 "For economy, it is more of the same: Satya Poddar")
Tax reforms are conspicuous by their absence in the economic reform agenda of the government outlined in Budget 2016. Prepared against the backdrop of global turbulence and volatility, Finance Minister Arun Jaitley has chosen to tread with caution, eschewing any "big bang" reforms or nasty surprises. His first two Budgets were seen as a continuation of the past, completing the unfinished agenda of the UPA government, especially in terms of the direct taxes code and GST. The government has little to show for its efforts for the past two years. The Budget does not chart a new course, nor does it provide a roadmap to the finish line. It is largely a collection of small carrots and sticks, which would soon be forgotten, with no lasting impact on the economy or government finances.
The world over, the principal objectives of tax reform are promotion of investment and economic growth, efficiency and simplicity. The Indian tax system fails miserably on these fronts. The GST, described as an "unprecedented reforms measure in the modern global tax history", would have addressed all of these objectives. However, to build consensus with the states, its design has been substantially diluted, sacrificing its simplicity, efficiency, as well as positive impact on investment and economic growth. The tax base has been truncated by the exclusion of important sectors such as real estate, petroleum, electricity and alcohol, the tax rates pushed up to very high levels, and the compliance procedures made cumbersome.
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The single design of GST for both the Centre and states is dubbed as a model of cooperative federalism. In reality, many states see it as a model of coercive federalism, resulting in a complete loss of their fiscal autonomy. The passage of the Constitution Amendment Bill (CAB) for GST has been blocked by the Opposition in the Rajya Sabha. Even if the CAB is eventually approved by the Rajya Sabha, significant friction awaits on other aspects of GST design.
Having tried for eight years to build consensus for harmonised GST, Jaitley had the opportunity to step outside the box and present an alternative model of a Centre-only GST, or the Australian national GST. His decision to remain with the current model may mean an indefinite extension of the status quo.
The other big ticket items expected in the Budget were rationalisation of corporate taxes by lowering tax rates and phasing out exemptions, transparency and certainty in tax determination, and restraint on tax terrorism. The Budget has been a disappointment on this front in varying degrees. On the corporate tax front, some progress has been made by capping accelerated depreciation at 40 per cent and reducing deductions for research and development. A corporate tax rate of 25 per cent has been proposed for new manufacturing companies not seeking incentive deductions or allowances. The rate has also been lowered to 29 per cent for enterprises with turnover of less than Rs 5 crore. Allowing exemption to 40 per cent of the corpus withdrawal from the National Pension Scheme (NPS) at the time of retirement and levying an additional 10 per cent tax on annual dividends beyond Rs 10 lakh make good politics but bad economics. While the former leads to no tax, the latter results in double taxation of corporate profits.
A confused approach to the Make in India initiative is seen in the excise concessions given to IT products like adapters and networking equipment, while keeping out laptops and desktops. While abolishing 13 cesses, a new Krishi Kalyan Cess of 0.5 per cent is being levied that would enhance the burden on the final consumer. On the transparency, certainty and tax terrorism front, the bugbear of Indian taxation - retrospective amendment - has not been done away with. The proposed Committee system to oversee "fresh cases" of retrospective taxation, if anything, serves to affirm that fresh cases may continue to be initiated under retrospective amendment and is unlikely to find favour with industry.
With the government entering the third year of its mandate, the curse of the "more of the same" is likely to stay with the Indian economy for the rest of its mandate.
The writer is Tax Policy Advisor, EY
