India Economic Update
Milind S. KothariManaging Partner
BDO India LLP
M & A Tracker
Transaction Advisory Services
Transaction Advisory Services
In his boldest move since assuming office in May 2014, the Prime Minister Narendra Modi announced withdrawal of currency notes of denomination INR 1,000 (equivalent of US 15) and INR 500 from circulation ('demonetisation') in November 2016. The broader aim of the radical policy move and the economic rationale was to target 'black money' (unaccounted money) and terror financing. These currency notes were to be returned to the banks and be replaced by new denomination and currency notes in the ensuing period that was to end by December 31, 2016.
What followed the demonetisation initiative was unprecedented disruption in the economy that most Indians experienced for the first time in their life; with the last such initiative in late 70's which seemed tame in comparison. The disruption engulfed the daily life of every individual and the impact continued to play out in intensity right through the end of last year. While the drive impacted the entire economy, what seemed worst hit were small industries that provided day jobs to millions in towns and villages. Lack of replacement of currency notes in quick time further crippled the economy impacting the banking sector which was pressured with long queues to exchange currency or withdraw money from ATMs creating huge frustration. Surprisingly, the core sector escaped unhurt by the note ban.
It remains debatable what demonetisation achieved in the end, as the ink has still not dried on the subject. The narrative changed that the shift to digital payments (the share of which grew substantially during this drive) will help economy grow. The claim of benefit is stated to be a bigger economy, a higher tax base and more money in banks and all these collectively could contribute a lot to growth of GDP. The hard lesson from the initiative was that the cash economy is not black economy as nearly all cash returned in the banking system, which was beyond expectation of most. What demonetisation did accomplish was devouring significant economic activity and usurping news in this period.
Flush with funds from deposits of cash, a near certainty was the expectation from the Reserve Bank of India (Central Bank) that the interest rate would be dropped at least by 25 basis points. However, the RBI surprised many by keeping interest rates unchanged and lowered its growth forecast for the year on account of the second-quarter slump and acknowledged that demonetisation would temporarily disrupt economic activity. It is expected that the GDP growth would shrink from 7.6% at the outset to 7.1% as per the fresh estimate of growth.
Following up on the demonetisation drive would be the announcement of Annual Budget which has been preponed to 1st February from the convention being the last day of February. Hopes have heightened as most feel that this time around, the Budget must provide a feel-good factor on the back of sharp negatives. Leading the pack would be tax-cuts which could be confidence booster. In the world of shrinking head-line tax rates, India stands out as an economy with high tax rates that remain in excess of 30%. The Finance Minister, Mr. Arun Jaitley fueled the anticipation highlighting benefit of low tax as a key to building a globally competitive economy. Overall, the expectation is sweeping changes on corporate and personal income-tax.
On the disinvestment of public sector undertakings ('PSU'), the strategic sale process is expected to kick off in the next fiscal with more than 20 companies identified that hold prime assets including land that can command premium valuation. The focus has shifted to strategic sales and listing of subsidiaries of state-run enterprises, away from the sale of shares in listed companies. Although the annual budget targeted realization of US $ 8.5 bn, there is an indication that the government may not push ahead with disinvestment as revenue collection seems comfortable and most likely, sale of oil PSUs may get pushed to the next fiscal year.
As the world braces for new leadership in the USA with President Donald Trump, India would need to face the backlash against outsourcing. In the backdrop of Mr. Trump getting tough with China, seeking to break away from Trans Pacific Partnership Agreement and exacerbated by nearing of deadline of Brexit, it would be interesting to see if India will pick up some wins from this new world order.
M&A in India
Between November 2016 and January 2017, around 180 M&A deals were announced / completed aggregating to approx. $6.32 billion; dominated by domestic deals (102) followed by cross border deals (78).
This period has been dominated by smaller deals. In terms of sectors, Healthcare saw the maximum deal value with deals worth around $1.92 billion, followed by Energy with $1.27 billion and Consumer Discretionary with $1.26 billion.
(Deals mentioned in the M&A Tracker do not include those with undisclosed deal values as well as those which have been announced but not closed)
Target Company : Chase Pharmaceuticals Corporation
Acquiring Company : Allergan Plc
Deal Value (in mn USD) : 1000.00
- In November 2016, Allergan PLC acquired Chase Pharmaceuticals Corporation, a clinical-stage biopharmaceutical company that focuses on the development of treatments for Alzheimer's disease in a deal potentially worth USD 1 billion
- In order to expand its CNS R&D pipeline and "build on [its] commitment to Alzheimer's Disease", Allergan acquired Chase for an upfront payment of $125 million and additional potential regulatory and sales milestone payments related to Chase's lead compound, CPC-201, and certain backup compounds
- As part of the deal, the British subsidiary of India's Cipla has sold its 16.7% stake in Chase Pharmaceuticals to Allergan
Target Company : Biosintez
Acquiring Company : Sun Pharmaceutical Industries Ltd.
