The genie in the leather briefcase

As the economy stands on the cusp of a high growth future, it is natural that the attention of industry is on a certain leather briefcase.

With the government possessing the required political muscle, industry expects the finance minister to deliver the right mix of tax proposals in the Budget to boost economic recovery.

The moot question is: How can taxes contribute to economic growth? The Organisation of Economic Cooperation and Development (OECD) believes that all taxes impact growth to some extent, but some are much less ‘taxing’ than others.

The OECD has ranked taxes from most to least growth-friendly with recurrent taxes on properties (e.g. land) having the least negative effect on growth followed by consumption taxes, environmental taxes and personal income-tax.

Corporate taxes have the greatest negative effect on growth. Can the Budget slay the genie of apprehensions on this count?

The Indian manufacturing sector has got a shot in the arm with the ‘Make in India’ campaign, but the factory output data for the last four quarters, save one, has not shown the desired upswing. This sector faces a two-fold challenge: in the short term, the demand side needs a boost with some tax proposals; the long-term challenge is the excessive manufacturing capacity across sectors and geographies. The sector, therefore, expects policymakers to make it competitive by optimising costs.

Policies are directed towards ease of doing business; the goods and services tax is expected to boost manufacturing. In 2013, an Indian car manufacturer told its vendors to buy plots closer to the factory to cut logistics time and costs. According to the India Development Update published by the World Bank in October 2014, the logistical cost of manufacturing in India is two to three times higher than international benchmarks.

GST alone can reduce logistical costs and increase certainty in the supply chain. GST may also reduce the time taken for freight by road. This would make Indian manufacturing competitive.

The Indian software industry could get a boost if the MAT on SEZ units is removed. This would promote investments in SEZs and restore global confidence in the Indian economy. If the intent is to increase the contribution of manufacturing to GDP, the service sector has to continue to contribute at the current rate of growth. FIIs could seek a reasonable deferment of GAAR provisions along with a fine-tuning of the tax laws on capital gains versus the business income issue.

To assure an investor-friendly climate, the time could be ripe for the government to clear its stand on availability of benefit under double tax avoidance treaties, especially with Mauritius.

Remedial proposals could include clarity on taxability of indirect transfer of Indian assets, clarity on the regime for taxability of real estate investment trust (REIT), and amendment of the roll-back of advance pricing agreements.The finance minister could also consider reducing or eliminating the dividend distribution tax, on a conditional basis. This could help channelise the surplus cash with India Inc and boost circulation of capital for domestic growth. It could also reduce pressure on banking to provide capital.

Businesses are keeping an eye on the urgency to move towards a non-adversarial tax regime in India; hence the eagle eye on the leather briefcase.

The writer is the head of tax, KPMG in India. The views are personal

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