Sowing the seeds of change

When Finance Minister Arun Jaitley rose to present the Union Budget 2015-16, expectations were running high and the agenda was well laid out.

He had a tall order in terms of creating a fiscal framework that balanced fiscal prudence, addressed populist expectations, attracted investments, and delivered on the growth agenda.

The fact that the government had a clear majority in Parliament coupled with the optimistic Economic Survey data which indicated that the economy was in a sweet spot meant that the soil was fertile to roll out bold reforms.

Jaitley has presented a budget that is forward-looking and seeks to put India on the double digit growth trajectory in the near future.

One of the key takeaways of the present Budget would be the steps taken to renew the interest of the international investors and improving the investment climate by clarifying a number of pending issues.

To begin with, the clarity relating to taxation of indirect transfers by prescribing a threshold of 50 per cent to determine the ‘substantiality test’ is a welcome move. The fine print indicates that further rules may need to be prescribed to determine the actual tax liability in case of indirect transfers.

Also, clarity needs to be provided on taxability in case of internal re-organisation that are not under merger or demerger, sale of shares in an overseas company which is listed on an overseas stock exchange.

Further, announcements relating to non-applicability of Minimum Alternate Tax to FIIs and the tax pass-through status for Alternate Investment funds were long pending and have been rightfully enacted.

Having said that, the government would do well to provide clarifications with regard to non-applicability of MAT to FIIs for a period prior to April 1, 2015, the extension of the benefit to foreign companies without restricting it to FIIs alone and also with regard to the characterisation of income (capital gains vis-à-vis business income) in the hands of AIFs to remove any ambiguity in this regard.

The deferral of GAAR by two years was something everyone was hoping and is a positive move. However, the proposed change to the residency rules by introducing the concept of place of effective management (POEM) might lead to uncertainty around taxability of foreign companies and one wonders if this was the legislative intent.

One hopes that representations are made and the government has a relook at the provision.

The other significant move was on the gradual reduction of the corporate tax rate from the 30 per cent to 25 per cent over four years by corresponding reduction in tax exemptions. Looks like the government has sought to give a quiet burial to the Direct Taxes Code by incorporating its key provisions in the Act itself.

Also, considering the ineffectiveness of the Sick Industrial Companies Act (SICA) and the Bureau for Industrial and Financial Reconstruction (BIFR) to address the needs of sick and loss-making companies, the government has proposed to introduce a comprehensive Bankruptcy Code that is in line with international standards.

It would be interesting to see how the code seeks to protect the interests of all stakeholders and ensure swift liquidation of unviable companies. Such a code should help create a robust market for credit and provide the much needed comfort to the lenders.

The government has done well by recognising the inability of the private sector to fund large-scale infrastructure projects and thereby increasing the proposed public expenditure for the same.

Also, the rationalisation of the capital gains tax regime for the sponsors of REIT and the pass-through status for rental income from owned assets is a positive for the real estate sector.

Setting up the Micro Units Development Re-Finance Agency (MUDRA) bank for lending to SC/STs, the use of post offices to extend financial access in remote areas, and the proposal to evaluate the need to do away with multiple approvals for setting up manufacturing facilities are steps that would give a push to the ‘Make in India’ initiative.

One expects the government to come up with many more reforms surrounding labour legislation and abolishing archaic laws to make the ‘Make in India’ initiative a success.

Further, the stringent provisions introduced to curb black money are expected to act as a deterrent and bring in more liquidity to the system.

There were no big bang changes to the policies around the personal taxation with the income tax slabs remaining unchanged. The abolishment of the wealth tax is a welcome move considering the rigmarole surrounding the collection of the same.

On the indirect tax front, the government has indicated its intention implement the GST by April 2016.

Steps such as subsuming the cess on excise duty and service tax and broadening the current tax base are a step in the right direction. Further, pruning of the negative list and service tax exemptions is also a move that is aimed towards achieving a phased transition to GST. The increase in service tax rate from 12.36 per cent to 14 per cent will result in consumers paying more for procurement of services.

Further, the proposal to levy a ‘Swachh Bharat Cess’ of 2 per cent on services may push up the effective rate of tax on services to 16 per cent which might not be good news for the common man.

This might not be a big bang Budget if one was to benchmark it against the high pre Budget expectations but it certainly is one of the best Budgets in the recent times.

Going forward, factors such as continued low crude oil prices, harmonious partnership between the Central and State governments, successful implementation of the GST would determine the extent of growth India achieves.

The writers are with KPMG in India. The views are personal

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