Kumkum Sen: Budget 2013: A bitter-sweet offering

This years Budget presented by the finance minister, was as expected, exceedingly well articulated; also not a populist Budget, which was the biggest fear. The challenges to the economy were correctly identified the slowdown with five per cent growth, the dismal balance of payments position, and inflation. To retrieve Indias growth trajectory, the finance minister has identified the goal to be inclusive and sustainable for growth. But the solutions are few and far between and the reactions to the Budget are not entirely optimistic.

That there is no option other than foreign funding, whether direct investment, portfolio investment, or borrowings is acknowledged, but there is no indication of new policies, opening up of existing or new sectors, addressing sectoral and other issues in telecom, insurance, and aviation to name a few. A multi-pronged approach to increase the penetration of insurance is envisaged, but the sectoral restrictions have not been relaxed. The textile and garment sectors are sought to be revived, when a large part of the market share has been lost to other jurisdictions.

The World Bank Surveys in their Doing Business in India 2013 have on a regular basis been ranking India in the bottom rung in the category of Ease of doing Business. The basic modalities of setting up a business in India, whether in obtaining regulatory approvals, accessing permissible funding, obtaining multiple permits from different regulators, central, state, municipal and more obscure ones, is time-consuming, inefficient and vitiated by corruption. The solution to this bottleneck cannot be addressed by the existing Cabinet Committee on Investment (CCI), which was set up recently for the industrial sector to remove bottlenecks and accelerate the implementation process. Intended for high value investments, this cannot be a substitute for providing single window clearances for all investments. What has to be in place are functioning regulators, not a committee which has the Prime Minister chairing it. What is required is an overhaul of the existing regimes, making the staffers more accountable, and introduction of better technology which can accelerate the processes.

On tax issues, the introduction of the investment allowance of up to 15 per cent for an investment amounting to Rs 100 crore or more in the manufacturing sector, in addition to depreciation benefits can be availed of by the investors in addition to depreciation is a deal sweetener. There have been no changes in the rates of Excise Duty and Service Tax. While the GST is on the anvil, GARR is expected to come into effect only in 2016. The proposal that investors routing Mauritius in order to avail of tax treaty benefits, cannot rely on tax residency certificates alone and would require to provide beneficiary certificates as well, led to the stock markets plummeting with foreign institutional investors (FII) dumping their holdings on the day of the Budget, but the government has since clarified that the Residency Certification is sufficient. FIIs are still unhappy with the proposal to introduce Commodity Transaction tax for all future based transactions, except agricultural commodities.

Surcharges have been slapped on domestic companies whose taxable income exceed Rs 1 crore, and from two to five per cent on foreign companies whose income exceed Rs 10 crore. Surcharges on dividend distribution tax have also been increased but possibly for a year. The tax on payment of royalties and fees for technical services to non-residents has been hiked from 10 to 25 per cent. How this will be reconciled with the existing tax treaties has to be seen. While on tax, it is unfortunate that the retrospective amendment of 2012 was not even referred to in the entire Budget.

Acknowledging the depleting of natural energy resources, particularly coal, a coal policy is expected to be announced and options such as renewable, wind and waste to energy, in the public-private partnership (PPP) models are being envisaged, but there is no mention of nuclear energy, on which the government was prepared to be voted out of power. Needless to say, none of the above proposals will resolve Indias energy requirements.

Rightly, the focus is on the infrastructure sector. The priority of infrastructure cannot be denied, and investments are expected from both domestic and foreign investments. But other than the stated intent to improve communications, dispel distrust, reduction of regulatory burden and review of tax policies there are limited specifics addressing the multiple concerns.

Infrastructure Debt Funds are expected to raise finance in cooperation with Development Banks Rs 50,000 tax free bonds are expected and two new funds are to be set up. The infrastructure industry is reportedly happy with this arrangement as well as setting up of a separate regulator for road construction, as there have been several instances of abandonment of projects.

However, it is essential that this regulator is the sole one, as disputes among multiple regulators is the bane of this sector. The Budget has not addressed any of the critical issues, such as, land, insurance, environmental clearances, as also further access to finance, as pension funds and other such sources are not being permitted to be approached. New industrial corridors are being envisaged on the lines of the DMIC Project, which potentially will provide many opportunities.

Going forward, it is not a breezy Budget, but hopefully it will pave the way back to good times.

Kumkum Sen is a partner at Bharucha & Partners Delhi Office

Email: kumkum.sen@bharucha.in