 1999. Apart from this aspect, the key principle in evolving the migration package is that it should work on ‘no

worse off’ basis for the existing players.

6. Data Protection and Privacy: After the Supreme Court’s landmark verdict on the right to privacy, India is now moving towards a legislation on data protection. The central government has set up an expert committee to study the different issues relating to data protection in India and make specific suggestions on principles underlying a data protection bill. Keeping in mind the fact that individual privacy is a fundamental right limited by reasonable restrictions, a white paper drafted by the committee of experts has been released by the MEIT on a data protection framework which is aimed at securing digital transactions and addressing customer privacy protection issues.

The comprehensive 240-page document studies various data protection laws across the globe. It actually stipulates various arguments around consent and notice, what constitutes personal and sensitive personal information, data minimization, roles and responsibilities of data controllers and data processors, issues involving individual rights, allied laws, data localization and cross-border data flows, enforcement mechanism viz. creation of an ombudsman, and code of conduct including obligations and penalties etc. The committee constituted by the government is chaired by a former Supreme Court judge and comprises the secretary, telecommunications, chief executive, Unique Identification Authority of India (UIDAI) and the additional secretary, MEIT, and some other experts on data and cyber security.

The MEIT held public Open House consultations through January 2018 in New Delhi, Hyderabad, Bengaluru and Mumbai to gather horizontal and vertical views from all sections of the civil society, industry and others.

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1. INTRODUCTION The year 2017 could be termed as a great

year of contrasting happenings for the telecom sector – one of turbulence and disruption but also of a shower of customer benefits; of financial stress and much-needed consolidation but also a remarkable technological leap to 4G; of decline in traditional voice but phenomenal rise in data; and, last but not the least, India making giant strides – milestones like a billion connections with lowest mobile voice and data tariffs, nearly 300 million smartphone users, over a hundred handset assembly units – to become the world’s second largest telecom powerhouse.

The transformation in data uptake following the entry of the new service provider has been nothing short of remarkable. As per venture capital investment firm, Kleiner Perkins Caufield & Byers, wireless data usage shot up over six-fold from about 200 million gigabyte (GB) a month in June 2016 to 1.3 billion GB a month by March 2017. The year has seen not just a sharp increase in data usage but, importantly, a very big growth in data-based services (rich interactive apps), bandwidth intensive music and video streaming applications. India is now one of the biggest data consuming markets in the world.

For over a decade, experts and industry players have been concerned over the fragmentation of the market due to too many players (about nine or more) whereas even the HHI Index calculated by the regulator (TRAI) and DoT shows competition is optimum with four, or a maximum five, players. Due to excessive competition, the viability of most of the operators has been steadily declining juxtaposed with a continuously-rising level of financial stress in the industry.

With the entry of the new player, the incumbent market leaders have seen a reduction of as much as 35 per cent in operating profit and around 10-percentage-points contraction in operating margins as they looked to match

the cost of the new players’ services, initially free and, later, in the form of ultra-cheap pricing. Incumbent operators rushed to cut tariffs in response to free services offered by the new player for the first six months, and then offered cut-rate data services. The price wars left operators struggling to repay debt even as the Reserve Bank of India (RBI) urged banks to set aside higher provisions to deal with bad loans in the telecom sector. The entry of the new player has triggered the process of direly-needed consolidation in the industry which may ultimately leave about four players.

The year also witnessed the commencement by DoT of bringing out a NTP to be released in 2018. DoT has begun a very comprehensive exercise for collecting, collating, analysing input on various areas that will have a bearing on telecom policy and formed 12 sub-groups.

On the regulatory side, too, there was a plethora of comprehensive consultations, recommendations and regulations like in no single year ever before. There was a mobile termination charge regulation that crashed has charges by over 50 per cent to 6 paise per minute now and with a subsequent proposal to make it zero in two years, it has caused much tumult in the industry. Other noteworthy recommendations include, inter alia, liberalization of public Wi-Fi which is a pre-requisite for broadband proliferation and Digital India, ease of doing telecom business, internet telephony, M2M communications, and, importantly, net neutrality. The last-mentioned recommendation has, most unambiguously, upheld the ‘Open Internet’ principle and reaffirmed the commitment to net neutrality.

2017 was also the launch pad of another great ambition for the future, namely 5G. In a most commendable initiative, the government has set up a 24-member high level forum for 5G India 2020. Widely recognized world over, 5G is the next technological frontier which takes us to a brave new world involving the internet of things (IoT) everywhere, fixed mobile convergence, artificial intelligence,

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virtual reality and augmented reality, etc. that is several orbits above the incremental steps of 2G to 3G to 4G. For India, 5G will fundamentally impact the various national mission mode projects. It would provide a new dimension to the Digital India, Smart Cities, and Smart Villages missions. It could potentially make huge contributions to the Make in India and Startup India missions also. The objective in setting up this High Level 5G Forum is to position India as a globally synchronized participant in the design, development and manufacturing of 5G, products and applications. The terms of reference of this multi-stakeholder forum are: To develop the vision, mission and goals for 5G India 2020 and to evaluate and approve roadmaps and action plans for 5G India 2020. The first meeting of this body was held on December 13, 2017 and slated to develop a concrete action plan in ensuing meetings.

2. TRENDS AND OPPORTUNITIES

The Indian telecom sector shaped by consumer demand, innovation and competitive forces offers tremendous growth opportunities. Recently, India with over 300 million smartphone subscribers, outpaced the United States, to become the second largest smart-phone subscriber base in the world. The mobile industry in India, currently contributing 6.5 per cent (€130 billion) to the country’s GDP, and employing over 4 million people (direct and indirect), is projected to grow rapidly in the coming years. By 2020, the industry is expected to contribute 8.2 per cent to the country’s GDP. In terms of unique mobile phone subscribers, India is expected to cross the 1 billion mark by 2020.

The total mobile services market revenue in India is expected to touch US$ 37 billion (€29.99 billion) in 2017, registering a Compound Annual Growth Rate (CAGR) of 5.2 per cent between 2014 and 2017, according to research firm IDC.

India is the world’s second-largest telecom

market, with over 1.21 billion subscribers as of July 2017. The wireless segment (98.02 per cent of total telephone subscriptions) dominates the market. It has also been growing at a brisk pace. During financial year (FY) 2007-17, wireless subscriptions witnessed a CAGR of 21.64 per cent to reach 1,170.2 million subscriptions. India is also the second largest country in terms of internet subscribers. The country is now the world’s second largest smartphone market and will have almost one billion unique mobile subscribers by 2020. Revenues from the telecom equipment sector are expected to grow to US$ 26.38 billion (€21.38 billion) by 2020.

India’s telecom market is expected to experience further growth, fuelled by increased growth in data and data based services revenues and higher penetration in rural market. Telecom penetration in the nation’s rural market increased to 57.45 per cent by July 2017. The emergence of an affluent middle class is triggering demand for the mobile and internet segments. Strong policy support from the government has been crucial to the sector’s development. The foreign direct investment (FDI) cap in the telecom sector has been increased to 100 per cent from 74 per cent.

2.1 Broadband According to a recent report by TRAI, the

fastest 4G mobile service provider had an average download speed of 18.8 megabytes per second (Mbps) in June 2017.

However, India was ranked 89th globally in broadband internet speeds with an average connection speed of 6.5 Mbps, according to the State of the Internet, Q1 2017 connectivity report by Akamai Technologies which is below the global average connection speed at 7.2 Mbps. By comparison, informs the same report, in the United States, 25 Mbps is the minimum to qualify as ‘broadband’, which is 50 times higher than the requirement in India.

The statistics underline the challenge that India faces in materializing the Digital India project,

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which aims to universalize mobile and internet access across the country.

To improve internet speeds in the country, the government must work on a few aspects. A low-hanging fruit is spectrum reform: there is an urgent need to increase amount of unlicensed spectrum in India. NTP 2012 provides for spectrum pooling and sharing, but the 2015 spectrum sharing guidelines need further liberalization.

A strong increase in the telecom subscriber base has necessitated network expansion covering a wider area, thereby creating a need for significant investment in telecom infrastructure. However, the fixed line market in India remains highly underdeveloped due to the dominance of the mobile segment.

Rather than a focus only on growth in subscribers the market is shifting to value-added. The roll-out of 4G/LTE (long-term evolution) services is driving significant shift to mobile data services across the country.

Indian broadband subscriptions have registered more than 85 per cent growth on a yearly basis to over 300 million users.

Mobile accounts for nearly 80 per cent of web traffic in India, one of the highest globally.1

2.2 National Optic Fibre Network (NOFN)/BharatNet

The BharatNet project, which aims to deploy high-speed optical fibre cable (OFC) network

across rural areas of the country, has now crossed 100,000 service ready gram panchayats (GPs).

• Plan is to provide Wi-Fi facility to 550,000 villages by March 2019 for an estimated cost of `3,700 crore (€460.50 million).

• The second and final phase of BharatNet project commenced on November 13, 2017 – with an outlay of around `34,000 crore (€4.23 billion) – to provide high-speed broadband in all GPs by March 2019. Telecom service providers (TSP’s) are expected to provide at least 2 Mbps speed to rural households.

