The FM has signalled financial sector and capital market reforms by committing to implementing recommendations of the Financial Sector and Legislative Reforms Commission

Source: Business Standard

The government has its task cut out for the forthcoming session of Parliament with growing expectations for a barrage of policy reforms – both fiscal and macro-economic – ahead of its first full budget. In the run-up, Prime Minister Narendra Modi, as part of his G20 heads of state meeting and visit to Australia, has signalled a framework about his government’s foreign (economic) policy.

Finance Minister Arun Jaitley, on the other hand, has set out an encouraging tone with public announcements in the past few weeks at various economic and leadership forums. The winter session presents an ideal opportunity to steamroll bold policy initiatives without hurting its electoral prospects, given the outcome of state elections.

The agenda is anticipated to bear two distinct facets – a) wider macro-economicreforms to inspire investments, both foreign and domestic participation, and b) long overdue tax policy and administrative reforms to address ease of doing business.

The Insurance Amendment Bill is most likely expected to see the light of the day, permitting foreign direct investment up to 49 per cent, allowing foreign pension and insurance funds to access the sector, which requires about $8 billion of capital investments.

The Mines and Minerals (Development and Regulation) Bill is yet another significant legislative milestone expected to be pushed, in the wake of impending auction of coal acreage licences, and for the impact it has on the manufacturing segment, particularly on cement, steel and power generation segments.

Rationalisation of Land Acquisition law to tone down the restrictive covenants and facilitate reasonable pricing, labour reforms impacting large enterprises, would possibly feature low in priority for the session. The government nonetheless recognises its relevance in fostering the flagship ‘Make in India’ initiative.

The FM has signalled financial sector and capital market reforms by committing to implementing recommendations of the Financial Sector and Legislative Reforms Commission. A key recommendation being to constitute a super regulator – Unified Financial Regulator Agency. Given that the expenditure commission has been in operation for the past few months, expect a stage being set for re-commissioning of the Fiscal Responsibility & Budget Management Act to chart a path for stricter fiscal prudence.

Moderate inflation and crude oil prices affords the FM this opportunity.

The fiscal deficit target of 4.5 per cent for FY15 is still far ahead of the three per cent target for FY17, and necessitates calibrated actions based on improvements in tax revenues and unplanned expenditure allocations.

Tax policy and administrative reforms
Considering that the technical work on the Goods & Service Tax (GST) is near complete, the constitutional amendment is widely expected to be tabled, and if approved, GST implementation will become a reality in April 2016. Recent state Assembly triumphs ought to give a fillip to the government’s endeavour of having states arrive at a consensus on revenue neutral rate and compensation formula. What, however, lurks as a probable threat is lack of consensus on the rate of GST, as the government has oscillated between moderate rates prescribed by the 13th Finance Commission to the recent proposal of 27 per cent by an empowered sub-committee, far above the global average of 16 to 20.

Recognising that a rate of 27 per cent is retrograde for a sub-optimal GST regime, should it leave out petroleum products from the GST chain, the government shall await recommendations of the Kavita Rao committee to signal a reasonable rate, which is likely to hover at 20-22. Although, rate calibration could be an effective means to build consensus with states, the government might want to push the constitutional amendment in the present session.

From direct tax reforms’ standpoint, it seems the Direct Taxes Code Bill, 2013 is unlikely to feature as a priority for the 2015 Budget. As a prelude to the Budget 2015, it’s widely anticipated that the FM might signal the implementation date for rolling out general anti-avoidance rules and/or its fine tuning. Though it’s early days for the G20 nations to signal changes in its domestic laws to implement base erosion & profit shifting action points, India’s challenge to deal with the menace of parallel economy and recent statements, could result in legislative and administrative actions.

Equally relevant will be to witness an action plan for tax administration reforms, independent of tax policy. The government-appointed Tax Administrative Reforms Committee has submitted reports of their work in two phases; recommendations unequivocally emphasise the need for institutional reforms to evolve taxpayer service focused administration.

It is anticipated that the third phase of the report will be submitted shortly with the last phase expected around Budget. Remember, the July Budget didn’t give any opportunity as the first phase was submitted in June, weeks after the Modi government came to power.

In summary – a bold legislative agenda and considering that it has only 22 sessions, the order of priority shall be crucial – watch out as the winter unfolds!