Though the budget exercise is an annual affair, my hunch was to crystal ball gaze the budgets for the next four years under the current regime. The successive annual exercise shall witness a whole lot of tinkering, though a trend to address fundamental aspects on managing the fiscal deficit and achieving inclusive growth would continue to guide policymakers. We could well see a trend that would focus upon revenue mobilization rather than (non-Plan) expenditure curtailment to address the fiscal challenges.
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Tax collection: If one goes by historical data on tax collection, we shall notice a significant buoyancy, predominantly aided by increase in the sheer size of the gross domestic product (GDP), per capita income and growth in various sectors. More importantly, even a slowdown situation has seen a decent tax collection, barring certain areas under customs and excise.
I don’t see any let-up in tax collection trends and, hence, to expect a CAGR (compounded annual growth rate) growth target ranging between 15% and 20% should not be surprising. The government’s objective would be to enhance the effectiveness and quality of tax collection; I mean stricter compliance regime rather than threatening coercive action.
This would partly be achieved by improving the tax administration, greater spends in improving the information technology (IT) infrastructure, bringing more individual taxpayers under the tax net, etc. Hence, we may see a slew of changes in the direction of administration and compliance obligations to keep up with ambitious tax targets.
Tax rates and slabs: As far as individuals are concerned and as articulated in the draft direct tax code (DTC), I don’t see a fundamental shift in rates; particularly the maximum marginal rate of 30% would remain unchanged. Surcharges may disappear and we shall see rejigging of tax slabs, which would benefit medium taxpayers.
The challenge is on the corporate tax rate. It is now acknowledged by the administration that the current effective tax rate of 33% is uncompetitive for India. The challenge is battling with an effective tax rate of 22-odd per cent due to a host of tax holidays. Expect surcharges to disappear in the short to medium term, but reducing the rate to an aspirational 25% as proposed under DTC will be a challenge.
Justification for tax holidays: There would be no let-up from the industry from an advocacy standpoint to continue with the tax holidays regime. The fact is that certain segments of growth, particularly capital-intensive infrastructure, would justify continuity. Political compulsions may force the government for continuity in backward states. There is also justification for prolonging tax holidays for segments of industry that have delivered robust growth in the past decade (IT/IT-enabled services, telecommunications, etc). Hence, it would be interesting to see how successive budgets address such competing needs.
On top of North Block’s mind would be DTC provisions that suggest a fundamental shift from profit-based exemption to investment-based criteria. There has been enough debate on this issue and my view is that policymakers need not get carried away by DTC proposals. An out-of-the-box balanced solution will augur well for the administration and the industry.
Incentivizing high technology and R&D: There is a need felt by all stakeholders to assess if the tax policy is adequately addressing the need for research and development (R&D) and promoting high-tech manufacturing, particularly in sunrise industries. Greater reliance on the services basket in our GDP portfolio shall force the government to rethink its tax policy to address growth. In addition, in slowdown cycles, experiences in Europe and North America have amply shown the need for growth in the real sector. I anticipate a slew of measures on this front in successive budgets.
Rejigging petroleum taxes: Though the debate on raising petroleum prices shall continue to occupy the mind space of our politicians, I anticipate a revamp of our tax system. It is important to understand that the petroleum sector at the Central and state exchequers contributed 22% of revenue receipts (tax and non-tax) and 15% of total receipts (revenue and capital) of the Indian government. In addition, the government is dealing with the bogey of under-recoveries by petroleum companies for subsidizing cooking gas and kerosene. It is not going to be an easy exercise to blend reduction in petroleum prices and dealing with under-recoveries, given the present tax system. We continue to remain as one of the most taxed nations on petroleum products. I anticipate a plan spread over the next few years to deal with the challenge of petroleum taxes is on top of the finance minister’s mind.
Roll-out of goods and services tax: Labelled as the mother of all tax reforms, we should immediately anticipate announcements on a reduction in the Central sales tax rate (CST) as part of the 2010 proposals. If the roll-out is deferred by a year, the reduction to nil rate could occur over two budgets. An anticipated change would be a phased increase of Central value-added tax and service tax rates as there are adequate signals to roll back the fiscal stimulus package.
Dispute resolution: Though the solution for addressing dispute resolution is not entirely part of the Finance Bill exercise, lawmakers would take steps to build greater accountability to deal with tax disputes, speed for redressal of tax disputes and overall quality of the tax ombudsman’s role to better taxpayers’ services.
Outside of the annual budget exercise, I anticipate the passage of the National Tax Tribunal Bill, paving the way for replacing state high courts on tax matters. This is certainly bound to address the challenge of our complex tax dispute mechanism. Also, tribunals, state courts and the Supreme Court would implement measures to speed up litigation by making intensive use of technology. The Delhi high court has currently piloted a paperless mechanism to deal with disputes.
In summary, an ambitious agenda is waiting to greet the citizens and business enterprises. Let’s wait and see how much is accomplished in 2010.
The author is a partner with BMR Advisors. The views expressed here are his own. Respond to this column at email@example.com