Don’t judge the Budget for what’s beyond its control

Girish Vanwari | Updated on March 12, 2018

Market mood: Despite panic selling in the capital markets, it would be wrong to assume that Budget 2013-14 was a missed opportunity. Bloomberg   -  BLOOMBERG NEWS

Girish Vanvari is Partner and Co-Head of Tax, KPMG in India

What is needed at this time is encouragement to entrepreneurs to create jobs, fewer execution hurdles, and lower interest rates.

If the stock markets are a barometer of the acceptability of a country’s budget, then the initial panic selling indicated that Budget 2013 failed to deliver on many popular expectations.

Prior to the budget, each sector, industry, or population segment was hoping that Finance Minister P. Chidambaram would wave a magic wand, and growth would move back towards 6 per cent and upwards in the short term. Prior to the budget, the Minister attended overseas road-shows and advocated a stable tax regime, indicating he would not fall prey to populist agenda.

Announced against the backdrop of challenging global macro-fundamentals, coupled with slowing GDP growth at home, high inflation and interest rates, and surging deficits (fiscal and current account), the Budget recognises the need for growth and deficit management. The underlying theme of the tax proposals has been “clarity of tax laws, a stable tax regime, a non-adversarial tax administration and a fair mechanism for dispute resolution”.

In line with the growth agenda, there are no cuts in expenditure outlays. In fact, allocations to various rural, socio-economic, and other programmes have been increased over the past year. It is proposed that fiscal deficit would be controlled through higher tax collections, pinning hopes on an economic revival and levy of surcharge on corporate and high-income individuals.

While the proposal to defer General Anti-Avoidance Rules (GAAR) by a couple of years has been accepted, there has been an attempt to curb tax avoidance on buyback of shares in the case of unlisted companies, and enhanced tax withholdings on royalties and technical know-how fees.

To provide a thrust to investment by the private sector, there is additional allowance for two years on investments in plant and machinery exceeding Rs 100 crore. As far as real estate is concerned, there are additional sops for first-time home buyers, and the introduction of a withholding obligation on transfer of immovable property where value exceeds Rs 50 lakh. There are attempts to boost capital markets by expanding the scope of the Rajiv Gandhi Equity Scheme, and reduction of securities transaction tax. Furthermore, there is an attempt again to introduce the commodity transaction tax.

On indirect taxes, the base rates of excise and service tax have been left unchanged. However, there is an additional levy of duties on luxury items. Surprisingly, there is no clear roadmap for the introduction of the Goods and Services Tax.

So, what caused the capital markets to panic? That was due to a proposed amendment that threatened the validity of the capital gains tax exemption under the India-Mauritius Treaty (TRC issue). The capital gains tax exemption is very important to foreign investors coming through Mauritius. Hopefully, with the clarification issued by the Ministry of Finance, things on this front should settle down.

So, if the TRC issue is behind us, is the Budget still a missed opportunity? One could always criticise the Budget, but reflecting carefully it is clear that our country needs growth, which is largely dependent on the global economy, monsoon (rural growth), and interest rates. The first two factors are outside the Budget, and beyond the Government’s control. The last depends on the Reserve Bank of India’s monetary policy — on which the Budget again has limited influence in the form of fiscal deficit management.

Coalition politics means slow decision-making; but even if the progressive steps taken in the last few months were to continue (FDI in retail, hike in fuel prices, direct cash transfer, and hike in rail fares) there is much to be achieved. What is needed at this time is encouragement to entrepreneurs to create jobs, fewer execution hurdles, and lower interest rates. Against this backdrop, to judge the Budget as a missed opportunity for not achieving something beyond its control would be rather harsh.

(Alok Mundra – Director KPMG in India contributed to this article.)

Published on March 11, 2013

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