• Aim is to connect 1.5 lakh (150,000) GPs through 10 lakh (1 million) kilometres of additional optical fibre and using alternate technologies like wireless and satcom so as to provide bandwidth to telecom players at nearly 75 per cent cheaper price for broadband Wi-Fi services in rural areas.

• The total project cost of BharatNet is around `45,000 crore (€5.60 billion), of which `11,200 crore (€1.39 billion) have been used for the first phase. After rural exchange rollout in the country when telecom services started, this is the biggest project involving domestically manufactured products for the entire project.

The BharatNet project will be the biggest user of Made in India equipment, ruggedized to suit the Indian rural conditions. Both the fibre and the Gigabit-capable Passive Optical Networks (GPON) equipment are fully made in India with C-DOT (Centre for Development of Telematics)

S.N. Description of Work Status

1. OFC pipe laid 260,081 km (114,922 GPs)

2. OFC laid 2,57,694 km (110,672 GPs)

3. Tenders finalized 3,334 Blocks / 1,24,757 GPs

4. Work started* 3,276 Blocks / 1,21,915 GPs

5. Current weekly performance of OFC laying 936 km

6. Current weekly performance of OFC pipe laying 534 km

7. OFC delivered on site 318,909 km

8. Service ready GPs 101,733 GPs

STATUS OF BHARATNET AS ON 14.01.2018 (AS PUBLISHED ON BBNL WEBSITE)

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technology. This is significant because the equipment is completely indigenous and has been customized so that it can work in rural environments, where there are power issues and dust is a big factor.

2.3 Spectrum Auctions It is widely recognized that broadband

communications networks are required to support economic growth in information-based economies such as India. Spectrum is the most important ingredient of the telecom policy of a country and spectrum assignments for broadband and other services will have a crucial role to play in delivering desired broadband outcomes and achieving the objectives of Digital India.

Spectrum’s greatest value comes from its usage rather than from the short-term revenues generated by its sale. Short-term revenue generation must be balanced with the subsequent infrastructure investments to be made by operators to make mobile broadband available to the Indian people. Mobile operators in India have been faced with high financial burden which, in turn, impact their ability to make the investment required to upgrade consumer services, meet demand in highly populated urban areas and, expand networks to provide coverage to people living in rural areas. At the same time, insufficient unlicensed spectrum has limited Wi-Fi and other deployments that complement carrier use of licensed spectrum.

In early September 2017, an IMG started looking into the telecom sector’s financial health. They suggested that the next spectrum auction should not be held this fiscal through March, but in FY 2019, after 20 units of 4G spectrum in the 2,300 megahertz (MHz) band is available, post-harmonization, a process that might take a year.

The sector regulator has floated a discussion paper seeking comments on the timing, pricing and quantum of spectrum to be sold in the next round of auctions, which could see 5G airwaves making their debut.

TRAI’s discussion paper had invited views on 5G spectrum caps and rollout obligations, besides pricing of 4G airwaves in seven bands, including the 700 MHz band that went unsold in the last auction. It has also sought stakeholder views on whether valuations for 5G bands should be derived from other airwave bands using a technical efficiency factor.

The sector regulator has also sought industry feedback on whether it is desirable to auction all available spectrum or opt for a phased auction based on the requirements of the industry.

The regulator is seeking telecom operators’ views on block sizes and minimum quantity for bidding on 700 MHz, 800 MHz, 900 MHz, 1,800 MHz, 2,100 MHz, 2,300 MHz and 2,500 MHz bands as well as in the 3,300-3,400 MHz and 3,400-3,600 MHz bands, which are proposed to be auctioned for the first time.

TRAI also wanted to discuss if there is a need to review the rollout obligations, which is one year from the effective date of licence or the date of assignment of spectrum won in the auction process, whichever is later. TRAI also wanted to review the current spectrum cap, which bars a company from holding more than 50 per cent spectrum in a particular licence area and 25 per cent spectrum in aggregate.

EBG has suggested in its response that all available spectrum should be auctioned together. There are crores worth of spectrum lying idle from previous auctions which should be made available and utilized by the operators as idle this spectrum is a loss to the exchequer.

On block size and quantity for bidding on 700 MHz, 800 MHz, 900 MHz, 1,800 MHz, 2,100 MHz, 2,300 MHz and 2,500 MHz bands EBG agreed with the previous auction size and quantity but for the 3,400-3,600 MHz, EBG suggested that since in May 2014, the European Commission adopted Decision 2014/276/EU11 which stated that the preferred duplex mode of operation in the 3,400-3,600 MHz sub-band shall be time division duplex (TDD). TDD may be preferable to frequency division duplex (FDD) mode as the centre gap of FDD will reduce spectrum availability

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as indicated in the consultation also. Blocks are being assigned in contiguous manner worldwide to ensure harmonization from word go in this fresh bandwidth. Harmonized frequency arrangement facilitates economies of scale resulting in the availability of affordable equipment’s. Accordingly, multiple consecutive blocks of 20 Mhz (TDD) size may be purchased by each operator through auction process.

On the issue of rollout obligations EBG suggested that when spectrum is allocated through market driven auctions, full market value for spectrum has been extracted by the government through an open market process and there is no justification for any rollout obligations. Therefore, no rollout obligations should be specified and the market forces should determine the rollout. Rollout obligations should be reasonable and should be comparable to global norms.

TRAI is consulting operators after a tepid response to the 2016 auction, when only 965 MHz out of a total of 2,354.55 MHz spectrum was sold for `65,789.12 crore (€8.18 billion). The money raised was a fraction of the `5.63 trillion (€70.07 billion) (at base price) of spectrum for sale.

TRAI, in the consultation paper, has acknowledged the industry’s poor financial health, massive debt of `4 trillion (€49.78 billion) and its commitment to pay `3 trillion (€37.34 billion) in deferred payments to the government for the purchase of spectrum rights in recent auctions.

The TRAI has concluded the Open House on the above consultation and is now in the process of finalizing its recommendations. It has given its opinion in response to a letter from DoT on September 29, 2017, as a follow up of the IMG report, on issues related to spectrum cap. TRAI has recommended that the current intra-band cap should be removed. Instead, there should be a cap of 50 per cent on the combined spectrum holding in the sub1 gigahertz (GHz) bands (700 MHz, 800 MHz and 900 MHz bands). The TRAI is of the view that principles applied in the notice inviting

applications (NIA) of August 2016 for the calculation of spectrum cap may continue to be applied while calculating revised overall as well as sub-1 GHz spectrum cap.

2.4 Make in India Scheme A big boost to Make in India was given on

November 12, 2017, when it was announced that the BharatNet project, will be the biggest user of Made in India equipment, ‘ruggedized’ to suit Indian rural conditions. Both the fibre and the GPON equipment are fully made in India with C-DOT (Centre for Development of Telematics) technology.

This is significant because the equipment is completely indigenous and has been customized so that it can work in rural environments, where there are power issues and dust is a big factor. No foreign companies will be allowed in the future for broadband connections as it will be all Made in India equipment – GPON, optical line terminals, and optical network terminal.

India is on the threshold of major reforms and is poised to become the third-largest economy in the world by 2030. In the words of our Hon’ble Prime Minister, India offers the 3 ‘Ds’ for business to thrive – democracy, demography and demand. Add to that a tech-savvy and educated population, skilled labour, robust legal and intellectual property rights (IPR) regime, and a strong commitment to calibrated liberalization. India’s manufacturing sector has evolved through several phases – from the initial industrialization and the licence raj to liberalization and the current phase of global competitiveness.

An export-oriented strategy is essential for the high-end telecom manufacturing sector to achieve the necessary volumes to be globally competitive, thereby creating larger number of jobs, building capabilities within the country and creating pull for local component suppliers to establish and grow.

There is a unique value-addition of advanced global telecom manufacturing coming into the country. The co-location of research

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and development (R&D) and high-tech manufacturing leads to a fly-wheel effect, resulting in faster product development and accelerated time-to-market. This builds the ecosystem and achieves self-sustainable continuous growth.

Incentivisation of local R&D would perhaps be possible through two ways:

a) Remove all barriers for setting up global R&D hubs, and

b) Incentivizing the process of setting up local R&D hubs by facilitating research, innovation, IPR creation, providing for a R&D fund, et al.

A telecom R&D fund should be set up which should be utilized for research, IPR creation and development activities. The fund should help provide soft-loans, grants, reimbursement of R&D expenses, IPR filing and renewal fee and for financing R&D projects.

For India to attain leadership in the area of manufacturing at a global level, it must have a strong R&D base. To attain leadership in R&D in new technologies, India needs to become a global R&D hub.

As the telecom industry is a fast paced and fast changing industry, we need to ensure that we provide all support to step up the R&D capability to keep pace with the rapid change of technology. The procedures for import of capital equipment to set up R&D labs out of India need to be simplified and facilitated as lack of which is likely to be detrimental to the growth of telecom infrastructure and deny India the opportunity to possibly become a global telecom R&D hub and in particular may lead to loss of a big opportunity in wake of development work on 5G.

