Home >Opinion >Budget 2015-16: Riding on hope

India is at an interesting stage and well positioned for presenting Budget 2015. With political developments and reduction in crude oil prices, there is expectation that the new central government, presenting its maiden full budget on 28 February, will make a powerful yet balanced statement. With a rejuvenated focus on foreign policy and foreign investment stance to elevate India’s status as an investment destination, foreign governments and investors alike, have expressed high hopes.

Finance minister Arun Jaitley has his task cut out, despite the economy exhibiting signs of recovery from macroeconomic challenges, with industry calling for unbundling of reforms for various sectors. The full-year budget could emerge as the most incisive tool for cutting through the growth bottlenecks and shouldering Prime Minister Narendra Modi’s Make in India initiative.

In the run up to the budget, BMR Advisors in association with CNBC TV 18 and Mint conducted a survey on the stakeholders’ perception of how this budget would deal with fiscal policy and tax matters. We received overwhelming response from over 175 tax and finance heads of leading Indian business houses and multinational companies and tax experts. The responses provide a useful insight to stakeholders’ key expectations from the upcoming budget—proposals to spur economic growth, liberalization and rationalization of entry rules for foreign investment in key sectors, establishing certain, clear and consistent tax regime to revive investor sentiment, revamping the dispute resolution frameworks for tax disputes, and announcement of incentives for infrastructure, power and other capital-intensive sectors.

Expectations on economic reforms

In pursuit of the Make in India initiative, the government is likely to prioritize reforms agenda over measures to contain the fiscal deficit. This sentiment has been resonated by over 77% of the respondents who said the government would put the thrust on economic growth over fiscal deficit management. This would require an efficient balance between monetization of resources for reforms agenda and the sources of revenue. It is likely that we shall see a structured divestment plan to fund budgetary spending. More than two-thirds of the respondents expect the government to unveil systematic plans of divestment in identified state-owned firms. Also, it is pertinent to mention that nearly 53% of the respondents said the government could also resort to rationalization of outlay for LPG (liquefied petroleum gas) subsidy, though it could be a combination of better targeting of the subsidy.

In the past, although the current government’s political wing has vehemently opposed foreign investment in multi-brand retail, investors expect the government may consider relenting its earlier stand, along with formalizing the move of raising foreign investment cap in Insurance to 49%. As many as 64% of the respondents say that foreign investment could be further liberalised.

It would be interesting to watch for government’s take on measures to tackle the so-called parallel economy. Following through apex court’s directive to establish a special investigation team for retrieval of unaccounted offshore money, it remains to be seen how the government cracks down on the defaulters. More than 40% of the respondents say it is premature to expect the government to iron out a roadmap for dealing with the parallel economy in the budget.

Tax policy framework and reforms

Dispute resolution and administrative reforms: A look at the state of protracted disputes before the appellate and judicial forums and associated cost, in terms of time, efforts and resources, it appears imminent for the government to consider overhauling dispute resolution forums and embrace international best practices by introducing alternative dispute resolution forums for expeditious resolution. Nearly half the respondents believe that the government would announce measures for realigning existing forums and propose new forums for tax litigation.

Further, around 535 of respondents say the budget would include proposals for accepting recommendations put by the Tax Administration Reform Commission to overhaul the tax administration.

Base Erosion and Profit Shifting (BEPS): In the backdrop of OECD’s intense endeavours on BEPS concerns, it would be interesting to see whether Jaitley announces measures to gear up the domestic tax law for tackling tax abusive practices, such as treaty shopping. Mindful of Government’s commitment to evolve a stable and investor-friendly tax regime, more than 40% of the respondents expect the government to steer clear of such radical announcements in this budget. It would be useful if the government sets out its approach to the OECD’s work on BEPS, as this would keep multinationals abreast of Indian government’s take on BEPS aspects.

GAAR and indirect transfer provisions: The preceding government’s move to introduce general anti-avoidance rules (GAAR) and prescribing rules for taxability of indirect transfer with retrospective effect received the most flak from the investor fraternity in past few years.

In relation to GAAR, the discussions have revolved around Indian tax administration’s ability to implement a sophisticated legislation. In view of the lack of preparedness amongst the tax administration and absence of detailed guidelines (apart from basic rules released in September 2013), it seems unlikely that the government would let GAAR provisions assume effect from 1 April. Nearly 77% of the respondents expect the government would defer GAAR to continue building positive investor sentiment.

Insofar as rules for taxability of indirect transfer are concerned, it remains to be seen if the government yields to recommendations of the Shome committee. Nearly 62% of the respondents expect the government to provide a sigh of relief to investors in this regard, by withdrawing, or clarifying, the indirect transfer provisions.

Transfer pricing (TP) litigation and other tax controversies: With Indian TP disputes taking up a lion’s share of global tax litigation, TP continues to bother corporates mainly on account of high value and arbitrary adjustments. To allay concerns, it is imminent for the Government to evaluate measures for simplification of TP provisions, the view being echoed by approximately 63% of the respondents to the survey.

