Services: An All-round Push
India’s services sector is rolling on. But key sectors such as financial services and hospitality need a big stimulus
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Services is a big contributor to the GDP, and like most past budgets, this one too needs to push the services sector. After all, it is often referred to as the engine of growth for the domestic economy. It’s one of the main contributors to the economy, contributing nearly 60 per cent of the gross value added. It generated a huge export value of nearly $38.95 billion in H1FY2019, despite global headwinds and trade wars.
According to market experts, taxation of services is well-settled. Most services are taxed at 18 per cent. “The budget per se would not have any major changes in terms of taxation issues; it is actually well-settled. Service sector policy issues will have an impact on the medium to long-term, but not in the immediate future,” said A K Sridhar, director, and chief investment officer, India First Life Insurance.
But the tailwinds of the demographic growth and the burgeoning middle class often times has a positive rub-off on other sectors in the economy, and therefore, services do play a vital role. If you look at some of the critical services sectors such as IT, the largely skilled manpower has transformed India into a global IT hub. Almost 33 per cent of the Indian workforce is said to be employed in the services sector which comprises of tourism, IT, healthcare, hospitality, real estate, and financial services.
One factor that sets apart the services sector is low-cost skilled labour. It helps India to, for instance, become an important destination for medical tourism as a result of cheaper and excellent healthcare services. Besides, Indian IT has nearly half the market share in the global sourcing market worth $185 billion.
WHERE TO LOWER GST
On the taxation front, for most services, the budget is likely to remain a neutral exercise, save for a few sectors where the GST could act as a prop such as hotels. But by and large, financial services, telecom, etc, are considered as revenue generators for the government.
Hospitality and tourism
Of course, some sectors such as hotels could do with a bit of lower service tax such as hotels. In India, tourism and the hotel sector has been largely a cash economy, and a high GST is luring away the traveller from travelling, according to market experts.
One of the demands of the hospitality industry is that it be granted infrastructure status for projects over Rs 25 crore to develop tourists packages and to develop destinations that are not traditional tourist destinations. The industry also wants the government to announce measures to promote tourism.
Others, clamour for a cut in real estate GST. In fact, GST on commercial real estate continues to be levied at 18 per cent on the overall rental value, while builders don’t get any input credit. Therefore, costs are passed on to tenants, which is impacting the demand for rental property.
“It will be a relief in a small measure if the GST, which was earlier imposed on apartments, is removed completely. The government should have given some sops to a few home buyers to encourage people to purchase homes and revive the sector. Today, in India, even affordable housing is not affordable for most people. So these are a few challenges that the budget should address,” says Mona Jalota, Founder and MD, Krypton Global Investments.
“Many mature countries like European nations have extremely friendly schemes for first-time home buyers. If this is something that the current regime would look at and replicate within the Indian scenario, it will give a real boost to the realty sector,” adds Jalota.
On real estate investments, the industry is also asking for a reduction in the holding period of REITs (Real Estate Investment Trust) for the calculation of capital gains. At present REITS are considered as long-term assets if held for 36 months. However, the industry wants this tenured reduced to 12 months.
Media and Entertainment
This is one sector that is expected to grow by leaps and bounds given the penetration and need of the entertainment sector. According to a report by CARE Ratings: “The industry expects single window clearance mechanism for setting up screens, along with tax holiday for setting up new multiplexes or for conversion of single screen to multiplexes.”
Being one of the biggest growth drivers as a facilitator of other services, telecom plays a vital role in the economy. Hence, the industry expects an increase in telecom infrastructure expenditure towards R&D and other such expenses, and also a reduction in spectrum usage charges.
This sector remains a concern. While the government announced the Ayushman Bharat Scheme, the allocation toward this has been minimal. Market watchers reckon that the government should increase allocation in this budget. “Our public expenditure on health at 1.2% of GDP has been one of the lowest in the world. At every budget, the biggest expectation is that the healthcare spend will go up. Out of pocket expenditures continue to be rising. It is important to have a realistic budget and enable healthcare service providers to deliver services through public-private partnerships. It is important that apart from building the infrastructure and bringing in efficient reforms, the budget should also account for a transparent and an all-encompassing system for medical education,” said Ameera Shah, managing director, Metropolis Healthcare.
Healthcare experts also maintain that with the rise in the treatment costs it will be wise on the part of the government to raise the limit of medical reimbursement from the present Rs 15,000 per annum.
India’s burgeoning middle class needs a seamless supply of goods. Warehouses play a critical role here, but this service is taxed without benefits of input credit. “A persistent demand has been to do away with GST on leases of warehouses, as lease expense on warehousing services provided on the leased warehouses is treated as a commercial expense. GST on the leases of warehouses is an expense on us and there is no input mechanism on the same. We think that such smaller things and larger sops in terms of tax benefits and credit availability will help the industry grow faster and bigger,” said SCLM Group CEO, Sandeep Sabharwal.
BIG CHALLENGES AHEAD
Of course, all round the services industry could do with lower service taxes, as most services are taxed at 18 per cent. “In all reality, much of what ails the services sector is due to the economic shifts. Yes, challenges lie ahead but not because there was a lacuna in GST implementation but due to cyclical sector rotation within economy, global and local factors sans appeasement politics that will drive the GST policy. Stressed sectors such as telecom, financials (banking in particular) could thus see policy adjustments in relation to GST,” said Rohit Jain, partner, Economic Laws and Practice.
But for many market watchers, kick-starting the banking sector should be a priority for the next government. For one, most of the PSU banks have not yet started to earn their keep. In fact, most PSU banks have slowed credit disbursals because of lower reserve capital. In fact, after the NPAs have hit the roof, the PSU banks need a boost in their reserve capital and it can only come from the government. Market observers reckon that the earlier it comes, the better it will be for the economic growth.
Among other challenges, the next government, the next government has to work on removing trade barriers and further improve on the ease of doing business. On healthcare and education, a zero tax policy could be a big boost. Besides, a lot of macro lift is required to promote the growth of services so the FDI policy has to be reviewed, according to experts. Some industry experts clamour for an automatic 100 per cent FDI in many services so as to open up the economy for foreign investment.
All in all, experts believe that the next government should increase allocations to the services such as transportation, which will boost tourism, internal movement of goods and services. But as there has been a constraint in the fiscal situation, which segments in the services sector get priority will remain a challenge. Experts agree that even if the next government can increase the allocation to domestic roads, ports, airports infrastructure, it can give a big fillip to services such as shipping, roadways, and aviation.
Market observers believe that finding the resources can be a huge challenge, given that fiscal deficit this year can be high and could cross the budgeted levels of 3.3 per cent. But it’s a challenge the next government will have to tackle head-on.
THE BIG FACTOR
* Government is working towards reducing trade barriers and improve ease of doing business
* On World Bank’s Ease of Doing Business - "Getting Electricity" ranking, India jumped to 24 in 2018 from 137 in 2014
* The sector has contributed 57.12 per cent of India's gross domestic value added
* Net services exports stood at $38.95 bn, while IT firms generated their highest $167 billion in revenues
* India's earnings from medical tourism can surpass $9 billion