Incentives offered for manufacturing

• Skill Development

Skilled manpower is one of the drivers in the overall growth of the telecom sector. Rollout of 4G technology with an increase in data, entry of new players in the market, introduction of digital wallets, popularity of smart phone leading to consistent increase in demand for

such technology and other developments in the sector are speculated to increase job opportunities by 20 lakh (2 million) in the year 2017 itself. Also, emerging technologies such as 5G, M2M and the evolution of information and communications technology (ICT) are expected to create employment avenues for almost 870,000 individuals by 2021. The existing manpower in the sector may not be adequate both in number as well as in skill to cater to the upcoming demand. There is need to bridge the gap in skill which on the one hand would require identification of skilled manpower in diverse roles such as infra and cyber security, application developers, sales executives, infrastructure technicians, handset technicians etc. as well as reskilling of existing manpower working on existing technologies updating them with the upcoming requirements. Government initiatives such as Skill India have been implemented for the ease of providing sufficient and appropriate manpower to the telecom sector, among other sectors. The Telecom Sector Skill Council (TSSC) has been set up to cater to the demands and skill needs of the telecom sector. However, the Industry recommends more targeted and specialized skill development programmes that would enhance existing manpower capabilities and availability to ensure uninterrupted development of the sector as a whole.

• Ease of Doing Business in India

The government has fast-tracked reforms in the telecom sector and continues to be proactive in providing room for growth for telecom companies. Some of the other major initiatives taken by the government are as follows:

The Government of India has liberalized the payment terms for spectrum auctions by allowing two options of payments to telecom companies at the time of acquiring the right to use spectrum, which includes upfront payment. The DoT has amended the Unified Licence (UL) and International Long Distance Licence for telecom operations which will allow sharing of active telecom infrastructure like antenna, feeder cable and transmission

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systems between operators, thereby lowering the costs of operations and leading to faster rollout of networks.

The DoT has taken several steps by making the necessary policy changes. The wireless operating licence has been abolished, SACFA (Standing Advisory Committee on Radio Frequency Allocation) process has been made online (no documentation required), e-KYC has been introduced for a completely paperless subscriber verification process that mitigates penalties and substantially reduces operational cost, the rollout procedure has been simplified with self certification of maps, a 10 per cent samples testing and 80 per cent reduction in test fee, the lock-in condition for equity reduced to one year, etc.

TRAI has recently taken up on priority the consultation on Ease of Doing Business in India in order to support unhindered growth of the telecom sector and, TRAI has issued the following recommendations recently:

i. The Authority recommends that the entire process of SACFA clearance as well as grant of all licences/approvals issued by WPC, should be made paperless and executed end-to-end through an online portal. Upon successful implementation of online portal, DoT may also review the SACFA fee being levied upon the TSPs. Further, there should be a defined timeline, not exceeding 30 days, within which an import licence should be granted.

Reinstalling/redeploying of wireless equipment by TSP into another LSA may be allowed after giving prior intimation to WPC, preferably through the online portal rather than taking prior permission of WPC for this purpose.

ii. Applications for demonstration licence and experimental licence should be processed and the licence should be granted within a maximum period of 15 days and 30 days respectively. This time period should be declared on the portal as well as in citizen’s charter.

With regard to transfer/merger of licences

it is recommended that, when licensor is notified about the merger proposal of companies as filed before the tribunal, the merger of licences also takes place during the stipulated window of 30 days.

If the merger results in excess spectrum holding beyond permissible spectrum cap, the resultant entity should be given an option to either surrender or trade its spectrum holding, within the stipulated period of one year.

Transfer of spectrum may be made easier where the transferee company/resultant entity should be liable to pay the differential amount for the spectrum assigned against the entry fee paid by the transferor company from the date of written approval of transfer/merger of licences by DoT.

iii. Also, it is recommended that spectrum trading should be permitted in all the access spectrum bands which have been put to auction.

iv. The Authority recommends that consequent to the implementation of the online portal Tarang Sanchar, DoT may review (a) the need of revised certification by all the TSPs for every base transceiver station (BTS) upon upgrade by any TSP on a shared site and (b) calling biennial certification for all the existing sites of every TSP.

v. It is recommended that the process for release of performance bank guarantee (PBG) upon completion of five stages of rollout be streamlined and the steps have been further recommended to improve the process. The Authority recommends that PBG for a particular phase of rollout obligations should be released after successful certification by the Telecom Enforcement Resource and Monitoring (TERM) Cell.

While the points given above cover a number of issues concerning the telecom industry, there are still unanswered issues which we had listed in last year’s position paper. However, the good news is that the with the open-minded

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approach taken by DoT and the TRAI to truly understand the industry issues with a view on forming the new National Telecom Policy, they have tried to cover all aspects including inter-ministerial gaps, issues on imports, preferential marked access (PMA), R&D labs. Some of the issues faced are:

i. Setting up of R&D Labs: Ease of import of used R&D equipment: As per the existing policy dictated and controlled at the behest of Ministry of Environment and Forest (MoEF), MEIT, DoT, Ministry of Communications (MoC) as the nodal ministry, old equipment of more than one year age is not permitted to be imported into India for the purpose of setting up R&D labs. Even if the equipment is less than one year old, the same equipment shall not be permitted to be in country for a period of more than three years. Such restrictive rules and policies may be detrimental to the Ease of Doing Business as equipment imported for this purpose is usually required for longer durations which run up to 5-10 years.

Global companies are establishing R&D labs in India and R&D projects typically use old capital equipment. Capital goods for R&D purposes with no further sale or commercial transaction should be free to import and it should be free from any re-export obligation. Else global companies would be forced to move out the R&D operations to other suitable locations.

ii. Exports and imports take longer for clearances versus other countries which take only 1-2 days: To keep mobilizing the industry and economy, availability of customs clearance 24x7 all around the year would be very beneficial. This will be a very important step in optimizing productivity of the country and economy and ensuring that resource wastage and idling due to unavailability of material because of long Customs holidays becomes a thing of the past.

iii. TEC (Telecom Engineering Centre) Interface approvals – Interface approvals

requirement for the point of interconnect (PoI) with BSNL and MTNL should be discontinued. Time required for this approval stretches beyond one year at times and DoT need to review this practice and discontinue it. Operators have a robust system under which every node is thoroughly tested before induction. No testing is required if two private operators interconnect, hence there is no rationale for this to be mandatory for PoI with BSNL and MTNL.

2.5 Net Neutrality TRAI held three Open House discussions this

year at three major cities in India to take inputs of stakeholders and the public on net neutrality: in (1) Mumbai, May 26, 2017 (2) Bengaluru, July 25, 2017 (3) New Delhi, August 30, 2017.

TRAI recommendations were announced on November 28, 2017. The Authority has recommended an amendment to the licence agreements to clarify the principle of unrestricted access given under the appropriate licence agreements. It has also expressed other views relating to the applicability of the principle; acceptable traffic management practices and permissible exceptions. However, the Authority notes that these recommendations are being made without prejudice to the powers and functions conferred upon it under the TRAI Act, 1997, including on issues relating to quality of services, consumer protection, transparency, and monitoring of compliance.

Recommendations on principle of non-discriminatory treatment, application, exclusions and exceptions. The Authority recommends that the terms of various licence agreements governing the provision of internet services in India (UL, VNO licence, UASL – Unified Access Service Licence and CMTS – Cellular Mobile Telephone Service) be amended in order to incorporate the principles of non-discriminatory treatment of content by Internet Access Services along with the appropriate exclusions and exceptions. This will also help in building uniformity in the terms

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governing the provision of Internet services by different categories of licensees.

Recommendations on applicability to Internet of Things (IoT) and specialized services. The Authority recommends that:

a) The provision of any specialized services, should be explicitly excluded from the principle of non-discrimination.

b) Further it recommends that specialized services should be provided only if:

• such services are not usable or offered as a replacement for Internet Access Services; and

• the provision of such services should not be detrimental to the availability and overall quality of Internet Access Services. This could be monitored using various quality of service parameters.

The Authority recommends that content delivery networks (CDNs) should not be included within the scope of any restrictions on non-discriminatory treatment, which are designed specifically to cover the providers of Internet Access Services.

Recommendations on transparency and disclosures. The Authority proposes to supplement its existing disclosure and transparency requirements by framing additional regulations in this regard.

Recommendations on monitoring and enforcement. The Authority recommends that for monitoring and enforcement, DoT may establish a multi-stakeholder body with framework for collaborative mechanism among the stakeholders. The terms, conditions and governance structure etc. would be recommended by TRAI once this recommendation is accepted by the government in principle.

2.6 M2M/IOT DoT also released draft ‘M2M Service Providers

Registration Guidelines’. DoT sought from TRAI its recommendations on roaming issues, spectrum requirement and quality of service

(QoS) in M2M communications.

The regulator has released its recommendation on its consultation on September 5, 2017 on ‘Spectrum, Roaming and QoS related requirements in Machine-to-Machine (M2M) Communications’ on the following issues.

All existing telecom service providers can be allowed to provide M2M or IoT solutions within their specified circle of operations, TRAI said in its recommendations. Licence holders can use existing spectrum to provide IoT services while TRAI is also considering de-licensing spectrum under the 867-868 MHz, 915-935 MHz and 57-64 GHz bands for M2M and IoT.