Deal Value (in mn USD) : 60.00
- In December 2016, Drug major Sun Pharmaceutical completed the acquisition of 85.1 per cent stake in Russia-based JSC Biosintez
- JSC Biosintez is a Russian pharmaceutical firm engaged in manufacture and marketing of pharmaceutical products in Russia and CIS region. Biosintez focuses on the hospital segment with annual revenues of about USD 52 million for 2015
- This acquisition is consistent with Sun Pharma's philosophy of investing in strategic emerging markets. This transaction gives them access to local manufacturing capability across multiple dosage forms in Russia, enabling them to serve the Russia pharmaceutical market more effectively
Target Company : Fractal Ink Design Studio Pvt. Ltd.
Acquiring Company : Dentsu Aegis Network Ltd.
Deal Value (in mn USD) : 45.00
- In December 2016, Dentsu Aegis Network Ltd acquired Fractal Ink Design Studio Pvt. Ltd, an experiential design studio which will join the network's digital agency Isobar. The agency will be rebranded as Fractal Ink Design Studio-Linked by Isobar
- Established in 2010, Fractal specializes in user experience (UX) and user interface design (UI) and offers digital design strategy services for clients including Aditya Birla Group, Raymond, Idea group, MetLife, Times Network and Axis Bank. With offices in Bengaluru and Mumbai, it has a staff strength of 65 digital experts.
- The acquisition will add scale to Isobar's expertise in mobility and user experience
- The Fractal deal will boost Dentsu Aegis Network's combined digital team, which includes digital agencies Isobar, iProspect, WATConsult and Dentsu Webchutney
Target Company : Chhaya Prakashani Pvt. Ltd.
Acquiring Company : S Chand and Company Ltd.
Deal Value (in mn USD) : 25.00
- In December 2016, Textbook-focused publishing firm S Chand and Company acquired a majority stake in Kolkata based Publisher Chhaya Prakashani
- This is one of the largest deals to have been struck in India's education content space
- The acquisition is also expected to push S Chand's turnover to over $100 million, according to analysts
- The acquisition of Chhaya Prakashani, which is believed to be the largest publisher in terms of reach in eastern India, is the third such deal struck by the 77 year-old S Chand, and follows its buyout of Delhi-based publisher New Saraswat
Building Global Competitiveness Through Collaboration - India Outlook
New year greetings to all our readers.
The year 2016 has gone by and will be remembered in history for some significant events that have made headlines the world over. Some noteworthy ones being the Brexit (June 2016), Donald Trump victory in the US Presidential Elections (November 2016) & lastly the 'Demonatization' of high value currency in India (November 2016). Each of these events would have far reaching political and economic impact in the near future.
Despite all this, India continues to be a promising economy and is poised to be the fastest growing market globally. In fact, Indian economy has already surpassed the British economy in terms of GDP, as per a recent report published by The Forbes . India is ranked among the 3rd largest investor in the UK and 2nd largest employment generator for the country. On the other hand, UK is the largest G20 investor in India.
Talking of India and the UK, a high level delegation led by the British Prime Minister Theresa May visited India in November 2016, her first visit outside of Europe after taking charge as the UK Prime Minister. The visit was marked by signing of 2 MoUs between the countries -
- Ease of Doing Business in India; and
- Cooperation in the field of Intellectual Property (IP)
India is ranked 130 out of 190 economies in the Ease of Doing Business. The UK has achieved phenomenal improvement in Ease of Doing Business rankings in recent years. The MoU with UK will facilitate exchange of best practices, offering technical assistance and enhanced implementation of reforms. The collaboration is expected to expedite adoption of innovative practises by the Government of India, State Governments and their agencies leading to easing of regulatory environment in the country and fostering conducive business climate in India.
The UK government has shown interest to offer expertise in the following areas:
- Support to small businesses and start ups
- Starting business and registration
- Paying taxes and tax administration
- Construction permits
- Getting electricity
- Risk based framework for inspection and regulatory regimes
- Trading across the borders
- Competition economics
- Getting credit
- Drafting of laws and regulations
- Reducing stock and flow of regulation
- Impact assessment of regulations
This is in sync with the Indian Government's initiative for making India, a corporate friendly market and attracting huge foreign investment.
On the Intellectual Property front, the MoU seeks to establish a wide ranging and flexible mechanism for developing and furthering the cooperation in the development of automation, new documentation and information systems in IP. It provides an opportunity for collaboration in training programmes, exchange of experts and technical exchanges and outreach activities.
The two prime ministers also discussed various other trade and investment opportunities in the respective countries and agreed to prioritize closest possible commercial & economic relationship, upon UK leaving the European Union.
