THE RETURN OF OPTIMISM

DESPITE THE MISSES, 2014 SAW A TREMENDOUS BUILD-UP OF EXPECTATIONS FROM THE MODI GOVERNMENT. NOW, IT SHOULD INITIATE ITS REFORMS AGENDA, VIA BUDGET 2015

Source: The Financial Express

Looking back, 2014 has been amongst the most eventful ones in many decades. A new government at the Centre, with an unprecedented electoral mandate, saw the return of optimism over India’s growth potential. The Narendra Modi-led government’s many diplomatic wins has the world taking India seriously again, and the tremendous build-up of expectations on reforms mark the new year. A close reality-check reveals a few misses, but one would overlook them in the interest of long-term vision of the new government that is laying a path distinct from any of the governments in recent times.

On the macro-economic front, 2014 began with challenging targets of economic growth and deficits—5.5% and4.1 %, respectively. The Mfd-Year Economic Analysis FY15 revealed encouraging trends in GDP growth and projected the year-end growth at 5.5-5.9%. Though the deficit situation is still far from benign, largely on account of less-than-budgeted tax collection growth and the relatively slow-paced economic recovery, it is likely that external factors such as softened crude oil prices will help the exchequer contain subsidies and import outgoes. A sustained trend of softening crude prices may further allow the government to target fiscal deficit aggressively in Budget 2015 as well, hopefully aided by tax reforms, starting with GST, which will enhance tax collections in the future.

The winter session of Parliament, labelled unproductive by the media, was not as bad as depicted, with close to 50% of the Bills being passed by either of the two Houses. However, the most significant ones that failed to be legislated in the winter session were The Insurance Laws (Amendment) Bill; the Coal Mines Bill; and the Constitutional Amendment Bill 2014 on GST. While the insurance Bill and the coal Bill are languishing in the Rajya Sabha, it is no surprise that the government has come out with Ordinances to push reforms through in these key sectors. Insofar as the GST law is concerned, the government has pulled off a clincher by introducing the revised Constitutional Amendment Bill, 2014; the revised Bill is a huge step forward and under-lines the in-principle concurrence of the Centre and states on the most contentious issues—taxing jurisdictions and the revenue-sharing formula. Whilst GST is one of the most significant tax reforms since Independence, the overhaul of direct taxes may have to wait as the government is working to prepare a revised draft of the Direct Taxes Code (DTC) Bill.

The year was also flush with many tax controversies, thanks to the high-stake transfer-pricing disputes that wound their way to the courts. While these disputes have for now been resolved, I hope that the finance ministry comes out with clear directives discouraging frivolous tax litigation.

Big hopes are pinned on the coming Budget as investors expect the finance minister to spell out a bold, reformist action-plan. The most important macro-economic fundamental that Budget 2015 must address is reinforcing stricter fiscal prudence by recommissioning the Fiscal Responsibility and Budget Management Act. There will be definite expectations as far as the financial sector and capital market reforms are concerned.

From a tax policy standpoint, it is widely expected that the government will stick to its commitment of refraining from retrospective legislations. I would also like Budget 2015 to announce more discernible timelines for GST and DTC implementation; besides, investors will be encouraged if they have clarity on the fate of the General Anti-Avoidance Rules (GAAR), though, given the inflection point of the economic recovery, it perhaps may be not sensible to push ahead with GAAR implementation. I would expect the finance minister to be pragmatic and defer GAAR implementation by at least a couple of years. Hopefully, a deferral of the GAAR will enable the tax administration to brace itself for sophisticated legislation through focused training and capacity-building measures.

Budget 2015 could also look at administrative reforms in taxation, especially in the wake of the shortfall in revenue collection in the current fiscal. Substantial progress has already been made by the Tax Administration Reform Commission, as far as research in the areas listed in the terms of reference mandated by the government. The Commission has also come up with set of recommendation and reforms measures, submitted in three phases. It will be interesting to see how the finance minister proposes the implementation of some of these recommendations in Budget 2015.

There will be a long-winding agenda to deal with these as the finance minister’s team prepares for the most-anticipated Budget of the decade thus far. The order of priority and the strength of political shall hold the key as the finance minister walks down the path of the NDA government’s reformist vision. While the build-up to 2015 is happening at its pace, the government can pat itself for progress made in the current fiscal.