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Reams have been written on the Union Budget extolling its proposals or damning them. As the discussion approaches an asymptotic termination, I find that something needs to be said in retrospect that balances the thrust of the debate that ensued soon after its presentation in Parliament.
The primary concern prior to the Budget was how to address the extremely negative aspects of taxation for business decisions that had driven domestic and foreign investment away from Indian shores. To elaborate, businesses face two obstacles when making a business decision. The first is risk. An investor has a perception of the risk he faces as a risk averter or a risk preferer. Reflecting his perception of risk in an investment, he decides to invest by taking risk insurance, or to stay away from the investment.
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The second is uncertainty. The investor has a hard time assessing uncertainty, for it represents factors quite beyond his conceptualisation in the environment from where he should ideally be in a position to judge if a potential investment is worth it or not. Tax laws between 2009-12 converted the investment environment quite uncertain. Worse, not only did uncertainty prevail for the future, but it was extended into the past through various retrospective amendments, some of which catapulted India to a global high as a poor place to invest.
To begin, the Budget has no doubt attempted to address uncertainty. First, it has postponed GAAR for another two years and has indicated its prospective application. However, this will not help unless tax officers are given intensive training as to how to use the instrument. Further, the income tax department has so far ignored the thirty plus examples provided by the 2012 GAAR committee for the use of GAAR. These examples should be vitalised. Otherwise, a mere postponement would be ineffective in removing uncertainty that would be caused by GAAR's application.
Second, Finance Minister announced that the taxation of indirect transfers will be addressed by CBDT through a clarificatory circular. That is welcome. However, there was no explanation why he did not prescribe primary legislation for it especially since such a circular can only address indirect transfers exclusively rather than remove or restrict retrospective taxation in a wider context. Yet only the latter would remove uncertainty comprehensively. Further, the 2012 committee on taxation of indirect transfers had cautioned against (1) treaty override since India still is a capital importing country, and (2) taxing indirect transfers between companies registered and trading on the stock exchange. If these matters remain inadequately addressed, a Pandora's Box of issues will jump out to scuttle government's stated economic objective of enhancing ease of doing business.
Third, FM's mention that recommendations of the Tax Administration Reform Commission (TARC) that has just completed its work, will be implemented in 2015-16 was salutary though elaboration would have been useful for taxpayers to be reassured. TARC emphasised the importance of assigning accountability since, contrary to modernising tax administrations, India simply does not practice it, looking at the mass of tax disputes. It would not be surprising if the Indian total surpasses a combined rest-of-the-world. FM's mention of a Disputes Bill was salutary but details are awaited.
Fourth, following the announcement of GST introduction in 2016, it is time now to put any proposed structure up for discussion with stakeholders and to desist from introducing GST just on the basis of centre-state discussions at government level. Governments tend to discuss GST proposals in great detail with taxpayers and the Indian government should follow those modern principles. After all, a move from the current indirect tax structure would make sense only if GST is anchored on easing business and investment. Yet so far there is no White Paper on GST structure leave alone deeper technical aspects that will undoubtedly affect taxpayers and fundamentally alter their interface with central and state tax administrations.
Fifth, FM's pre-announcement of government's intention to reduce the headline corporate tax rate to 25% in consonance with GST dynamism was a daring step in the right direction. However, the super rich tax does impact corporations as well so that in the current year, they will be hit with a higher tax rate. This could have been explained through some justification in the government's view of a super rich tax that includes non-individuals.
Sixth, the abolition of the wealth tax that hardly yields revenue was a good idea but, in as poor a country as India, should government reject wealth taxation completely, or should it redesign it at a very small rate on a wide base as proposed in DTC2013? This matter should be seriously reconsidered.
Indeed, seventh, FM's statement that the DTC was being dropped altogether on grounds that most DTC proposals had already been incorporated in the Income Tax Act reflected an erroneous view of the tax administration that the remaining tough nuts to crack could be safely set aside from the ITA. Even Yashwant Sinha expressed disappointment at this. FM should retract from this position not necessarily through another statement but through re-examination of DTC2013 and incorporating the many reform features that remain to be included in ITA. This topic is worth revisiting at some point by tax experts.
Eighth, tax revenue has suffered due to the underground economy. While Switzerland has an announcement effect, the bulk of the problem resides in India. The Budget announcements to curb black money are the strongest ever made by any Indian government. It is to be seen how far government is able or willing to move on this. If it can, greater tax revenue will get rightfully captured in the exchequer and the administration would be more easily able to become customer friendly in its operations. The crux here would be to encourage and ensure voluntary compliance by not going after roving enquiries and thereby turning good taxpayers into non-filers.
Ninth, the small attempt by government to address environmental degradation by doubling the clean energy cess on coal from Rs 100 to Rs 200 per metric tonne was welcome though, certainly, this is not enough. Urban areas in India deplete life by three years on average; yet there is blindness in favour of pushing the concept of the small car hub. There has to be wider unilateral use of carbon tax in India without looking over our shoulders to see what other countries are doing. We owe this to ourselves.
Tenth, I would like to emphasise three salient features that added sense and sensibility to the Budget. First, it made sense to focus tax incentives on investment, primarily infrastructure where the widest gap exists. Second, it also made sense to extend the fiscal deficit target by one year for absolutely nothing was to be gained by strict adherence to a paper target when revival of the economy is of the direst importance. Third, there was a touch of sensibility by focusing expenditure subsidies on the absolute poor while cutting back on the ones fraught with leakage as field reports continue to reveal.
That the government bit the bullet to reveal its intentions and promises is a sign of apparent sincerity. However, its Budget did leave behind a veil over feasibility and a challenge of delivery.