Union Budget FY16 – Govt must reset the reform agenda
Source: The Financial Express
In the past decade, Indian policy-making has all been about tinkering at edges, while political forces scuffled over marginal demands of social welfare, tax cuts and dole-outs. Largely, the lack of both unfettered political mandate and a will to implement caused the phenomenon of a policy logjam and reform inertia to endure. India is, however, all set to put the past behind as a more vibrant investment landscape is rapidly emerging since the Modi-led government took office less than a year ago. Plunging crude oil prices, coupled with currency stabilisation, presents finance minister Arun Jaitley a propitious opportunity to undertake next-gen policy reforms. Budget FY16, therefore, is an opportunity to reset the agenda. While expectations are many, and the Finance Bill lends a window for changes to tax-legislation only, the FM is expected to tread the path of a definitive agenda. Improved sentiments and the green shoots of an economic rebound suggest that the FY15 GDP growth target (5.5%) may well be within sight; although, a sustained and inclusive economic recovery requires a fresh dose of capital investments in manufacturing and infrastructure sectors. The government will be expected to roll out the red carpet for foreign investors as well as long-term investments by sovereign and pension funds, especially in key sectors such as power, insurance, defence, etc. Hence, the focus is likely to be on dealing with hurdles and improving the ease of doing business. The halving of crude oil prices over the past six months has significantly reduced India’s import bill and is expected to help the government achieve the deficit target (4.1%) for FY15, despite the latter missing its ambitious tax collection and divestment targets. There are signs that the slump in crude oil price is anything but temporary; the government must seize the opportunity to further rationalise subsidy and target stricter fiscal discipline through recommissioning of the Fiscal Responsibility & Budget Management (FRBM) Act. The fiscal deficit target of 3% by FY17 may well be achieved by revenue mobilisation and the curtailing of unplanned expenditure, given growth expectations. Another significant reform on the agenda ought to be the overhaul of capital and financial market regulations. While the government has indicated its in-principle commitment to implement recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), it will be imperative to announce a road map for implementation, including institutionalising the Unified Financial Regulator Agency (UFRA) for ensuring enhanced accountability of the financial regulators. While the Budget may not explicitly deal with the financial sector and other impending industrial reforms, I am hopeful that the budget session shall deal with reform on pension law and labour laws, which are seen as key to fostering the government’s flagship Make-in-India initiative. Budget FY16 is expected to lay enhanced emphasis on revenue augmentation besides expenditure management. Arguably, less-than-robust growth in tax collections could be an odd wrinkle in the the current fiscal, given the ambitiously budgeted 20% growth. Mobilisation of revenues being the key objective, the budget may consider means of enhancing tax collection base through tax policy and administrative reforms—both at the direct and indirect taxes front. Structural reforms to tax policy and administrative practices are key to inspire growth in tax collection targets as there is limited scope to undertake legislative changes. The most contemporary tax policy reform which the government must consider accelerating is—pushing through the Constitutional Amendment Bill on GST. It is now broadly acknowledged that introduction of the GST regime alone could add up to a couple of points to the overall GDP growth. It will thus be logical to push for this legislation. A more definitive timeframe for the roll-out of GST will help the trade and industry make necessary investments for technology improvisation and capacity building in a credible and phased manner. Without losing sight of impending GST, it may be prudent for the government to refrain from small amends and repairs to existing indirect taxes including service tax law. From direct tax policy standpoint, I will anticipate the budget to lay down a new roadmap for the implementation of DTC, considering the overhaul of the existing direct tax law is vital to expanding tax base and reinforcing the best practices of tax administration. Deferral of GAAR legislation will be prudent, as it is a no-brainer that neither the taxpayer nor the tax administration is adequately equipped to deal with it. From a bilateral tax policy standpoint, the government may consider articulating its apprehensions/ restrictive covenants, if any, regarding the non-resident’s claim to tax treaties; such proactive policy endeavours could help ‘nipping in the bud’ frivolous litigation. There are a few distinct industry-specific expectations, too. The energy sector expects the government to reinstate the tax holiday for commercial production of mineral oil and natural gas. Consistent with the spirit of the tax holiday regime, the rate of minimum alternate tax (MAT) on tax holiday profits ought to be rationalised; this move will encourage investments in capital-starved infrastructure sector as well as domestic manufacturing sector operating out of Special Economic Zones (SEZs). An increased weighted deduction or investment allowance for manufacturing units is another key expectation of investors as the domestic manufacturing emerges as a potential area fior growth thrust. To give a filip to business trust as alternate financing vehicles for large infrastructure projects, pass-through status granted by the Finance Act 2014 should be extended to exempt SPVs from dividends distribution tax (DDT). Also, sponsors of the trust should be allowed capital gains exemption on sale of listed units, to provide a level playing field with non-promoter unit holders. To improvise tax administration’s efficacy, it is important to strengthen the alternate dispute resolution forum and mechanics through legislative and administrative reforms. There is an urgent need to reinforce the spirit and bandwidth of the dispute resolution panel (DRP) as the first alternate dispute resolution forum; endeavours of the administration ought to be to ensure that only exceptional disputes find their way to higher appellate authority. To allow taxpayers and administration to engage in dispute only as the last resort, the government should consider legislating arbitration under the tax laws. Clearly, expectations from this year’s budget is more directional and policy-centric; I am confident we are well placed to call on certain bold measures which shall have positive outcome in years ahead. Key to this will be the legislature’s readiness to unleash the power of decision-making in rolling out these reforms.