The Government of India has preponed the presentation of Union Budget to February 1 this year as against the tradition of February 28 every year. There is no doubt that demonetization has put a break on the Indian economy and corporate India is looking forward to various incentives/subsidies in the coming budget that would give a push to growth prospects of the country. The Hon'ble Prime Minister of India, in his New Year's eve address has already laid the foundation through announcement of certain reliefs and welfare measures.
On the regulatory front, the Government has invited comments from various stakeholders on the Foreign Direct Investment Policy (FDI Policy) to be rolled out in due course. This would help bring about certainty in the investment climate of India.
Indian International Tax Policy
A vibrant and interactive platform, which acts as a bridge between the taxpayers (corporates), tax consultants and regulators. Taxsutra provides real time, up-to-date news and case law analysis on Income tax from the Income Tax Appellate Tribunal (ITAT), and the High Courts and Supreme Court.
Brexit, 'Make America Great Again' win in 2016 indicate change in narrative from "global & open" to more "protectionist" approach by nations. In the tax context, EU-Apple ruling and Base Erosion and Profit Sharing (BEPS) concept too reflect similar sentiment where the pendulum is tilted in favour of 'source country' tax regime.
India traditionally has asserted the source country tax regime, where cross border transactions are taxed at source (v/s the residence based system) 2016 witnessed an unprecedented policy action to reinforce this view by introduction of 'Equalisation levy' (tax on specified digital economy transactions with non-residents), followed by re-negotiation of three key tax treaties, first with Mauritius, then Cyprus and Singapore. The revised treaties allow India as a source country to tax income from capital gains. However, unlike few decisions in the past (which were labelled as 'tax terrorism'), India's actions in 2016 on tax-policy side have largely received positive & constructive response. Also, the relatively "aggressive" policy view, has not been reflected in tax administration's approach in dealings with the taxpayers.
A few important trends from India in 2016 relevant for the global community -
Indian Revenue Service (IRS) 'walks the talk' on non-adversarial regime
One of the highlights of 2016 would be the number of clarifications issued by the Indian tax administration on various aspects. In this year, IRS has issued 43 circulars (clarifications on tax provisions) compared to 25 in the preceding year demonstrating the emphasis on strengthening non-adversarial regime In January 2017, Indian Revenue was again quick to react on the controversial circular on taxation of foreign portfolio investors (FPI) and has kept it on hold. I hope that the trend continues in 2017 too, the year in which General anti avoidance rules (GAAR) and few more BEPS proposals would be implemented in India.
Advance Pricing Agreements (APA)/ Mutual Agreement Procedure (MAP) - Tax certainty
Since the launch of APA program in 2012, Indian tax administration has demonstrated an impressive track record on APA closure. The Indian APA program has received over 700 applications in the first four years and over 120 APAs have been concluded as on date. In financial year 2016-17, India concluded about 58 APAs. Per the recent release from the Government, 66 MAP cases relating to transfer pricing issues have been agreed to be resolved under Framework Agreement with USA. This will significantly reduce the tax litigation particularly for MNCs. Similar trend is expected to continued in 2017, especially pursuant to India-US framework and introduction of Article 9 (relating to taxation of transactions between associated enterprise, Transfer Pricing and resolution using APA or MAP) in the revised India-Singapore tax treaty.
India and BEPS
After BEPS reports were released by OECD in October 2015, the Union Budget 2016 introduced following action plans through amendment in the domestic tax law:
- Equalisation levy on B2B online advertisement payments to non-residents [Action plan 1];
- Patent income incentives (akin to patent box) [Action plan 5];
- Master file and Country by Country Reporting (CBCR) reporting: [Action plan 13].
India has participated in the Ad-hoc Group on multilateral instrument & has also committed implementation of minimum standards. However, the IRS has not yet announced which aspects of the multilateral instrument will be adopted. Taxpayers are also eagerly awaiting final CBCR guidelines and in fact, India would be among few countries where CBCR will be filed by November. India is expected to introduce more measures on remaining BEPS action plans, including its policy view on the multilateral instrument in 2017.
This week, Union Budget for 2017-18 will be presented by the Indian Finance Minister. This would be the penultimate Budget of the current Government, before next elections due in 2019. The Government will hopefully follow the roadmap to reduce corporate tax rate to 25% over 4 years period (from current level of 30%). With new tax residence rules & place of effective management (POEM) criteria already kicking-in and the General Anti-Avoidance Rules (GAAR) becoming effective from April 1, 2017, MNCs will need to be more attentive on the tax risk evaluation. GST once implemented in 2017 will be the biggest indirect tax reform in the last 50 years.
One hopes that non-adversarial experience from tax administration will reduce the turbulence in these exciting times.
The views expressed herein are solely the author's. BDO India does not take responsibility for actions or decisions arising out of individual perspectives or opinions.