A budget for the new ‘normal’ in India’s economic landscape

Source: Outlook India

The Union budget exercise takes centre stage on the political scene for the first quarter of each calendar. This year it is generating more interest, both in India and overseas, in the backdrop of the impact of demonetisation on the economy, the Centre-state logjam over the GST regime, ­impending elections in five states, surge in international crude oil prices and falling commodity demand. Finance Minister Arun Jaitley will be balancing multifarious expectations with the current budgetary exercise. With the Model Code of Conduct (MCC) coming into effect for state elections, the Government’s move to advance the budget proposals by one month has ­already generated an intense debate.

The upcoming Union budget is the Modi Government’s fourth, and the industry cries for econ­o­mic and tax reforms are louder than ever.  In terms of priority sectors which are likely to feature high on the FM’s agenda, ‘agriculture’, ‘infrastructure’, ‘railways’ and ‘manufacturing’ emerge as the front runners; the netizen vote on the Finance Ministry’s Twitter handle resonates with this list. Insofar as the budgetary alloc­a­tions are concerned, it is likely that the FM may loosen the fiscal deficit target for 2017-18 to 3.5 per cent of GDP (as against three per cent of GDP), to acc­ommodate enhanced spending on priority sectors.

From a tax reform standpoint, this budget could prove to be a game changer on multiple fronts. In terms of direct tax reforms, the budget may lower the tax rate for corporates, a move which the India Inc. has ­patiently awaited since the FM’s announcement in 2015 for a phased rate reduction coupled with withdrawal of tax exemptions.  In 2016, the FM fulfilled a part of this promise by setting out the sunset dates for a host of tax incentives. The other part on tax rate ­reduction seems to be in the offing now, particularly to boost industry sentiments post demonetisation.  The common man is expecting relief to soothe the demonetisation ­impact; whether this is addressed through a rejig of exe­mption threshold, slab rates, tax rebates on interest and loans, etc. or uses the long handle of fostering job creation by extending a helping hand to corporates, remains to be seen.  India Inc. may get a breather from the tax accounting standards, which result in advance recognition of the income and a greater administrative burden for the taxpayers. The Industry wish-list for deferral of General Anti Avoidance Rules (GAAR) may not cut ice, given its last two-year deferral in the 2015 budget; though the Place of Effective Management (POEM)-centred residency rule may be shelved with the anti-avoidance-based Controlled Foreign Cor­p­oration (CFC) provision. It is likely that the FM will act on the implementation of sel­ect recommendations of the Easwar Committee and of the Tax Administration Reform Commission, to ­address ‘ease of doing bus­iness’. Notably, the government has implemented a host of measures on the tax dispute resolution front since assuming power and the trend is likely to continue this time. This has further become critical from the standpoint of discretion which the revenue authorities may seek to assume in the context of GAAR and demonetisation-related provisions, thus, necessitating the government to imp­lement credible counter mea­sures in anticipation.

In its recent report on global economies, the World Bank has pared India’s growth forecast for the financial year 2016-17 to seven per cent from 7.6 per cent estimated earlier; similarly, the IMF in its World Economic Outlook update, trimmed India’s growth rate in the current fiscal to 6.6 per cent. Given these developments ahead of the budget announcements, the FM will certainly seek to cement India’s position as the ‘preferred investment destination’ by articulating India’s intent for convergence towards emerging global consensus on tax policies.  On the international tax front, the FM is likely to reiterate India’s commitment to the OECD’s BEPS programme, Multilateral Instrument (MLI) being the key piece, which India is likely to sign in 2017-18. It is expected that following the release of the MLI text by the OECD in December last year, the FM could lay down broad contours of India’s approach.

The GST-related announcements are likely to hog the limelight in the FM’s budget speech.  He may not push through changes in the indirect rate structure, as India is on the verge of implementing GST. He may seek to modify the existing service tax rate, to align it with the proposed rate for services under the GST.

It does seem that the Union Budget 2017 may set the tone for the new ‘normal’ in India’s economic landscape—be it corporate tax rates, India’s stand on MLI, implementation of the GST or the change of the current accounting year to a calendar year.