The regulator has also put forward recommendations on SIM roaming, QoS levels, privacy, security, and other aspects of IoT/M2M as listed below. (Note that these recommendations will be reviewed and approved by DoT and are not yet enforced.)

Who can provide M2M/IoT services?

• DoT licence holders including VNOs.

• Critical IoT/M2M services should be provided under licensed spectrum. Therefore, these critical services should be provided only by robust wired optical fibre, copper network or LTE-capable access networks.

• Each sector can have its own IoT regulations: IoT and M2M services are still at a very nascent stage in India. Industry regulators (apart from TRAI) like the Central Drug Standards Control Organization, National Highways Authority of India, Inland Waterways Authority of India, Central Electricity Regulatory Commission, etc. and Ministry of Law and Justice can constitute their own regulations and policies regarding M2M and IoT solutions.

• New M2M Service Provider (MSP) category: TRAI wants M2M/IoT providers to identify themselves as an MSP legally. Because some telecom providers might also provide telebanking, e-commerce, call centre hosting, vehicle tracking, etc. but these will be classified under Other Service Providers (OSP) list. Exclusive guidelines for MSP registration should be issued. MSPs should also provide

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details of the connectivity provider who would be providing connectivity to their M2M application, TRAI added.

1) Security and privacy recommendations for IoT/M2M providers

• ‘Security by design’ principle: TRAI calls upon the government (DoT) to create fresh guidelines for manufacturing and importing of M2M/IoT devices to India. These guidelines should look “the amount and sensitivity of data collected and the costs of remedying the security vulnerabilities.” At the same time, ‘low-risk’ IoT devices (like LED bulbs) need not be burdened with too much regulation, so the government could look at creating a ‘graded’ level of security certification for devices.

• Standards for IoT and M2M systems: Since most of the M2M applications “would be operating in (an) unlicensed band, the government should issue specific standards for devices to be used in the M2M ecosystem, in line with international standards organizations,” TRAI added. For this, the regulator suggests setting up an independent IoT/M2M certification body which certifies both hardware and software segments.

• Special security recommendation for the Northeast and Jammu and Kashmir (J&K): “Suitable security mechanism similar to the existing mobile networks shall be put in place by the DoT for the border states like J&K and NE areas, if deemed

fit,” TRAI said.

2) Entry fee, bank guarantee, network requirements etc. for M2M and IoT licence

Existing and new operators can get licences from the DoT under different categories including:

• UL (M2M) Category ‘A’ for national area

• UL (M2M) Category ‘B’ for telecom circle/metro area

• UL (M2M) Category ‘C’ for city bases coverage

3) Spectrum availability, usage and SIM requirements

• Spectrum allocation should be technology and service neutral: No separate spectrum band should be allocated exclusively for M2M services, TRAI said.

• Requirement of fresh spectrum: Requirement of additional licensed spectrum for access services to meet the projected influx of connected devices due to M2M communication will be revisited by the Authority after 2019. TRAI added “licensed spectrum available with the telecom service providers as on date as well as the spectrum likely to be made available in the near future is sufficient” to meet spectrum requirements for IoT and M2M.

• Imported SIM cards can be allowed for M2M/IoT: “It should not be mandatory to use only domestically manufactured SIMs in M2M. Embedded SIMs with standard

Table: Entry Fee, PBG or FBG, Net worth, equity for UL (M2M)

Sl. No.

Service Authorization

Minimum Equity (Rs. Cr.)

Minimum Net worth (Rs. Cr.)

Entry Fee (Rs. Cr.)

PBG (Rs. Cr.)

FBG (Rs. Cr.)

1 UL (M2M) "A" (National Area

Not prescribed Not prescribed 0.30 2.00 0.100

2 UL (M2M) "B" (Telecom circle/Metro Area)

Not prescribed Not prescribed 0.020 0.100 0.100

3 UL (M2M) "C" (SSA)

Not prescribed Not prescribed 0.002 0.005 0.001

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specifications can be imported and relevant information shall be submitted by importer while import of the devices/SIMs,” TRAI said.

4) Roaming and sharing arrangements

• National roaming for M2M/IoT shall be under forbearance and the rates can be set under current Telecom Tariff Orders (TTOs) for access service (voice/data) licence holders, TRAI said. TRAI, however, added that it will review and issue separate TTOs for M2M and IoT providers “at an appropriate time in future, if deemed fit.”

• Sharing arrangements: Telecom service providers (who want to provide IoT/M2M) can separately enter into commercial agreements to meet their roaming requirements for subscribers within India and outside India.

2.7 Smart Cities The Ministry of Housing and Urban Affairs has

till now announced the names of 90 cities that the government aims to help under the Smart Cities scheme. Under the scheme, each city will get `500 crore (€62.22 million) as central assistance for implementing various projects. There are about 3,000 projects worth `140,000 crore (€17.42 billion) at various stages of implementation under the scheme. Ninety smart cities have identified 2,864 projects. Of these, 148 projects worth `1,872 crore (€232.98 million) have been completed. Work on another 407, accounting for about 14 per cent of the total investment envisaged under the mission, has started. About 72 per cent of the identified projects are still at the stage of preparation of detailed project report.

Two-and-a-half years after announcement of the Smart Cities Mission, 5.2 per cent of the total identified projects have been completed with just 1.4 per cent of the total envisaged investment of `135,958 crore (€16.92 billion). Many projects are stuck as local governing bodies are unable to raise money using their own resources. Many cities are also facing resistance in execution of projects as citizens

have opposed user charges for services provided under the mission.

Ideally, it is easier to build new smart cities rather than transform old ones. However, in the Indian context, upgrading cities is as imperative, and it may take several years to accomplish it. A lot hangs in the balance for the Smart Cities Mission as 63 per cent of the country’s GDP is generated in these cities. With 70 per cent of the country’s new employment expected to be generated in urban areas by 2030, it’s time our cities got ‘smarter’.

Recently fresh efforts have been infused as twenty cities across three the Indian states of Punjab, Haryana and Rajasthan are likely to have a fast-track development under a new Indo-Canadian initiative to train smart city planners on capacity-building and governance, reform implementation, water supply, sewerage amongst others. The proposal aims at training at least 150 official urban planners and designers and build localized platforms and tools for efficient and predictable planning and execution of smart cities.

Telecommunications Standards Development Society, India (TSDSI) the Indian Telecommunications Standards Development Organization (SDO) under DoT, MoC, shall continue working if already started working or kickstart activities around the standardization of emerging technologies such as below to keep a pace with technological evolution:

• Future Network: NFV/SDN, Multi Access Edge Computing, mmW, 5G, Artificial Intelligence (Cognitive N/w), Smart Card (eUICC), m-Wallet (Fin-Tech) etc.

• Future Internet: Internet Protocol, IPv6 etc.

• Next Generation of M2M/IoT: Industrial IoT (Wireless Industrial Automation), Smart Appliances, Body Area Network (eHealth), ITS etc.

• Next Generation of Fixed Line: DECT, UWB, DSL, PLT etc.

• Open System, Open API, and Open Data

• Security: Telecom Security, Cyber

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Security, Quantum Safe Computing, Block Chain, Electronics Signature, LI for new technologies, Advanced Security Algorithm – Ciphering, Encryption etc.

• Smart Cities: Big Data, Deep Learning, Context Information Modelling etc.

• Sustainability: Energy Efficiency in ICT

• Society: Accessibility [ICT for all – Disability], Active Assisted Living etc.

Also considering the reality of convergence, TSDSI shall consider including topics of:

a. Satellite communication

b. Mobile and broadcast convergence – media quality, broadcasting and user experience,

c. Protection and right mechanism, data privacy etc.

2.8 5G and Standardization India is getting future ready and has started

serious work on identifying and formalizing the standards for the rollout of 5G.

The key drivers for 5G rollout and adoption will be an anticipated increase in data consumption, increasing digitized life and services, growth of smart cities and the need to have an all-encompassing network architecture which can utilize all available spectrum band rather than replace existing networks.

Connected devices, digitized lifestyle where almost all aspect of human life will be consumed digitally, calls for a paradigm shift in telecommunications ecosystem.

Telecom services will migrate to 5G architecture sooner or later, and time has come to start serious preparation for standardization and network upgradation.

The Telecommunication Engineering Centre (TEC) is the nodal agency of the DoT, MoC which is responsible for drawing up of standards; generic, interface & service requirements and specifications for telecom products, service and networks.

Ericsson has partnered with Bharti Airtel on 5G technology for their India operations towards creating a strategic roadmap for evolution of the network to the next-gen 5G technology. Ericsson also partners with IIT-Delhi on 5G testbeds. Earlier this year, Bharti Airtel had inked a similar pact with telecom gear maker Nokia to expand their partnership to areas like 5G technology standard and management of connected devices.

