Union Budget delivers without risking fiscal health
Source: The Financial Express
It is fair to say at the outset that the finance minister has pulled off a milestone budget with a clear vision for achieving double-digit growth through vital reforms.
The shifting of the base year for computing macro-economic fundamentals, coupled with the softening of crude prices, presented an encouraging backdrop for the finance minister to target near 8.5% growth in FY16 and push the fiscal deficit target realisation to FY18. Visible signs of economic recovery allowed the finance minister to announce many proposals to revitalise the investment landscape and carry out sector-specific reforms.
At the policy front, the Budget delivers without risking the fiscal health of the economy. The tax collection projections display realism—10% in corporate tax, 12% in individual income and robust 19% and 24% increases in excise and service tax collections, respectively. Growth in tax revenues are largely predicated on the increase in service tax rate, from 12% to 14%, the marginal increase in excise duty rate, the pruning down of exemptions and the doubling of the clean-energy cess. These targets relieve revenue field-officers of the pressure to adopt coercive measures to meet targets or make high-pitched assessments.
The Budget rolls out major regulatory reforms for financial and capital markets. The setting up of the Public Debt Management Agency will facilitate the integration of external commercial borrowings and domestic debt markets. The proposed merging of the Forward Markets Commission with Sebi will curb speculative behaviour in the commodity market. For better monitoring of foreign equity inflows, FEMA is proposed to be amended to allow the government to exercise control in consultation with RBI.
Reaffirmed commitment to GST roll-out from the next financial year and the firm withdrawal of the direct taxes code (DTC) Bill signal clarity in the tax reforms agenda. To address the inverted-duty regime, the rationalistion of basic and countervailing custom duty rates on specified items under ITA has been proposed. The deferral of the GAAR by a couple of years is a well-timed policy move. The two proposed laws to curb black money highlight the commitment to bring delinquent taxpayers to book. These ensure seamless implementation by amending the PML Act and FEMA. Indirect transfer laws have been amplified, though clarity is still needed.
On the direct tax front, while no immediate reduction in the corporate tax rate has been announced , the proposal to bring it down to 25% in a phased manner is a bold move. Levy of the ‘super-rich’ surcharge will hurt domestic corporates marginally. By legislating that FIIs and AOP members will not be subject to the minimum alternate tax (MAT), the Budget seeks to avoid possible tax disputes.
The proposal to allow foreign investment in alternate investment funds (AIFs) unlocks the potential of this sector while the tax pass-through extended to Category II AIFs will do away with arbitrage. The safe-harbour proposal for fund manager provides a breather to the foreign funds.
The rationalisation of capital gains tax for sponsors of REITs and InViTs could make the business trust structures attractive for financing large infrastructure projects. The focus on tax administration reforms, on the lines of the recommendations of the Tax Administrative Reforms Commission, is encouraging.