A Budget of Aspirations
While expectations are soaring, there is reason for one to believe that Union budget 2014 may only be a curtain raiser for more planned and structured reforms the new government will focus on. Markets have been buoyant and business confidence, in anticipation of a growth cycle, has seemingly picked up. While inflationary conditions on food prices continue to be a concern besides an expected under-par monsoon and rising crude oil prices, the government has not fallen short in putting out encouraging reformist statements. Business sentiment, in general, makes the job of the finance minister tricky, as he is expected to contain rising fiscal deficit, improve business climate and rein in inflationary tendencies. With long-standing policy paralysis and controversial tax changes plaguing the country’s image over the past few years, the stage is all set for a grandiose curtain raise on 10 July.
Our survey on taxpayers’ perception of how this budget would deal with fiscal policy and tax matters revealed an overall optimistic mood. Here are my observations on the key findings of the survey.
On the economic policy front, only bold reforms will lead the economy into an orbit of 7% GDP growth, and most optimists have held a return to 9% growth as a mirage. The government would need to make an efficient and realistic determination of sources of revenue from taxes and channelling of savings. It is expected to fund part of its budgetary spending through timebound and structured disinvestments from public sector undertakings and the majority of respondents felt the budget would announce a structured divestment programme.
From a foreign investment perspective, while the BJP has categorically opposed foreign investment in multi-brand retail, it is likely to announce the opening of growth-driving sectors such as insurance, e-commerce and defence. Most respondents also felt that foreign investment norms, in general, would be liberalized, with a 49% cap in all sectors.
Another key area to watch would be on how the new government tackles the parallel economy. In its first decision, the government established a special investigation team for dealing with hidden offshore wealth. While achieving this end is not easy and entails moving through a quagmire of legal and political bottlenecks, the intention seems well-directed. I anticipate the budget proposals would set direction for this objective.
Tax litigation and stability of tax policies seem to top the list in pulling down India’s charm for foreign investors. Added to this, the general anti-avoidance rules (GAAR), indirect transfer provisions and disputes on transfer pricing seem to top the survey findings.
(a) GAAR has been intensely debated in the context of the tax administration’s ability to handle a mature legislation coupled with inadequate guidance on its applicability. While it seemed evident that the erstwhile government was determined to introduce GAAR from April 2015 on hopes of stability, respondents felt the budget may delay its implementation.
(b) It is imperative for the budget to consider expert committee recommendations on the prospective applicability of indirect transfer provisions. Almost two-third of respondents hope the retrospective amendments to law will be withdrawn.
(c) Transfer pricing adjustments and consequential tax effect continue to rattle globally-experienced multinationals. Also, the pace of issuing advance pricing agreements and settlement of disputes under the treaty mechanism ranked high on respondents’ agenda. It is becoming imperative to issue directives in administering to simplify transfer pricing provisions and reduce tax litigation as echoed in the survey. I feel that to combat unprecedented litigation, new, quicker and efficient alternate dispute resolution mechanisms should be introduced. This view finds support from a majority of respondents.
Most respondents felt a need to rein in tax administration and embrace a coherent and service-oriented approach. Recommendations of the tax administration reforms commission (TARC) must be holistically adopted and suitably implemented. Nearly 58% anticipate that the recommendations of TARC will be accepted and implemented.
Though expectations on tax incentives, in general, are absent, the majority felt that tax holidays for the energy sector will be extended, taxes for SEZs will be simplified and 10% median excise duty rate for specified industries would be extended to all for reviving manufacturing.
Lastly, after over four years of speculation, the fate of two most ambitious tax reforms—direct taxes code (DTC) and goods and services tax (GST)—may well be decided in the upcoming budget, though majority felt that DTC may be shelved. I feel that a decision should be taken on the need to enact DTC, especially after the extant legislation has undergone several changes in the past few years with introduction of GAAR, APA, safe harbour rules, etc. GST will be a focal point of tax reform agenda and hence an overwhelming majority felt that the government will announce measures and a concrete plan for introducing GST by 2016.
Overall, I expect that the budget will focus on economic reforms, resetting the tax policies and attempt to bring stability and certainty to revitalize growth over a long-term period. The extent to which the new government would be able to deliver on its promise in this year’s budget remains to be seen. However, it will certainly be seen as a step in that direction.
The author is managing partner, BMR Legal. The views are personal.