To deal with wider set of tax controversies and demonstrate the government’s commitment to develop clarity, certainty and consistency in tax regime, it is important for the department of revenue to consider releasing periodical notifications clarifying ambiguous aspects of tax laws. More than 58% of the respondents are hopeful that the government would commit to such measures in the approaching budget. There are early signs that this approach has found favour with the government and the administration, as the new government has clarified several aspects in past nine months

Direct taxes code (DTC) and goods and service tax (GST): Even after five years of deliberation, the fate of most ambitious direct tax reform of the erstwhile government—the DTC—remains uncertain. With economic growth featuring high on the government’s agenda and many of the provisions of DTC already finding a place in the existing statute, it seems unlikely that the government would rush through implementation of DTC in the current budget. Nearly 61% of the respondents echoed the sentiment that DTC would not be legislated in the current budget.

Insofar as GST is concerned, the constitutional amendment bill was tabled in the last Parliament session in December with an objective of passing it in the upcoming budget session. The bill is required to be passed by both houses of Parliament and ratified by half the state legislatures before the model GST legislation is introduced.

The present government has shown immense grit and determination in bringing GST by tabling the bill, discussions with state government, giving favourable statements during press releases, etc. Due to this, a large number of respondents (nearly 80%) expect that GST-related announcements are likely to feature in the budget proposals. Respondents also feel hopeful regarding roll out of road map for implementation of GST. We can merely pray for better sense in opposition to support the GST bill.

Tax rates and incentives

Incentivize manufacturing sector: Given the spotlight on the Make in India initiative, the industry is hopeful that the government will introduce tax incentives in the upcoming budget to boost local manufacturing, particularly for small and medium size business.

Excise duties on automobiles, capital goods, consumer durables, etc, were lowered in February last year to provide an impetus to the manufacturing sector. These benefits were later withdrawn in December. Also, domestic manufacturers in certain industries are facing the issue of inverted duty structure.

The survey results are divided on this aspect, with nearly 50% of the respondents hopeful that excise duty sops would be re-introduced along with reduction in customs duty rates on import of raw materials; nearly the same number of respondents (50%) are either skeptical about reduction in tax rates or feel that it is unlikely, given the tight fiscal position.

I anticipate that with price of crude oil cooling, customs duty will be imposed. Though, the issues relating to inverted duty structure are likely to be addressed.

Impetus to infrastructure, energy sectors and exports: In the spirit of the Make in India initiative, the government is expected to announce measures to spur growth in infrastructure, power and other capital-intensive sectors. Nearly 78% of the respondents say tax holidays and benefits for these sectors could be extended.

However, nearly 45% of the respondents expect that the government is unlikely to withdraw the levy of minimum alternate tax and dividend distribution tax (DDT) on special economic zone (SEZ) developers and units. However, it is widely anticipated that DDT regime would be re-jigged.

Considering the sluggish growth of exports, there is an urgent need for increasing export benefits to ensure the competitiveness of Indian products in international markets. Besides policy benefits, such as, continuation of interest subvention scheme, increase in rates of duty drawback to exporters, we could witness introduction of simplified procedures to ensure timely processing of indirect tax refunds.

The poll results exhibit high hopes in the export industry participants with nearly 65% respondents expecting enhanced export benefits.

Exemption from special additional duty (SAD) and reduction in SAD rate: SAD at 4% was introduced in 2005 vide amendment in the Finance Act, 1994, in order to bring the importers at par with manufacturers paying value-added tax (VAT) and central sales tax (CST) on domestic procurements. Despite a gradual reduction in CST rate over the years from 4% to 2%, SAD on import continues to be levied at 4%, creating a dissonance between taxes paid on components and products manufactured in India and imported into India. The poll depicts a divided opinion on the possibility of exemption from SAD and reduction in SAD rate in the forthcoming budget.

Whilst nearly 36% of the respondents expect a reduction or exemption, an almost equal proportion (32%) anticipate no such relaxation. While on one side, reduction in SAD rates will eat into the government’s revenue flows, on the other side, a continued SAD rate of 4% poses a threat to IT industries, the growth of which is on top priority list of the government considering recent initiatives such as Digital India, Make in India and Smart Cities.

Imposition of Swachcha Bharat Cess on services: In the wake of the Swachcha Bharat Abhiyaan, the government is considering proposals for creating specific fundflow for financing the campaign. While there is a positive sentiment for Swachcha Bharat Abhiyaan, an incremental cess on services will be seen as an additional burden on consumers and run counter to the government’s agenda of providing affordable services, especially to rural and backward areas. Nearly 46% of the respondents say there is high probability of a third cess (over and above education cess and secondary and higher education cess) being imposed on all services by way of service tax amendment.

REITs and InvITs: The Last year’s budget introduced provisions dealing with taxation of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), and provided partial pass-through status to them. With a view to give filip to REITs and INVITs as alternate financing vehicles for large infrastructure projects, it is expected that the government would further rationalize the taxation provisions applicable to REITs and InvITs. Approximately 46% of the respondents expect the government to announce proposals to this effect.

In summary, at a macro level, it is expected that the government would stay committed to a high-growth agenda leveraging on economic reforms package, policy level and administrative measures for unlocking bottlenecks in investment and tax policy for inducing certainty and lending a spur to the manufacturing sector. Our scorecard on expectation quotient can be reviewed only on 28 February once the finance minister tables budgetary proposals.

The author is managing partner, BMR Legal. The views are personal.

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