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Budget: A preparatory exercise to usher in reforms

July 11, 2014 17:03 IST

Arun JaitleyThe run-up to this year's Union Budget witnessed unprecedented hopes and aspirations from industry following the massive electoral mandate to the Narendra Modi government.

While stakeholders anticipated a cure-all Budget, the government's maiden one strikes a fine balance between fiscal prudence and a reforms agenda to spur inclusive growth, and sets the tone of reforms to be pursued over three to five years.

It is important at the same time to view this year's Budget in the context of the tough macroeconomic state the incumbent government inherited, and the need for urgent directional measures to revive the economy in the medium to long term.

The Economic Survey, unveiled on the Budget eve, emphasised the importance of structural reforms in the tax policy and administration for inspiring sustainable economic growth, and suggested that the next stage of tax reforms ought to usher in structural shift from the extant industrial policy-based tax system to a simplified and more equitable regime.

The finance minister's Budget speech carries an unequivocal commitment to implementing tax policy reforms in the form of the goods and services tax and the Direct Taxes Code -- though I was expecting a definitive date on the GST roll-out. Whilst policy announcements on these two key tax reforms are anything but surprising, the current administration may eventually have its way by conjuring states' consensus and an acceptable revenue compensation formula.

The proposal to introduce a revamped DTC Bill after taking into account stakeholders' feedback will elicit mixed reactions -- especially when the large quarter of the investor community would not expect a comprehensive overhaul of the direct tax legislation in successive Budgets of the past.

To me it seems that the controversial General Anti-avoidance Rules reform has been deferred.

Another important cue for me in the Economic Survey was the two-pronged strategy to contain deficits rather than the traditional measure of curtailing the expenditure-to-gross domestic project ratio; an absence in the Budget of any significant doles by way of reduction in headline tax rates, barring relief to individual taxpayers, is in line with a revenue-driven sharper fiscal-correction goal.

The finance minister's ambitious fiscal deficit targets (three per cent by 2016-17) will make it imperative for the government to usher in a new fiscal responsibility and budget management Act with ‘teeth’ for greater transparency and improved budgetary management.

At the tax-policy level, the government's stated abstinence from making retrospective amendments is a huge relief.

The proposal to set up a specialised committee in the tax administration to review disputes emerging from retrospective amendments carried out in the Finance Act 2012 is a welcome administrative reform; though investors would have merrily embraced a more incisive review of the controversial amendments. Given the finance minister's legal background, the convention to not intervene in matters before a court of law would have played on his mind.

Proposals to rationalise transfer-pricing rules were largely anticipated; a rollback provision in the advance pricing agreement regime shall significantly enhance its acceptability and help resolve pending high-stake transfer pricing disputes.

Allowing use of Organisation for Economic Co-operation and Development-advocated inter-quartile range for the determination of an arm's-length price and multiple year data would add renewed spirit to transfer pricing compliance and documentation -- and eventually lead to a better dispute-resolution framework for multinationals in India.

In the spirit of minimising avoidable disputes, the Budget does away with the income-characterisation controversy surrounding taxability of portfolio investors in India; characterisation of income from investment in securities as capital gains shall provide much desired certainty.

A three year-extension of the tax holiday for power generation undertakings (till March 2017) is the largest fiscal proposal the Budget has for the energy sector, which wishes for the re-introduction of the holiday for upstream and downstream operations.

Perhaps these two key tax reforms for the energy sector could see the light of the day as the sector undergoes a structural transformation in the near term.

Tax pass-through status for infrastructure investment trusts and real estate investment trusts is a welcome move for channelising new investments in these sectors.

What is more encouraging for me personally is administrative reforms proposed to strengthen tax dispute resolution framework.

Enabling the reach of the authority for advance rulings to resident taxpayers; strengthening the AAR's bandwidth by adding new benches; and reinforcing the settlement commission forum for efficacious and timely dispute resolution are largely in line with the Tax Administration Reforms Commission's recommendations submitted a month before the Budget.

A wholesome implementation of the TARC's wider set of recommendations would have been more reformist; perhaps the finance minister has bought himself adequate time to debate these recommendations comprehensively before enacting appropriate reforms in the next year's Budget.

On regulatory policy, the Budget scores well by elevating the composite foreign direct investment cap to 49 per cent in the defence and insurance sectors.

Roll-out of a number of infrastructure projects under the public-private-partnership mode will catalyse new investments in this capital-starved sector.

The announcement of the acceleration of a green energy corridor, and to resolve the regulatory impasse for development of the mining sector in an expeditious manner are encouraging moves; the test shall though lie in an enthusiastic follow-through of the statements in the Budget document.

There are a few misses, too -- though fewer.

Absence of any significant growth-inspiring fiscal policy articulation for special economic zones is a dampener.

Similarly, I would have anticipated the Budget to extend the sector-agnostic tax pass-through status to alternative investment funds.

There was no definite announcement on a road map for implementation of the GAAR; ideally, I would have liked to see deferral of GAAR for several years.

A timeline to last-mile implementation of the GST and the DTC was again conspicuous by its absence.

I reckon this year's Budget a prudent preparatory exercise to put the house in order before significant regulatory and fiscal reforms are unveiled, hopefully, in the first full-year Budget next February.

For now, I shall expect the interim policy direction and sporadic fiscal measures should pump in enough adrenaline in the economy to sustain the positive momentum, and achieve a reasonable rebound growth target of near six per cent in the current fiscal.

I shall, however, anticipate a big-bang reformist Budget in 2015.

Image: Arun Jaitley

Mukesh Butani is managing partner at BMR Legal. These views are his own.
(With inputs from Sumit Singhania)

Mukesh Butani
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