India has the potential to be one of the global frontrunners in 5G. The High-Level Government Forum set up to chart the actions in this area is clear evidence of the government’s top priority thrust for this. India can match – if not better – what happened in 1992/1993 when DoT charted the course for leapfrogging the analog era and going straight into the GSM digital age at a time when GSM was not even commercially launched anywhere in the world. Likewise, although 5G standards still in the process of finalization, we can start our journey now to take India to a 5G leadership position. With our unbeatable combination of Digital India, a 1.3 billion population and being the nation with the youngest workforce, our initiatives on 5G could well decide the way global standards play out.

India doesn't want to miss the opportunity this time like in case of 2G and 3G, where it lagged behind other countries. For 5G, India wants to become a leader and have its own standards and IPR that will become part of the 5G global standards.

As India aims to become a leader in 5G, the government is working to create a `500-crore (€62.22 million) fund for development of the technology and it has also created a high-level committee to work on a roadmap for the rollout of 5G by 2020.

The committee or forum will primarily look at three things. First, the committee will look at developing use case scenarios because the industry needs to be prepared in terms of knowing how to use 5G technology and where it will be deployed, among other things. These areas need to be defined.

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Second, the forum will work on a roadmap on how to get the ecosystem ready like the various device manufacturers, platform providers, various tools and technology providers – all of that has to be ready.

The third thing the committee will look into is the regulatory work which is also going to be involved like what is the spectrum band for 5G; how can it be made affordable; what kinds of regulations need to be changed and what security standards have to be applied.

Areas like IoT, robotics, artificial intelligence (AI), M2M are going to be critically dependent on 5G. Since India is already looking at all these areas and has significant software capabilities (5G will be software driven), India looks to position itself as a leader in 5G.

2.9 FDI in Telecom Services India – which is the second largest telecom

market in the world with over one billion mobile subscribers – saw FDI equity inflow of US$ 5.56 billion (€4.51 billion) between April 2016 and March 2017. This is more than four times the average inflow of about US$ 1.3 billion (€1.05 billion) every year since 2013-14. The industry has attracted FDI worth US$ 24.033 billion (€19.48 billion) during the period April 2000 to June 2017, according to the data released by DIPP. FDI of 100 per cent is allowed in the telecom sector; of this 49 per cent is allowed through the automatic route.

This is applicable in case of Basic, Cellular, Unified Licence (Access Services), Unified Licence, National/International Long Distance, Commercial V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS), all types of ISP licences, Voice Mail/ Audiotex/Unified Messaging Services (UMS), resale of International Private Leased Circuits (IPLC), Mobile Number Portability Services, etc.

2.10 Virtual Network Operators (VNOs)

The time is opportune for the VNO model to

become a business reality in the Indian telecom landscape given the market conditions as well as regulatory environment. The last two years have seen massive consolidation in the telecom market with the number of operators coming down to about 5-6 in various circles and ushering in of a data revolution and huge uptake in data based services. In such a scenario, VNOs will be essential for ensuring existence of adequate competition in the market as well as making telecom service more affordable. The VNOs are capable of unleashing a new telecom revolution in the Indian telecom industry and taking it to the next level of growth, catalysing government’s digital initiatives.

A VNO including Mobile Virtual Network Operator (MVNO) is a service delivery operator who does not necessarily own the underlying network(s) but relies on the network and support of the infrastructure providers, telecommunication suppliers/operators for providing telecom services to end users/customers. VNOs/MVNOs have a lot of potential in terms of providing customized products for highly penetrated markets, improving penetration in rural areas and Tier-2 and Tier-3 cities, M2M and cloud play and a pivotal role in Digital India and Smart Cities.

DoT vide its notification dated July 5, 2016, separately issued guidelines for grant of UL (VNO) for authorization for category ‘B’ licence, with districts of a state as a service area, for entrepreneurs like direct inward dialing (DID) franchisees.

DoT further clarified vide their letter dated September 12, 2016 that there shall be no category of DID franchisee licence in future. The Authority, upon examination of the reference from DoT, issued the consultation paper (CP) on March 20, 2017 raising specific issues for consideration of stakeholders.

On September 8, 2017, TRAI released its recommendations against responses received for the consultation. In the case for Need for UL (VNO) Category ‘B’ licence, the Authority recommends that:

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A new category of authorization may be introduced under Unified Licence (VNO), for Access Service as Category ‘B’ licence with districts as a Service Area on non-exclusive basis. Should allow existing DID franchisees to migrate to UL (VNO) Category ‘B’. Should not be restricted only to existing DID franchisees and should also be open to new entities intending to offer such services. Should provide only wireline access services within a district. Wireless access services shall not be a part of the scope of UL VNO Cat ‘B’. Number of districts to be in a telecom circle should be limited to four. If a licensee wishes to provide services in more than four districts of an LSA, the licensee should be mandated to obtain UL (VNO) Access Service Authorization Licence for entire LSA.

With reference to licence terms, conditions and obligations the Authority recommends the following:

The duration of UL (VNO) Cat ‘B’ licence shall remain consistent with the guidelines of UL (VNO). Accordingly, licences will be issued for 10 years duration and further renewable for 10 years as per prevailing terms and conditions.

On introduction of VNO regime, an issue of double taxation has arisen. DoT may consider review of AGR components; and charges paid by UL (VNO) licensee to the TSP/NSO for procurement of services should be allowed to be deducted as pass through charges for the purpose of calculating the AGR, similar to other pass through charges permitted under UL like IUC, roaming charges etc. This will be in line with the Input Tax Credit (ITC) feature under goods and services tax (GST) regime.

In order to meet the requirement of connectivity UL (VNO) Cat ‘B’ licensees may be allowed to have arrangement for connectivity at different locations with different TSPs/NSOs in its licensed area of operation i.e. within the geography of a district, only in case of provision of wireline access services through EPABX. UL (VNO) (Access service) licence may be amended to enable the provision of allowing parenting with multiple NSOs by a

VNO for wireline network at different locations of the LSA only in case of provision of wireline access services through EPABX.

3. KEY ISSUES AND RECOMMENDATIONS

Policy and Regulation

The new telecom policy (NTP) is expected to include a package to boost domestic manufacturing of equipment to cut dependence on imports and create local jobs.

Work on the policy blueprint started after the September 8, 2017 meeting of the Telecom Commission – the highest decision-making body for the telecom sector.

The NTP roadmap was placed before the inter-ministerial panel early September where the big thrust of the policy is ‘Internet for All’ and the second is Make in India. To begin with, the policy draft will be placed in public domain for wider consultations by March 2018. Meanwhile industry views have been called for by DoT in an ongoing effort for including all inputs from all stakeholders.

Commencing the work on NTP, DoT has set up working groups and committees for this and the ministry has initiated the widest possible public consultation involving the industry, with a series of regional workshops to get inputs from local stakeholders on the new policy.

Technologies like 5G and IoT will form the basis of the new Digital India. Other areas of focus will be skill development, getting more investments into telecom since we need to continuously upgrade our networks, and the aspect of security. The new telecom policy is expected in April 2018, and the focus is going to be the use of new technologies to enable socio-economic transformation and a multi- fold jump in the digital economy. Typically, the NTP is expected not to be a directive but more of a set of guidelines and approaches, and specific regulations made around that.

The NTP will address sector issues and enable quantum leap in economic growth using the

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cutting edge next generation technologies such as 5G and AI.

Analysts and the industry estimate high-speed data services with cross-industry IoT applications and AI-driven services, could open up close to 20 per cent of additional revenue opportunity.

3.1 Call Drops Telcos informed DoT earlier that they have

embarked on a full one-year strategy for network optimization in all 22 licensed service areas. In order to achieve this already 3.49 lakh (349,000) base stations and 15,000 repeaters and boosters were installed in addition to 4.08 lakh (408,000) sites that were optimized in a year.

The DoT plans to introduce a ranking system for telecom operators to tackle the problem of dropped calls. Under the plan, customers will be able to rate their network provider and name-and-shame them for poor service. By doing this the government plans to send a strong signal to telcos to clean up their act as the current level of quality of service cannot be allowed.

Call drops have lessened when compared to previous year but it requires continuous monitoring which is being done by the department.

The new regulatory norms, effective from October 1, 2017 would be based on new benchmarks that include readings at a more granular level compared to the circle-level approach.

3.2 Market Consolidation The telecom market is mature (in terms of

revenue from voice); hence, all telecom operators are focused on offering high-speed broadband. However, broadband services require significant investment in spectrum and infrastructure, which many telco operators are unable to commit to. Therefore, consolidation is imminent.

At stake is India’s data services market, which

is estimated to be ̀ 95,000 crore (€11.82 billion) by 2020, growing at a compounded annual rate of 21 per cent. (The Hindu – Businessline)

While Airtel consolidated its market position as the No. 1 player with the acquisition of Tata Teleservices’ mobile business, the bugles have been sounded by Vodafone and Idea, with the shareholders of the latter overwhelmingly approving the earlier-announced merger.

Once the merger goes through, the Vodafone-Idea combine will become the largest operator in terms of subscribers, but Airtel will keep the pole position in terms of revenue market share and spectrum holding.

“Jio’s entry precipitated exits by the weaker players and a merger of incumbents Idea and Vodafone. Since Jio’s entry, the incumbents have seen a reduction of 30-35 per cent in EBITDA and 800-1,000 bps in margins as they have tactically matched Jio’s tariffs,” said Deutsche Bank Markets Research in a report to its clients.

