A vision for future fiscal management
National Tax Leader, EY
There were two clear expectations set by the finance minister himself in the run-up to this Union Budget: One, not to expect any significant goodies due to the grim economic and fiscal situation facing the country; and two, not to expect dramatic changes — given the short period of time available with the government to frame the Budget — but to expect a road map and a vision for future fiscal management in the country.
Budget 2014, if looked at from both these perspectives, comes up as trumps.
In an ideal world, and in keeping with the pronouncements in the Economic Survey, one should expect a gradual rationalisation of tax rates, especially by removing all kinds of surcharges and cesses which have crept in over a period of time. In fact, the Economic Survey also notes that India needs to gradually reduce corporate tax rate to make it more attractive for investors vis-à-vis neighboring countries. However, given the fiscal constraints as expected, the tax rates remain unchanged and also the fiscal policies of continuance with sector-based tax incentives remain untouched.
There has been clearly a serious attempt to try and reduce tax disputes, particularly in the area of transfer pricing, and to provide greater certainty to both domestic and foreign companies.
Towards this objective, the internationally recognised range concept for benchmarking arms-length profit has been introduced to replace the current arithmetic mean formula in the Indian transfer-pricing provisions.
Similarly, use of multiple years’ profits while doing comparability has been accepted as opposed to one year’s data. These measures by themselves will significantly reduce some of the avoidable disputes in the system. The proposal to apply advance-pricing agreement upto four previous years will also help in eliminating some of the present transfer-pricing disputes arising out of past years.
Finally, the proposal to extend the facility of seeking advance ruling to resident taxpayers is really welcome as it offers an opportunity to taxpayers to gain certainty in respect of their proposed business transactions. The only dampener would be the fact that retrospective amendment in indirect transfers has not been rolled back and has made its way through the legal system. The good part is that any future tax demands arising out of this provision will be first taken to a high-powered committee before they are finalised by the assessing officer.
There are other welcome measures — like clarify-the-pass-through treatment for real-estate investment trusts (REITs), extension of tax holiday on power units, reintroduction of investment allowance on lower threshold of plant and machinery investments. In view of the prevailing challenges before the government, this is certainly a pragmatically bold budget as the FM could not have afforded any other option.