A Budget to Rekindle Confidence
Senior Tax Professional
Ernst & Young
The writing on the wall could not be clearer. The recent CSO advance estimates for national income for 2012-13 estimated the GDP growth at a mere 5% as against 9.3% in 2010-11. Slow growth, coupled with slowdown in savings and investments and a rising current account deficit paints a truly grim macroeconomic picture. In this backdrop, the FM will be presenting the last full Budget before the government goes for general elections in 2014. His highest priority will be to establish credibility by keeping the fiscal deficit within target and revive investments by both domestic and foreign investors.
The government’s tight leash on expenditure is reflected in the December 2012 estimates for fiscal deficit which show a decline in fiscal deficit in absolute numbers. Apart from seeking to curb the non plan expenditure, for instance making diesel pricing fully market related and restricting fuel subsidies, the government is also trying to compress the planned expenditure. Reportedly, ministries have been directed to cap spending in the January-March quarter to 33% of total allocations. On the revenue front, while the growth in tax collections has improved in the last quarter, it remains lower than the budgeted growth. The slippage in the GDP growth also means shrinkage in the tax base and is likely to further impact the tax collections.
In this situation, the FM is faced with serious dilemmas. A heavy cut in expenditure may adversely affect growth. On the other hand, increase in indirect taxes may be inflationary and increase in direct taxes would reduce disposable income and thereby savings. In keeping with his assurances about maintaining stability in taxation and providing a pro-investment climate, the FM may decide not to tinker with the tax rates. Clearly, the current exemptions will see a pruning to add to the revenues.
Speculation is rife whether on the lines of the US, new taxes like the inheritance tax will be introduced in India or a possible increase in the effective tax rate on dividends to 30% by imposing tax on dividend received beyond a threshold received by the “super-rich”. A higher likelihood is that of a surcharge on the high networth individuals. In 2008-09, the surcharge collection from the non-corporate tax collections was more than Rs 10,000 crores when 10% surcharge was levied in the case of income above Rs 10 lakhs. How the FM defines the ‘super rich’ would determine the potential collection from this source.
There is some unfinished agenda on the corporate taxes front. The Shome Committee and Rangachary Committee set up to review the contentious provisions on GAAR, retrospective taxation and Indirect transfers and taxation of development centres have submitted their reports to the Government, but a final view on the suggested measures is awaited.
The government’s announcement of its acceptance of Shome Committee’s key recommendations on GAAR has been a positive move. There are many significant issues on which government needs to bring a final view, for instance, on GAAR provisions being subject to the overarching principle of tax mitigation distinguished from tax avoidance and that GAAR should apply only to artificial, abusive and contrived arrangements. Similarly, while either GAAR or SAAR will apply, the basis on which the selection of GAAR vs. SAAR will be made remains unclear. Other issues like GAAR’s applicability in the case of treaties with LOB provisions or in case of Mauritius companies which are presently covered by the Circular No. 789 are now expected to form a part of the Finance Bill, 2013.
One would like to hope that just as in the case of GAAR, the Shome Committee’s suggestions on these aspects would also be accepted by the government. Expectations are that there may be some carve outs from the indirect transfer provisions, for instance, for the intra-group reorganizations and SEBI approved portfolio/ institutional investments. But, it remains to be seen how the retrospective element of the amendments would be addressed.
One area that should certainly receive attention is tax administrative reforms and strengthening the dispute resolution mechanism to unlock the huge sums locked in tax disputes. More than Rs 4 lakh crores are currently locked up in income tax disputes at various levels. There has been a rise in the international disputes too, evident from the high transfer pricing adjustments of about Rs 45,000 crores for 2011-12, almost twice the amount adjusted in previous year. Going by the recent instances of TP adjustment orders this number is likely to go even higher and send a negative signal to the investor community.
The FM has been time and again emphasizing the need to lower the tax disputes. However, the implementation of the dispute resolution mechanisms leaves a lot to be desired. The Dispute Resolution Panels introduced in the Budget 2009 continue to face many implementation issues. Even the Advance Pricing Agreement scheme does not seem to have had a very auspicious beginning. Already, there are reports about the unhappiness expressed by the US Competent Authority with India's "irrational" examination process and lack of optimism about India's new APA program in offering a better solution for resolving U.S. companies' tax disputes with Indian tax authorities.
This year's Budget should therefore focus on consolidating not just the fiscal situation, but also the confidence that the government can put the economy back on track by providing a conducive investment environment.
(Views expressed are personal)