Once the initial pain points are mitigated, the surviving two or three operators will emerge stronger to capitalize on the huge potential that data services will bring. While Airtel and RJio are clearly emerging as the two dominant players, it will be interesting to see how the Idea-Vodafone merger shapes up.

3.3 Broadband Infrastructure For business, Digital India is a US$ 1 trillion

(€810.63 billion) business opportunity, combining the requirements of the telecoms, IT/ITeS and electronics manufacturing sectors. The government is building a robust broadband infrastructure for digital delivery of services, including e-education cable and e-health, with the rapid rollout of a country-wide optical fibre cable network that will connect all GPs or village blocks. We need to think of and prepare for an ecosystem where 'Internet of Things’ and artificial intelligence are mainstream, and connectivity is seamless, designed to improve the quality of e-governance and education, as well as to enable financial inclusion, smart cities, and an intelligent transportation system,

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amongst other things. The telecom sector finds itself in an unenviable position where despite falling average revenue per user (ARPU) the players are forced to invest significantly in infrastructure and technology upgrades in order to maintain competitiveness. Moving up the technology curve and expanding the breadth of coverage is paramount for the industry to provide differentiated value offerings to end customers. Successful realization of the Digital India vision in a cost effective manner, requires critical players in the telecom value chain to collaborate and work in a synchronous manner. The government intends to use the universal service obligation fund (USOF) for various initiatives such as providing network infrastructure and connectivity to remote parts of the country. [refer section on Bharatnet] (KPMG Report on Accelerating Growth)

Broadband infrastructure is often considered as the utility of progress and accelerated growth. In fact it is axiomatic that all the nine ‘Pillars of Digital India’ rest on the foundation of broadband infrastructure. The broadband infrastructure directly impacts India’s socio-economic and development goals in scale and speed. It is a given that strong and extensive fibre backhaul will support a data intensive high capacity and high speed mobile broadband ecosystem. Approach towards sustainable telecom is fundamental. However, multiple challenges have deterred the speed of growth of the infrastructure as is evident from our broadband density which stands at ~ 20 per cent today. As has been borne out by TRAI’s own statistics, most of the broadband subscribers are in the urban areas and very few in the rural areas. This is a huge opportunity for investment and business potential in the rural areas.

The objectives of Digital India shall be unattainable without broadband infrastructure and broadband services reaching rural India. All government schemes, be it socio-economic programmes of e-health, e-medicine and e-governance or the financial inclusion schemes of Pradhan Mantri Jan-Dhan Yojana, JAM (Jan Dhan, Aadhar and Mobile), DBT

(Direct Benefit Transfer), etc. need ubiquitous broadband connectivity in affordable and accessible manner. While several government programmes like BharatNet and Smart Cities are focused on the growth of this critical infrastructure, more needs to be done to expand, protect and future-proof the infrastructure.

There is an acute lack of funding to meet the future requirements of infrastructure (fibre, tower, new technologies). The cost of expansion is currently not shared by ministries who gain from this national asset. There is no telecom infrastructure fund. Unlike roads and highways, the Union Budget does not have a proper budget allocated for broadband infrastructure, despite it being a utility for progress.

Given massive rollouts in rural, urban, borders and smart cities, there are no centrally held guidelines to address quality procurement and deployment of broadband infrastructure from the government as in the case of roads, highways and power.

Implementation of right of way (RoW) policy continues to be a barrier. Network providers spend almost 50 per cent of the overall capital expenditure (CapEx) on RoW fees. States are required to view RoW as an enabler for creation of a sustainable national asset instead of a source of revenue generation.

Lack of on time and automated payment in massive government rollouts creates an entry barrier for newer players due to cash flow and Ease of Doing Business.

Considering this is an essential infrastructure, there is no legal protection available to broadband infrastructure (fibre, towers). Also lack of mandating inclusion of broadband infrastructure like FTTH (fibre-to-the-home) and IBS (in-building solutions) in building code certification is deterring expansion and growth.

3.4 Cloud Computing Telecom regulator, TRAI, floated a consultation

paper in June 2016 seeking stakeholders' views on cloud computing-related issues such

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as data security, service quality and legal and regulatory frameworks.

In view of the NTP 2012, DoT requested TRAI to examine adoption of cloud computing services by government departments. Therefore, questions with respect to (i) government’s adoption of cloud services (including requirement of a separate cloud for the government); (ii) steps for enhancement of cloud infrastructure in India; (iii) cost-benefit analysis of adoption of cloud services; and (iv) infrastructure challenges for establishment of data centers perhaps seem relevant for the government.

The TRAI’s ‘Recommendations on Cloud Services’ announced on August 16, 2017 spoke of light touch regulatory approach and recommended that DoT may prescribe a framework for registration of cloud service providers (CSPs) industry bod(y)(ies), which are not for profit.

All CSPs above a threshold value notified by the government from time to time in previous financial year have to become member of one of the registered industry bodies for cloud services and accept the code of conduct (CoC) prescribed by such body. The threshold may be based on either volume of business, revenue, number of customers, etc. or combination of all these. Industry body, not for profit, may charge fee from its members, which is fair, reasonable and non-discriminatory.

A Cloud Service Advisory Group (CSAG) to be created to function as oversight body to periodically review the progress of cloud services.

For data protection, the government may consider to enact, an overarching and comprehensive data protection law covering all sectors, incorporating the following points: (a) Adequate protection to sensitive personal information (b) Adopt globally accepted data protection principles as reiterated by Planning Commission's ‘Report of Group of Experts on Privacy 2012’ (c) Provisions governing the cross-border transfer of data;

No regulatory intervention is necessary with

regard to interoperability and portability and these aspects may be left to the market forces for the time being.

The TSDSImay be tasked with the development of cloud services interoperability standards in India.

With regard to legal framework for CSPs operating in multiple jurisdictions – and the issue of access to data, hosted by CSPs in different jurisdictions by law enforcement agencies, it is recommended that robust mutual legal assistance treaties (MLATs) should be drawn up with jurisdictions where CSPs usually host their services, enabling access to data by law enforcement agencies and existing MLATs should be amended to include provisions for lawful interception or access to data on the cloud.

3.5 Mobile Devices In the second quarter of 2017, Chinese brands

captured over 50 per cent of India’s 109 million unit annual smartphone market. Only a year ago, their combined market share was less than 15 per cent. Indian companies accounted for nearly 40 per cent of the market. That share has now slid to less than 15 per cent. Chinese brand Xiaomi has toppled South Korean electronics giant Samsung to become the market leader with 26 per cent plus market share.

There are other reasons for the rather steep decline of Indian handset makers. Most of the companies suffered heavily in the post-demonetization period that saw a substantial decline in cash transactions and offline retail sales. The lack of innovation and R&D capabilities and the fact that many Indian firms still buy from Chinese vendors and merely re-badge and sell in India-has probably been an even bigger reason. Plus, the China based vendors primarily cater to the Chinese market, which is four times bigger than the Indian market, thus providing economies of scale.

One aspect that differentiates the Indian handset market from all others in the world is the big feature phone segment. The progression

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from basic entry level feature phones to smartphones has been relatively slow in India. Unlike the US and China, where the market is dominated by smartphones, 136.1 million units of feature phones were sold in India in 2016. The segment has been in in perpetual decline since 2013 when sales had peaked at 213 million units but still accounted for over 55 per cent of all mobile phones sold in India in 2016. As per IDC, in the first quarter of 2017, its share was 52 per cent. Smartphones have been gaining ground but the pace has slowed down in recent times. In 2016, smartphone sales grew by just 5.3 per cent, slowest in five years. Sale of feature phones has also slowed down. Last year, sales declined 9.6 per cent against 16.2 per cent in 2015 and 15.7 per cent in 2014.

There is a significant gap in price between a smartphone and a feature phone. So, it will take some time before smartphones stifle feature phones.

There are about 650 million mobile phone users in India, and just over 300 million of them have a smartphone, according to technology consultancy Counterpoint Research. That means India is already a bigger smartphone market than the US and second only to China. It also means there are about 1 billion Indians who do not yet have a smartphone – a huge market opportunity.

As China has already become a smartphone

market, most Chinese vendors do not wish to participate in the feature phone market. This opens up an opportunity for Indian handset makers. The quick migration to 4G technology, falling data charges and the need for affordable handsets may offer a scope for resurgence of feature phones and, with them, the Indian brands.

Though smartphone prices have also come down, Chinese companies are yet to breach the sub-`5,000 (€62.22) level, which is the mainstay for all feature phones in the country. Indian companies are trying to drive home the advantage. Another driving factor is the deeper penetration of feature phones and connectivity in Tier-III cities and rural areas. As per IDC, while China-based vendors are not focusing on feature phones, it provides an opportunity to Indian vendors to capture lost share in this segment. It will not be an easy task though, as prices of components is continuously increasing and bringing in a quality device will be a challenge.

Languages can unlock growth. India has dozens of regional languages, and many of the country's newest mobile users are discovering the internet in one of them.

