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Setting the right direction for reforms

Setting the right direction for reforms
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First Published: Fri, Feb 26 2010. 11 46 PM IST

 Rajiv Memani, CEO and Country Managing Partner, Ernst & Young India
Rajiv Memani, CEO and Country Managing Partner, Ernst & Young India
Updated: Fri, Feb 26 2010. 11 46 PM IST
The Budget reaffirms the government’s priorities of reverting to 9% growth and ensuring inclusive development. Since the expectations on the tax measures were low given the fiscal backdrop, the Budget, on the face of it, does not offer any unpleasant surprises.
Rajiv Memani, CEO and Country Managing Partner, Ernst & Young India
Gautam Thapar would increase employment. What would you do if you were FM. Play the game, read the analysis. All on Livemint.com’s Budget 2010 microsite .
Fiscal consolidation and rising inflation, necessitating a review of the government spending while keeping the gross domestic product (GDP) on the high growth path are the key challenges today. It is commendable that the finance minister has chosen to address the situation through greater expenditure restraint compared with tax measures.
Moreover, this is being sought to be done in a more transparent manner, with the target fiscal deficit of 5.5% not including oil and fertilizer bonds. It is also reassuring that the target for disinvestment proceeds would be higher in 2010-11.
This Budget sets the direction for some important reforms. The move towards direct transfer of subsidies to the farmers under the nutrient-based subsidy policy; viable and sustainable system of pricing of petroleum products and user-friendly foreign direct investment policy by consolidating all prior regulations are good signals of things to come. The reaffirmation about bringing in the direct tax code and the goods and services tax (GST) from April 2011 also reflects a firm intent to push legislative changes.
The allocation of Rs1.7 trillion to infrastructure development, constituting 46% of the total Plan allocation, would catalyse economic growth. The initiative to constitute a financial stability and development council would provide an institutionalized mechanism to maintain financial stability and address inter-regulatory coordination issues. The additional banking licences to private firms and non-banking finance companies would encourage a new generation of banks.
On direct taxes, while the corporate sector has some cause for cheer in the lowering of surcharge from 10% to 7.5%, the hike in the levy of minimum alternate tax to 18% from the current 15% has come as an unpleasant surprise. The manufacturing sector at this juncture can ill afford any new burden when recovery still needs support. The measure is also a setback for information technology companies.
The waiver of capital gains tax on the transfer of assets at the time of conversion of small companies into limited liability partnerships (LLPs) would encourage more entities to come into the organized fold. However, this should be allowed as a one-time waiver for all companies converting to LLPs, just as in case of conversion of partnerships to companies. Exporters’ woes have also been addressed to some extent by extending the 2% interest subvention for specified exports.
The ambit of income from other sources has been broadened to include shares received by a company—excluding firms in which the public are substantially invested—or an entity without consideration or for inadequate consideration in cases where the fair market value of such shares exceeds Rs50,000. This provision will even bring to tax transfer of shares between two group companies in an internal restructuring at a price that is below the fair market value.
The revision in the personal income tax slabs is one of the most positive steps that will increase disposable income and encourage savings. However, given the burden of food inflation, the individual taxpayer was looking to some increase in exemption limits on necessary expenses such as healthcare and children’s education.
The partial withdrawal of the excise stimulus has been on expected lines. Customs and excise relief for environment-friendly technologies are welcome initiatives.
The service tax rate at 10% has come as a welcome relief. However, there has been a substantial increase in the scope of service tax. It is being expanded to all air travel, both domestic and foreign, and in all classes of travel. Currently, the tax only applies to foreign travel in premier classes.
Significant amendments have been made in the taxation of commercial property rentals and construction of residential and commercial complexes. Construction of homes would now attract service tax even where the builder enters into a contract for a sale of a completed unit and not for rendering construction services. This would lead to double taxation as both service tax and stamp duty would be levied on the same value. Service tax on renting of commercial property has been introduced retrospectively, neutralizing a recent high court judgement.
The GST implementation date has expectedly been shifted to April 2011. The finance minister has emphasized the need to build consensus with the states and seems to be in favour of the 13th Finance Commission’s recommendations on a flawless GST. However, more needs to be done to develop a GST road map and actual implementation of the various tasks.
Generally, the direction set by the Budget is commendable. It would now be important that it should focus on the implementation and the timely execution of the promised reforms.
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First Published: Fri, Feb 26 2010. 11 46 PM IST