Positive intent, but it’s time to deliver
The Financial Express
Country Managing Partner
Ernst & Young India
Chidambaram had indicated earlier that his last pre-polls Budget would be grounded and prudent. He indeed kept his words. With a firm focus on stimulating growth, promoting investments and curbing the twin deficits, the FM has not given in to the temptation of doling out large populist measures. Nor has he unsettled the tax rates or even the base, much to the relief of the taxpayers. But, the Budget announcements hinge on a strong optimism for economic growth recovery. How realistic will these assumptions be is the issue to watch out for.
The fiscal deficit roadmap pegs target for next fiscal at 4.8%. The Budget estimates an overall expenditure increase of 16.4%, with a planned spending hike of 29.4%, against revised estimates for the current year. The non-plan expenditure is budgeted to go down by 11%, with a hefty one-third cut in the petroleum subsidy, to be made possible by the phased decontrol of diesel prices.
These numbers are guided by expectations of a nominal GDP growth of 13.4% and tax buoyancy of nearly 1.5 in gross tax revenues. Considering that the tax buoyancy was only 0.93 in the last financial year and 1.3 (revised estimates) in the current one, the assumptions seem to be somewhat ambitious. Even the target for non-tax receipts at more than R1.7 lakh crore, nearly 33% increase over the current year, looks aggressive.
RBI will be closely watching the quality and sustainability of fiscal consolidation. It remains to be seen if the projected fiscal numbers will be able to create space for monetary policy and convince the RBI to lower the interest rates.
The FM had called higher growth and sustainable development as his mool mantra. Growth needs investments, including foreign investments which are also precious for addressing FM’s other big worry – reducing the current account deficit. Unfortunately, India is perceived as one of the toughest markets for doing business. It is critical to create a positive environment for attracting investments.
The industry hopes a high tax revenue targets, without any attempts to widen the tax base, do not translate into aggressive tax administration and undue pressures on the existing taxpayers.
The very first tax proposal in FM’s speech was the setting up of a Tax Administration Reform Commission to review the application of tax policies and laws and bring them at par with the global best practices. If implemented in the right spirit, the initiative could well serve the dual objectives of attracting foreign investment and unlocking the huge amounts currently stuck in litigation. For income tax alone, more than Rs 4 lakh crores are stuck in litigation at various levels.
The finance minister emphasised that there are only 42,800 persons who admitted to a taxable annual income of more than Rs one crores. However, there have been no visible measures for bringing in more persons, across income groups, into the tax base. There is clearly an urgent need to leverage technology for data mining and information sharing both at the Centre and State levels.
The Budget has been uncomfortably silent on many unaddressed issues. While the incorporation of the recent decisions on GAAR in the Income tax Act was expected, the industry was hopeful of gaining more certainty on the vexatious issue of retrospective amendments. Even the issues of taxation of development centres and safe harbor rules remain in a limbo. An early announcement of the government’s decisions on these matters is important for sending a clear and positive signal to the investors that the government would abide by its assurance of clarity in tax regime and a non-adversarial tax administration.
The industry shares the FM’s optimism that the worst is over. However, for achieving the ambitious growth of 6.4%, the government must continue its focus on bringing efficiency in delivery mechanisms, removing obstacles to investment and providing certainty in taxation. Otherwise, all the good intentions will remain just that.