Budget 2012: The FM could have been bolder

The Economic Survey presented the UPA government's scorecard for 2011-12. Clearly, there weren't too many surprises on the macroeconomic front.

A tapered estimate of economic growth at 6.9 per cent, reduced from the mid-year revised target of 8.2 per cent, and a fiscal deficit at 5.9 per cent (versus the target of 4.6 per cent) underlined stress on fiscal health.

To a large extent, these deteriorating indicators can be ascribed to slackened industrial and agricultural growth, poor tax collections and dismal disinvestment receipts, and the back seat that reforms took thanks to the year's unstable political climate.

...

Macroeconomic concerns were echoed by the finance minister (FM) in his Budget speech, in which he laid out a robust road map of fiscal and regulatory reforms for the first fiscal year of the 12th Plan period.

Raise resources to accelerate growth

Without mincing words, the FM emphasised the need to raise tax revenues to meet the resource requirements of the 12th Plan.

The principal way in which the fiscal deficit would need to be reduced would be by raising tax-to-GDP ratio and cutting down on unplanned wasteful expenditure.

Towards this objective, the FM endeavoured not to take the traditional approach of withdrawing exemptions or tax incentives; instead, the focus was on enhancing tax collection through anti-abuse measures and promoting voluntary compliance.

...

Proposals to advance general anti-avoidance rules (GAAR), to increase the threshold for reopening of past assessment, and to tax unaccounted wealth at the maximum marginal rate are revenue-pro measures, which would dissuade tax evasion - and, at the same time, mobilise revenues critical to sustaining growth.

The proposal to usher in advance pricing arrangements will bring MNCs a respite from lengthy litigation, especially in high-value transfer-pricing disputes with the revenue - which have assumed unprecedented proportions in the past couple of years.

Measures for checking the black money menace are also welcome, though we will anxiously await findings of the promised White Paper.

...

While the Budget has not proposed disclosure schemes equivalent to the voluntary disclosure of income scheme, enhancing the rigour with which evasion is tackled, such as the constitution of trial courts, is a bold move.

Given the increasing contribution of indirect taxes to the tax-to-GDP ratio, the FM has sought to hit the bullseye by increasing the median rate of indirect taxes to 12 per cent (from 10 per cent).

Coupled with the proposal to introduce negative list-based taxation service tax, this would significantly add to overall revenue collections.

Offshore transfers and software taxed

A quick review of the Finance Bill suggests that the FM has resorted to the old habit of bringing about retrospective amendments in the law to override the outcome of high-value court disputes.

From a bare reading of relevant amendments, I fear that Vodafone-like complex transactions on underlying Indian assets could be brought in tax net. If this is indeed what was intended, it would be a retrograde step!

...

Another retrospective amendment in the present law, to tax all software transactions including licensing, will not be welcomed by industry.

These changes, if enacted, are certain to ignite a fresh round of interpretational controversy leading all the way up to the Supreme Court.

The Budget has proposed to bring specified domestic transactions (valued over Rs 50 million) within the purview of transfer pricing. This would herald a fundamental change for Indian businesses by enhancing the rigour of assessment and increasing compliance.

Comprehensive reforms agenda for 12th Plan

The key underlying message through the FM's speech was to let bygones be bygones, and to renew the growth mission. Not surprisingly, there were a slew of measures to accelerate tax and regulatory reform.

...

Foremost, the amendments proposed to the Fiscal Responsibility and Budget Management Act are bold. The concept of the "effective revenue deficit" and the "medium-term expenditure framework" will prove to be expenditure-reform milestones.

Also, recommendations made by the expert committees to streamline and reduce the number of centrally sponsored schemes and to address Plan and non-Plan expenditure classification would be pivotal to achieving fiscal balance.

The FM's statement that the government would endeavour to evolve consensus among states for 51 per cent foreign direct investment in multi-brand retail and enhancing FDI limits for the aviation sector is heartening, given that the growth of these two key sectors has been marred in last fiscal.

...

That said, FDI in multi-brand retail appears a distant reality. Relaxation of external commercial borrowing guidelines for aviation and other infrastructure sectors (power, housing, road construction, etc) should promote investment in this sector over the next Plan period.

The addition of sectors to the list of those eligible for viability-gap funding will provide a major push to the growth of PPP projects in infrastructure.

The guidelines for establishing joint venture companies by defence PSUs should prove to be a major policy push for nurturing the PPP mode of project delivery in this sector.

Policy reform for the domestic capital market received a critical boost in the form of incentives proposed for retail investors investing in equities. Simplifying the initial public offering process and allowing qualified foreign investors access to the Indian bond market will also deepen the markets.

...

<B>Tax reform - not a mirage</B><BR>

This year's Budget was the last chance for the government to reinstate its credibility when it comes to ushering in tax reform, an important policy agenda at the beginning of its present tenure.
While the tax amendments proposed in the Budget largely fall in line with the proposed direct taxes code and goods and services tax regimes, the FM reiterated that the DTC would be implemented by the end of the next fiscal year.

While the corporate income tax and minimum alternate tax rates remain unchanged, to cater to populist sentiment, the Budget provides the individual taxpayer marginal relief by raising the income tax slabs.

...

Given the present inflationary climate, however, this marginal relief might not translate into any credible savings for households. Nevertheless, taxpayers' expectations have been, theoretically, ticked off the Budget wish list.

To sum up, I would hail this Budget as a valiant effort from the FM, as he produced a mixed bag of promises and disciplinary measures.

Considering that he did not have options to choose from, he stuck to the course of sustaining growth with an inclusive agenda. Though the FM could have been bold and more reformist, I would still rate this as a forward-looking Budget.<hr> 

(<I>With inputs from </I><B>Sumit Singhania</B>) 

<B>Mukesh Butani</B>, <I>Chairman, BMR Advisors</I>