India already has 234 million local language internet users, according to a recent report by Google and KPMG. That number is expected to soar to 536 million by 2021.

Indian internet users

2011

2016

2021(projected)

42million

68million

175million

199million

234million

Indian language internet users

Source: 2017 Study by KPMG and Google

English internet users

536million

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One of the major reasons the smartphone hasn't been able to penetrate rural areas or smaller towns is because it's all in English. India needs to have the regional languages on phones, and a lot of players have understood that.

The demand for the mobile phones in India is largely met through import of mobile phones. As for domestic manufacturing, the overall localization rate for smartphones in 2016 stood at a low of 6.1 per cent, far below the localization rate in China and Vietnam. The low level of local value addition is due to weak manufacturing ecosystem which stems from limited capabilities across various processes of manufacturing value chain and resulting primarily in last mile assembly.

By 2019, it is possible to achieve an overall local value addition of 25.8 per cent for smartphones, which translates into `31,000 crore (€3.85 million) generated through local sourcing and assembly. Battery pack, non-electronic parts, accessories, packaging etc. have high local sourcing possibilities, while the main electronic components have low local sourcing capabilities.

Import duty without Input tax set-off should be imposed on the imported handset. This could be done by applying a reasonable 8-10 per cent on handsets which will also translate into countervailing duty (CVD) on imports. Indigenously manufactured handset should be exempt from excise.

India manufactured mobile handsets worth `90,000 crore (€11.20 billion) in FY2016-17, a growth of 166 per cent over 2015-2016. The mobile handset manufacturing industry in India provides employment to around 40,000 people, and this is bound to increase with additional manufacturing units becoming operational and also increase in existing manufacturing capacity.

3.6 Public Wi-Fi Hotspots Infrastructure

India is hugely starved of broadband penetration and one of the ways to go forward

is by the proliferation of public Wi-Fi. India today needs more public Wi-Fi hotspots if it has to spread affordable access and make broadband available everywhere so that people are able to benefit from it. One of the principal benefits among many others of public Wi-Fi is the data offload for the current 4G and future 5G networks. This enables users of 4G and later 5G networks to download high capacity data services at an affordable cost of merely 2 paise/megabyte (Mb) as compared to 23 paise/Mb for mobile broadband as mentioned in the TRAI ‘Consultation Paper for Proliferation of Broadband through Public Wi-Fi Networks’ dated July 13, 2016.

Given the imperatives around the importance for proliferation of public Wi-Fi hotspots, the situation of Wi-Fi hotspots is not encouraging at all with a total number of 31,500 hotspots as of 2016. Although we represent one sixth of the world’s population, our share in Wi-Fi hotspots is less than 1/1,000, the study also estimated that the global number of hotspots would grow to over 340 million which would mean nearly one Wi-Fi hotspot for every twenty people on the earth by 2018, as compared to one Wi-Fi hotspot for every 150 people today. Globally the increase in number of Wi-Fi hotspots from 2013 to 2016 has been 568 per cent whereas in India, the increase during the same period has been only 12 per cent. For India to reach a goal of one hotspot for every 150 people, 8 million additional hotspots will have to be installed.

At present, service providers offering commercial Wi-Fi hotspots mainly rely on wired backhaul. In urban areas, establishing wired backhaul is expensive, time-consuming, and, in some places, even infeasible. This problem can be potentially overcome by the use of V-band. Despite the need for public Wi-Fi hotspots in the urban areas, the availability of Wi-Fi hotspots in such areas in India compares poorly with the West. Based on the number of hotspots reported on www.ipass.com portal, it is reported that India has about 25 commercial Wi-Fi hotspots for every 1 million inhabitants (in the urban areas), while the global average is

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at 1470.34 for every million population. So, in spite of the low base, the pace of proliferation in India is much lower. It is expected that the use of V-band for backhauling Wi-Fi hotspots in densely populated urban areas will help perhaps tide over the situation which shall lead to proliferation of new Wi-Fi hotspots.

Further, given the challenges of alternative backhaul options, it is expected that if V-band is released/opened up by the government, about 40 per cent of the new commercial Wi-Fi hotspots established in the top 15 cities will use V-band for backhaul, while around 20 per cent will do so in other urban areas because of lack of feasible backhaul options. The benefits from these hotspots can be fully attributed to V-band, while those from other hotspots that use this band for backhaul can only be partly attributed. So, it is quite evident that opening of the V-band is likely to lead to spurt in creation of public Wi-Fi hotspots due to lower costs and faster speed of deployment.

In this context, EBG Federation supports the government’s initiative for large-scale deployment of public Wi-Fi networks in improving broadband penetration and adoption in the country for last mile connectivity.

The regulator, TRAI, has also recommended that internet services through Wi-Fi onboard should be made available when electronic devices are permitted to use only in flight/airplane mode. The Authority has also recommended that a separate category of ‘IFC service provider’ be created to permit IFC services in Indian airspace. The IFC service provider should be required to get itself registered with the DoT and it need not necessarily be in Indian entity.

3.7 In-country Security Testing The ‘Gazette Notification on Testing and

Certification of Telegraph’ dated September 5, 2017 issued by DoT has made it mandatory that all telecom equipment shall have to undergo prior mandatory testing and certification in respect of parameters as determined by the telegraph authority from time to time and must be certified and tested by the telegraph

authority or any other agency designated by the telegraph authority. Although this measure shall ensure India’s preparedness against security testing but without having a proper testing framework, skills and testing Infrastructure, and especially when original equipment manufacturers (OEMs) are already carrying our rigorous testing in their lab, this step would not only be fruitful but unnecessary. These equipment’s are developed based on various international standards and do undergo rigorous testing and certification regime at international labs for necessary safety and security features. Hence, we strongly believe that this measure will only add one more layer of regulation to the struggling telecom industry in India, add up more cost unnecessarily, go against the spirit of Ease of Doing Business and have greater impact on the global supply chain cycle.

3.8 Domestic Manufacturing If India has to reduce dependency on import,

there is need to encourage local telecom companies to not just make for India but also for overseas markets like the Middle East, Asia and Africa. It will have to be enabling environment which can catalyse Make in India. We will be strengthening the preferential market access policy. As we develop local capability for manufacturing we will be ensuring that more and more manufacturing happens here.

The Indian government has renewed efforts to augment local manufacturing of telecom equipment and reduce the industry’s reliance on imported gear.

Regulator TRAI has issued a consultation paper seeking stakeholder views on a policy framework to achieve the goal of boosting local equipment manufacturing and on attracting foreign investment into the market segment.

The consultation paper notes that while efforts to stimulate the local mobile handset manufacturing industry have been amply made in the past five years, the telecoms equipment manufacturing industry has not been able to

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match this performance.

There is also currently no manufacturing program for promoting local manufacturing of telecom equipment unlike with handsets. Currently around 90 per cent of the nation's telecommunications equipment needs is served by imports, TRAI said.

“While a liberal trade policy enabling import of telecom equipment with low or no duty has kept both service providers and consumers happy, the lack of capacity building for domestic production poses a serious challenge to India's continued success in the telecom sector,” the paper states.

TRAI first started exploring the issue of stimulating domestic equipment manufacturing in 2010, but now feels the need to revisit the issue due to the exponential growth in the telecom sector in the past five years. The consultation will also explore the issue of resolving disputes related to standards-essential patents and fair, reasonable, and non-discriminatory (FRAND) licensing terms, a source of ongoing controversy between local handset makers and global players/multinationals.

The growth of electronic manufacturing industry depends a lot on R&D activities. The investment in such activities will make India self-reliant and also generate income in years to come. So, the objective should be to make India a global R&D hub for the world. The focus shall be on:

a. Indigenously design and develop complete range of telecom/IT infrastructure products,

b. Making best of the laboratories available for development and testing,

c. Certification of labs in India which are recognized globally. Products used in India shall be certified by these laboratories,

d. Creating IPR.

The World Trade Organization (WTO)-led first Information Technology Agreement (ITA) was signed in 1997 aimed at increasing the scope of the trade pact that guarantees zero-tariff and duty-free trade in hundreds of products. The second phase of the agreement was expected

to be worth US$ 1 trillion (€810.63 million) and add about 200 products to the list. India decided not to become a signatory due to the fact that the ITA would only benefit a country if its domestic manufacturing was robust. Signing the agreement would go against the Make in India push, as it would make importing goods cheaper than manufacturing these in the country. India had joined ITA-I (as the first phase was called), but that supposedly had a devastating impact on the domestic electronics hardware sector, so the government stayed away from ITA-II talks. India, along with many other countries, isn’t party to the agreement and, therefore, the pact is not legally binding on it.

However, there is a recent move to impose basic customs duty (BCD) on certain ITA-I and ITA-II listed products to promote domestic manufacturing which may negatively impact not just European ICT manufacturing companies dependent on sourcing components globally but any multinational with a manufacturing base in India. Imposition of BCD may adversely affect the end-pricing for the service and EBG should look at making joint representations to the Telecom Commission to impress upon them that imposition of BCD on existing zero-tariff items will not help domestic manufacture. Rather incentivisation more than protectionism should be the practice.

