The Budget keeps a firm focus on growth and fiscal consolidation. However, both these goals will remain distant without positive investor response. The finance minister has lived up to his promise of a stable tax regime for investors, but he could have done more. Many of his initiatives to restore confidence of investors in India as a place to do business remain a work-in-progress, which, while unavoidable, will delay the return of the economy to a higher growth trajectory.
The FM hoped that growth and fiscal consolidation would prevent any downgrading of Indias credit rating, result in a stronger rupee, lower interest rates, and lower inflation. This way, he would have achieved the objective of keeping the voters happy. After all, the most populist measure for the people would be to put more purchasing power in their pockets or at least not have it eroded through increase in prices.
It was perhaps for this reason that he abstained from a major increase in excise duty or service tax, as that would have directly fed into prices and fuelled inflation. The items that he chose for fiscal consolidation, such as income tax surcharges, and duty increases on luxury vehicles, mobile phones and cigarettes, will have limited, if any, impact on inflation.
There is a lot to applaud in the overall macro stance of the Budget, but this is not enough to unleash investments needed to restart the growth engine. The FM calls investment an act of faith. This requires not rich incentives or tax concessions to investors (which the government can ill afford at this juncture), but a hospitable, stable, and certain policy environment.
The trust and confidence of investors in India was badly shattered by the policy paralysis that has plagued the UPA government for the past three years. The GAAR and retrospective taxation enacted in the 2012 Budget were the last straw that broke the investors back. They were perceived as arbitrary and hostile by investors around the world, and undermined the independence of judiciary.
The FM has done a yeomans work in clearing the fiscal mess created by the last budget. Expert Committees were set up under the Chairmanship of Dr Shome, and Mr Rangachary to examine GAAR, taxation of indirect transfers, retrospective provisions, and tax disputes in the IT Sector. The committees worked hard and submitted their reports in a record time.
Yet, the government review of the reports remains a Work in Progress. Investors are disappointed that the Budget does not include a definitive and comprehensive response to the reports. The FM has been supportive of the reports, and promises to provide further clarification on these during the Budget session. But until then, businesses cannot be faulted if they remain apprehensive of India as a destination for their investments.
Their apprehensions were compounded by the new provision in the Budget suggesting that the Tax Residency Certificate (TRC) alone will not be sufficient for investors to avail of the benefits under a tax treaty (e.g., capital gains exemption under the India-Mauritius treaty). The FM was quick to assure the investors that the TRC will be accepted as sufficient evidence of their residence. But then one wonders what was the need for this amendment.
Behind the scenes, the tax authorities are continuing their aggressive posture in tax audits and transfer pricing assessments. Frightening demands have already been raised against several MNCs in India and the authorities are hounding even the domestic investors for making additional tax payments to meet the revenue targets. In fact, questions have been raised about the credibility of the 19 per cent growth in revenues projected in the Budget. It is far too optimistic at the assumed nominal GDP growth of 13.4 per cent. Might it be that the government is counting on aggressive assessments to meet the overly-optimistic revenue projections? The government is projecting a 36 per cent growth in revenues from the Service Tax, and has given significant additional powers to tax administration to enforce the payment of tax.
Such aggressive tax administration is very damaging to investments. It is a lose-lose proposition because it results in less investment, locks up revenues in tax disputes, and deters voluntary compliance.
The FM has promised a Tax Administration Reform Commission (TARC) to improve tax administration. Better administration with fair mechanism for dispute resolution can lead to more investments and revenue. This is not a big bang reform that requires a lot of spend by the government.
It only needs a new approach and attitude from the tax administration. But, for the time being, this too remains a Work in Progress.
Satya Poddar, Tax Partner, Ernst & Young (Shalini Mathur, Advisor-Tax & Regulatory services, Ernst & Young contributed to the article) Views are personal
