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The Budget That Defied (Some) Expectations
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The Union Budget presented by Finance Minister Arun Jaitley on 28 February is in a sense, most pragmatic budget in the last two decades. At the same time the budget also suffers from mis-steps and missed steps that do not contribute to our confidence in the vision of the Government.
The boldest move of course is proposed reduction of 5% in the corporate tax over next 4 years, starting from f y 2016-17. This is tempered by proposed withdrawal of exemptions and a 2% increase in surcharge on corporate tax, dividend distribution tax and on minimum alternate tax.
Income of foreign institutional investors, generated from transactions which attract STT, is exempted from MAT – partly resolving the controversy on the latest demand of MAT on FII income, from I T Dept.
Income tax on royalty payments on technology transfer is reduced from 25% to 10%.
Foreign fund manager can be located in India without attracting permanent establishment provisions, i e without any tax implications.
General Anti Avoidance Rule (GAAR) deferred by two years and to be implemented only prospectively from April 2017.
Abolition of wealth tax is another welcome move which loss is partly compensated by a 2% increase in surcharge on taxable incomes in excess of Rs. 1 cr.
The intent is more important than the impact of the above tax concessions, as it shows that the Finance Minister is keen on a simple and user-friendly tax regime.
The budget includes several measures to boost infrastructure. An infrastructure fund with an annual flow of Rs. 20000 cr will be established. This is in addition to Rs. 25000 cr allocated to Rural Infrastructure Fund set up in NABARD. Tax free infrastructure bonds are proposed for projects in rail, road and irrigation sectors.
While the role of infrastructure is rightly emphasized in each successive budget, the impact of multiple funds / agencies created for this purpose is not yet felt. How the funds allocated so far have been utilized will make an interesting study. Primary issue with infrastructure credit appears to be more with risk sharing than refinancing the banks. The Finance Minister elsewhere appears to have reservations on public-private partnership, and it is not clear if the tax-free bonds are also proposed to be issued by private sector.
The Finance Minister also proposed setting up of 5 ultra mega power plants, each with 4000 MW capacity, on plug & play basis i e with all required clearances in place prior to bidding. It is a welcome step if the proposed power plants have a firmed up supply of gas or coal, and are implemented without cost and time over runs. A skeptical view is justified if we look at the current status of about 12 super mega plants, out of which only two are commissioned and rest are in various stages of implementation.
There are several welfare measures in the Budget for rural population providing for subsidized pension schemes, apart from promises for housing and jobs for rural and urban poor under Vision 2022.
Changes in indirect tax structure – particularly, in customs and excise, appear to have been designed to encourage ‘Make in India’. Additional investment and depreciation allowances are permitted for new manufacturing units over next 5 years. Customs and excise duties on raw material and other inputs is rationalized to minimize impact of duty inversion.
Budget proposals as above contribute to overall improvement in business environment, even if the efficacy of some of the measures is yet to be tested.
Mis-steps
While some of the measures proposed in the Budget relating to finance sector are promising, some others point to an intrigue.
The Budget sets an inflation target of 6%, supported by an agreement with Reserve Bank of India. The Finance Minister also proposed setting up a Monetary Policy Committee. Elsewhere it is indicated that the Committee would comprise of a government representative – which would be unfortunate as it cuts in to RBI’s independent decision making.
A Public Debt Management Agency will be established – which The RBI Governor had not favoured earlier for good reasons.
The Finance Minister also proposes amendment to Foreign Exchange Management Act (FEMA), to bring the capital controls in to Government’s Policy purview. There could also be other measures in the pipeline as the Government intends to introduce India Financial Code Bill, based on the recommendations of Srikrishna Commission.
RBI is one of the few institutions of democratic India, which is not tarred by political intervention, and is known for professional management. RBI has also waded successfully through several domestic and global crises, and has an enviable international reputation. Hence it is worrisome if at this stage any type of political intervention is made possible, despite benign intentions.
The Budget includes severe penalties to prevent black money and money laundering. While the intentions are laudable, merits of some of the proposals are debatable. In particular, one of the proposals include imprisonment for violating certain provisions of FEMA. It is to be remembered that FEMA replaced the earlier FERA , with one of the objectives being not to make any violation of the provisions criminal. The Finance Minister should not be overzealous in introducing and implementing draconian provisions, which few would dare to oppose given the current hype on black money. There is need to take into account genuine lapses, some of which may arise from out of ambiguity in regulations.
The Finance Minister is also proposing a Financial Redressal Agency, with unclear goals – as each regulatory authority has its own mechanism to address the customer grievances.
The Budget also contains a proposal – what many may consider as an eccentric one, work on which appears to have already started – to establish Gujarat International Financial Tech City (GIFT), which is expected to be on par with Singapore and Dubai(?). Whatever happens to the vision of Mumbai as global financial centre.
Another proposal is to establish MUDRA Bank – a Micro Unit Development & Refinance Agency, need for which is not clear, when there are already banks and other specialized institutions engaged un similar functions. The Finance Minister has allocated Rs. 20000 cr to MUDRA Bank.
In fact the weakness of the otherwise well meaning budget lies in the multifarious schemes and agencies the Government wants to promote in one go. Only to name a few – Self Employed Talent Utilisation Fund (SETU), Deendayal Grameen Kaushal Yojana, Pradhan Mantri Suraksha Bima Yojana, P M Jeevanjyoti Bima Yojana, P M Krishi Vikas Yojana, Atal Innovation Mission etc. Multiplicity of schemes with overlapping objectives drain resources and make monitoring and evaluation most complex.
The Budget has more proposals for establishing two IITS / IISC, and 6 new AIIMS institutions in various parts of the country – even when the 5 IITs proposed in interim budget have yet to take shape. The issue is not only with investment required, but also with requisite infrastructure and faculty. A fanciful expansion would only lead to dilution of standards.
Proposals such as above give vent to a feeling that approach to the budget was not serious enough.
Missed Steps
It is not always a fortuitous combination of factors like falling oil prices, low inflation, positive interest rate outlook and high global liquidity, ready to flow in to low lands of India – that a finance minister is blessed with while preparing a budget. Even if Mr. Jaitley did not have a dare devil approach, he could have been more practical and propose concrete steps such as:
- Rationalize various deductions in direct taxes and improve overall tax collections even at lower rates. In fact the Finance Minster could add to the tax brackets for higher income and super rich groups with incremental tax rates, instead of tampering with surcharge, which in any case was supposed to be for a limited period.
- Minimise tax litigation, say, by directing ITDept to desist from appealing beyond two levels
- Reverse retrospective tax laws and waive / reduce significantly transfer tax and withholding tax which are currently scaring foreign investors
- Rationalise subsidies – particularly those which are reaching higher income groups( e g gas and fuel subsidies)
- Reorganize PSU behemoths like Food Corporation and Coal India and have concrete proposals to dispose of / completely restructure loss accumulating PSUs
- Monitor more closely how the subsidized funds are utilized by public financial institutions.
Let us hope for better times!
C. Chandrasekhar
( Sr Vice President, Mecklai Financial)
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