The move to impose BCD on certain ITA-I and ITA-II listed products recently, to promote domestic manufacturing, has been set aside in the Union Budget FY 17-18 thanks to the efforts made by the European Union (EU), its members and perhaps the efforts of EBG which submitted its comments to DoT, NITI Aayog and the DIPP on the issue.

BCD exemption for SEZ supply to domestic tariff area (DTA):10% BCD was imposed as per Union Budget of 2014 on certain telecom products under non-ITA category. The above amendments were made to promote domestic manufacturing; however, the adverse impact of the same on special economic zone (SEZ) manufacturing (which is also part of domestic) has been ignored.

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Suitable amendments should be made in order to give BCD exemption on said goods if they are manufactured in SEZ area and cleared in DTA. The objective to introduce the 10 per cent BCD was to encourage local manufacturing in India, invite investment, create jobs and promote electronics export from India. This incidentally is also being fully undertaken by a manufacturer operating from an SEZ in India. With the budget ruling, 10 per cent BCD is imposed on manufacturers operating out of SEZ if they are selling in DTA. This will make them non-competitive to sell in DTA and defeat the purpose of the setting up manufacturing for telecom and electronics in SEZ in and for India. For setting up manufacturing for telecom equipment, scale is needed which can only be achieved if the vendor is able to address both local and exports, else the business viability will not be there. It should perhaps be recommended to “not levy BCD on the finished product, but instead if there has been any benefit that a SEZ manufacturer would have otherwise had on input (components) vis-à-vis a DTA manufacturer, the government may be requested to charge the duty foregone by it on inputs from a manufacturer operating from SEZ which otherwise would have been charged to a DTA manufacturer”. This we believe would bring both the DTA manufacturer and a SEZ manufacturer on par with each other for selling in DTA and have similar advantage to an importer of non-ITA telecom products.

Further there is no basis for classifying the products mentioned as non-ITA. EU/US trade associations have verified the products category and clearly believe these products should be part of ITA list only. Imposition of BCD will only increase the CapEx burden of the industry.

Government may like to consider, instead of widening the differential gap in tariffs, alternative modes to support domestic manufacturing, such as, early build-up of the strong base of component manufacturing, as well as local ecosystem and some tax holidays for a specified period. The high finished duty differential between import and domestic

products tends to encourage grey market/increased smuggling activities. Also, there is a need to incentivize service providers, instead of making it mandatory, to deploy indigenous products in their networks if they are of sufficiently high quality and are available at globally competitive prices.

3.9 Multiple Levies and Taxes Government has taken cognizance of the

financial stress faced by the industry and a high-powered IMG was formed to address the issues in consultation with industry. The telecom industry pays 8 per cent per cent of the AGR as licensing fees, about 6 per cent SUC (including USOF) and 15 per cent service tax. Moreover, states levy additional taxes such as octroi, VAT, stamp duty, entry tax and levies on the towers, which aggregate to 30 per cent of the revenues earned by telecom companies as compared to about 5 per cent in other Asia-Pacific (APAC) countries. The levies are also charged on the non-telecom related revenues of the service providers. This makes Indian telecom one of the highly-taxed industries in comparison to other Asian countries. There is a need to rationalize and bring down the taxes and levies in the sector to encourage rapid growth of the telecom sector and delivery of telecom services at reduced prices to the Indian masses. There is an urgent need to rationalize the present rate of Universal Service Obligation (USO) contribution which is presently 5 per cent of AGR, while as per TRAI’s recommendations it should be 3 per cent. Industry also expects that the present framework of AGR model may also be reviewed since it does not address the issue of double levies for the same service/product. Industry is lobbying hard to reduce spectrum usage charge to less than 1 per cent.

The communications minister has said the Telecom Commission would soon take a decision on improving the sector’s health taking into consideration the recommendations of the IMG. Action for obtaining necessary approvals is underway, including consultations with TRAI and other government departments. The IMG report has

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recommended giving one-time opportunity to telcos to opt for more number of instalments (16 instead of the current 10) for payment of spectrum, and the matter needs further approval by the Cabinet.

The high-powered IMG has also proposed amendment to spectrum trading guidelines, saying that the telecom department should issue clarification that only gain or profit from spectrum trade will form part of revenue for the purpose of calculation of AGR.

Other recommendations include easing the interest rate on delayed payment of licence fee and SUC and harmonization of spectrum in 2,300 MHz and other bands on a priority.

It has also suggested that approach to fixing reserve price for spectrum should be reviewed in sync with global best practices.

Retrospective tax amendments changes in tax laws foster a sense of “uncertainty” in the business which dampens enthusiasm for investment and merger and acquisition (M&A) activity. The new government has assured that retrospective changes in tax will not be introduced in order to improve business confidence of investors. To make any industry preferred destination for investor, there is a need to ensure a stable environment with simpler and transparent regulations, Ease of Doing Business, robust infrastructure, single window clearances, etc.

The anomalies of different tax regimes levied by the states, especially VAT have been resolved to some extent, on the introduction of a pan-India uniform GST, from July 1, 2017. However, the new GST policy requires a lot of improvements as new issues have arisen such as GST registration in each circle versus centralized service tax registration earlier, which has increased logistic costs. GST has been set at the higher slab of 18 per cent whereas the service tax earlier was 15 per cent. The minister has taken cognizance of this anomaly and has requested the Cabinet to relook at reducing GST slab from 18 per cent currently to 12 per cent on telecom services.

Introduction of the service tax on auctioned

spectrum as advance tax with credit over the following period is an inhibitor to spectrum acquisition via auctions or spectrum trading. The government has exercised its right to tax the usage of a natural resource, but, it has unfortunately laid a huge onetime payment burden over and above high spectrum prices.

3.10 Telecom Interconnect Regulation The TRAI had an Open House consultation

with the public and industry after which on September 19, 2017, it exercised the powers conferred upon it under section 36, read with sub-clauses (ii), (iii) and (iv) of clause (b) of sub-section (1) of section 11, of the Telecom Regulatory Authority of India Act, 1997 (24 of 1997), and made the following regulations through Gazette Notification, making the Thirteenth Amendment to IUC Regulations to further to amend the Telecommunication Interconnection Usage Charges Regulation, 2003 (4 of 2003), namely:-

1. Telecommunication Interconnection Usage Charges (Thirteenth Amendment) Regulations, 2017

2. They shall come into force with effect from the October 1, 2017

3. In Schedule I of the Telecommunication Interconnection Usage Charges Regulation, 2003 (4 of 2003), in the table under column “1. Termination Charge”, for the words and figures “Re. 0.14 (paise fourteen only) per minute”, the words and figures:

a) Re. 0.06 (paise six only) per minute with effect from the October 1, 2017 to December 31, 2019; and

b) 0 (Zero) with effect from the January 1, 2020 shall be substituted.

3.11 SATCOM It costs ten to twenty times more to connect the

last 10-20 per cent population of any country, including India. Satellite communication (SATCOM) helps connect this last 10-20 per cent population in a very cost-effective way. The satellite service providers licensed by DoT

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have an installed base of more than 250,000 terminals.

Despite having a share of a sixth of the global population, India’s share in the communication satellite market stands at less than 2 per cent of the global communication satellite population. Thus India, the target focus of the ‘Next Billion in Broadband’ has less than 3 per cent of the total global satellite population (41 as against 1,381). This clearly establishes that India is far below global norms on satellite communications.

Globally Low Earth Orbit (LEO) and Medium Earth Orbit (MEO) networks are being developed, which along with other next generation satellite technologies viz. spot beam technologies coupled with higher capacity spectrum bands are expected to bring about an exponential increase in capacity and at the same time bringing down the cost by a factor of 100. India’s ambition to be a global power in the satellite launch space and reaching out to the moon and mars should not cloud the benefits that affordable satellite communications can bring about for the masses. Therefore enhancing the role of satellite communications is needed for accelerating ‘Broadband to All’.

4. CONCLUSION We believe that 2018 could mark the beginning

of much brighter prospects for Indian telecom on several fronts.

With significant consolidation among the service providers getting completed in 2018, the aggressive tariff battles will gradually cease and the telecom industry will start experiencing the much-needed financial relief.

The NTP 2018, expected around April 2018, will hopefully usher in a completely new perspective to telecom by transcending it from the voice era to that of data and data-based services.

Two clear phenomena have emerged. One the data segment is going to grow stronger and the broadband sector will witness tremendous growth in terms of wireless connectivity, Wi-Fi hotspots as well as fibre layout. Two, the quality of customer experience and quality of networks will determine the success of players in the market.

The other important issue will be how companies use their platforms to create fresh revenue streams.

Last, but not the least, India would have charted its way forward to the 5G world and given a huge impetus to innovation, manufacturing, and entrepreneurial initiatives. We expect that India would further consolidate and improve its position in the global digital rankings as well as in the Ease of Doing Business thereby heralding the much needed investment which is required to usher in rapid growth in telecom/broadband infrastructure.

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Endnotes

1 ‘Mary Meeker’s India Internet Trends 2017’, https://tech.economictimes.indiatimes.com/news/internet/mary-meekers-internet-trends-2017-key-india-takeaways/58940234

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Notes