Mr. Finance Minister delivered his maiden budget speech in the backdrop of huge expectations from all sectors as if he possesses a magic wand to dispel all negatives from the economy. To add to this burden of expectations was also the problem of unpredictable and delayed monsoon, Iraq crisis bearing effect on oil prices further worsening government’s subsidy bill and already high inflation, really low investor confidence, and last but not the least the legacy of economic mess of the last government.
The minister smartly caveated and set the expectations right at the beginning of the speech stating India isn’t the only country gripped with slow growth sending signals not to expect a big bang change in the short run from the government barely in office for 45 days. But definitely the journey has begun to labour hard and achieve the daunting task of containing the fiscal deficit at 4.1% of the GDP as set by his predecessor and gradually taming it to 3.6% in financial year 2015-16 and 3% in financial year 2016-17.
The tax administration and reforms were mentioned a couple of times in the speech. This reflects serious intention in this regard. But, the budget did not mention any roll back of retrospective amendment. Rather it emphasised the sovereign right of the government to make retrospective legislation, although with extreme caution on its impact on overall investment climate. As a result, there will be no relief to Vodafone or Nokia kind of cases which are already in dispute. But, fresh cases will be looked into and scrutinised by a high level committee. Surely, the budget misses on this crucial issue of rolling back the retrospective amendment.
The emphasis was also laid on reducing the tax litigation and disputes. Over 4 lacs crore are stuck in these disputes. Clearer and transparent tax legislation could avoid such disputes. Interestingly, the government’s record of winning tax disputes is a meagre 20% but much money is wasted in fighting these tax battles.
To minimise tax disputes, the budget provides for advance ruling for even resident tax payers. Ideally, as was much expected, the budget could have provided for a tax amnesty scheme to tempt tax payers to come forward and settle their disputes. The carrot shown for this could have been the waiver of interest and penalty on the taxes. This could have ensured clearing, most if not all, tax disputes and embarking a journey on a clean slate.
Major expectations are met on FDI front. The sectoral caps in defence and insurance have been increased from 26% to 49% with the prior approval of the government. With respect to the defence sector, the existing policy of above 26% being approved on a case by case basis where it results in access to modern and ‘state of the art technology’ will no longer be applicable as no such condition has been imposed except of course the full management and control should be in Indian hands. It will be interesting to see the fine print and language of the amended FDI policy. Another major relief in the defence sector is permitting foreign portfolio investors and foreign institutional investors to invest through portfolio investment. This was ban because of the August, 2013 circular of the government.
While the increase in cap in defence can be achieved by an executive order of the government – simply put through the amendment in FDI policy; for effecting increase in insurance cap, the Insurance Act will require a specific amendment. The next task should be to introduce the Insurance amendment Bill without any delay.
There is some cheer for companies trading through e-commerce. The manufacturing units will now be allowed to sell their products through retail including e-commerce platforms. Although the expectations were much higher in this regard but still it is a step in the right direction. This will also dispel NDA’s image of being opposed to opening e-commerce.
To fulfil the dream of setting up smart cities, and attracting foreign participation for that, major condition of the existing FDI policy applicable to construction development – townships, housing, built-up infrastructure with respect to minimum area to be built up and minimum FDI to be infused has been respectively reduced from 50,000 square metres to 20,000 square metres and from USD 10 million to USD 5.
Nothing has been said for FDI in railways, perhaps it needs some more thinking. The real estate companies also have reasons to rejoice as the REITs will be given the tax pass through status. This will encourage them to raise funds through this mode. An outlay of Rs. 10,000 crore for investments in start-up companies through venture capital, quasi equity and debt will encourage entrepreneurship by young entrepreneur who are full of ideas but devoid of capital.
In order to give fillip to capital markets, 5% withholding tax on bonds will continue up to June 30, 2017 (tax incentive will be extended to all types of bonds instead of only infrastructure bonds), liberalisation on ADRs / GDRs is also announced, although the fine prints will need to be seen to determine the real effect of this proposal. Then there is revamp of IDRs, there again, the fine prints will have to be seen. Introduction of KYC across all financial sectors and use of one demat account for all kinds of financial transactions will ease business dealings in financial and capital markets.
While there is some cheer for individual tax payers as exemption limits have been enhanced, there is no major change with respect to corporate taxation except for a 10 years tax holidays for companies which begin generation, distribution and transmission of power by March 31, 2017. Contrary to expectations, the surcharge and education cess has not been reduced. The other change which though not quite clear is with respect to income and dividend distribution tax to be levied on gross amount instead of amount paid net of taxes. Although it does not appear that it shifts the dividend tax burden on the recipient of dividend. The concessional rate of 15 percent on foreign dividends will continue for the time being.
A major concern of foreign portfolio investors has been addressed whose foreign fund managers are posted in India and accordingly treated as a permanent establishment in India. Consequently, the income earned is charged as business income. Now it is proposed to charge the income to capital gains tax irrespective of the presence of fund managers in India. This will reduce their tax burden.
In order to achieve the overall objectives of reducing tax litigation in transfer pricing, a slew of measures have been announced. These include introduction of a “roll back†provision in the Advanced Pricing Agreement (APA), range concept for determination of arm’s length price, allowing use of multiple year data for comparability analysis. All this is expected to reduce the transfer pricing challenges.
While the budget is a smash hit on many accounts and is perceived as business friendly, there is much that it has missed. It did not say anything about the scrapping of the planning commission.
Some quarters had expected this. But, this cannot be decided in haste. While the budget did talk about raising non-tax revenues but it did not clearly specify the channels of funds to be raised through disinvestment, specifically, when SEBI has now provided for increasing public shareholding limits in PSUs over the next three years. This will require offloading government’s stake in PSUs to the general public.
Nothing much was said on the GST, while on DTC all that the finance minister said that his government will consider the comments on the revised DTC from all stakeholders with no other assurance on when will the DTC be in force. Deferment of GAAR was one area which was also expected but nothing has happened on that.
Contrary to expectation, the inheritance tax is not brought in force; perhaps, the experience in the VP Singh government which brought this tax was not very encouraging. The cost of collection and administration far exceeded the revenues.
With the new Companies Act, 2013 now is force there were expectations that certain tax issues with respect to new provisions in this Act will be clarified but the budget did not mention even a word about them. These include the tax treatment of CSR expenditure and tax on cross border mergers when an Indian company merges with a foreign company. Although, since the provisions of the cross border merger are yet to be notified, the tax treatment there can wait, but for no clarity on
CSR expenditure, the ambiguity will exist and the taxmen will disallow such expenditures from the business income of company making CSR contribution.
The budget speech surely missed quotes from any poet!
(Lalit is a partner with J. Sagar Associates. Views are personal and not of the firm.)
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