Published Editorial

Strong focus on asset-creation

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Rajiv Memani

Chief Executive Officer and Country Managing Partner, EY India

The economic backdrop to the Union budget 2014-15 indicated the importance of addressing the domestic structural constraints that have engendered an undulating and gradual economic recovery. Despite the new government being in office for only 45 days, the finance minister was carrying lofty expectations on his shoulders as he rose to present his maiden budget. The task before the minister was very challenging—reviving growth, introducing fiscal prudence, improving the tax-to-GDP (gross domestic product) ratio and increasing non-tax revenue.

The finance minister’s commitment to maintaining the fiscal deficit at 4.1% of GDP is commendable. The government’s objective appears to be increasing economic activity, which will translate into better tax collections and help address the deficit. The focus of the budget is on asset creation.

Investment clearly is the underlying theme in this budget. Realizing that the growth rate of the economy is correlated with the investment rate, the budget contains proposals for development of industrial and economic corridors, with smart cities linked to transport connectivity, as the cornerstone of the strategy to drive India’s growth in manufacturing. It also contains initiatives for development of small and medium enterprises and promotion of entrepreneurship.

The budget has some significant proposals for the real estate and infrastructure sector such as grant of a pass-through tax status for real estate investment trusts (REIT) and infrastructure investment trusts (InVIT). The budget proposes to amend the tax law to put in place a specific taxation regime for providing the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such trusts in the hands of the unit holders of such trusts. Certainty and clarity on taxation of the new investment vehicle would result in expansion of asset creation and delivery through the public-private partnership model.

India’s complex tax system suffers from problems in both structures and administration. The finance minister’s commitment to provide a stable and predictable tax regime that would be investor-friendly and spur growth is welcome. The statement that the government will not ordinarily bring about any changes retrospectively which create fresh liability is also assuring to investors.

After causing consternation in the international business community in the 2012-13 budget by way of a retrospective amendment to tax indirect transfers, the government has now proposed that all fresh cases of indirect transfer taxation arising will be scrutinized by a high-level committee. Unfortunately, contrary to expectations, the budget does not contain any proposal that would provide relief to taxpayers who are already in litigation on this matter. Taxpayers who are currently embroiled in litigation would need to continue defending their positions in litigation, which can be expected to be time consuming and uncertain. One would hope that the proposal to enlarge the scope of income tax settlements would provide an alternative non-adversarial forum for resolving their disputes.

The finance minister has recognized that one immediate imperative on the agenda of the new government is the need to find a faster and better way to resolve tax disputes. The proposals to extend the scope of advance rulings to cover residents, enlarging the scope of the Income-tax Settlement Commission and enabling roll-back of advance pricing agreements (APAs) would seek to minimize the scope for disputes and improve the taxpayer’s experience in dealing with the tax administration. The APA programme has seen a lot of interest since its launch.

The minister reaffirmed the commitment to introduce a goods and services tax, even though a timeline or a road map to implement the same was not spelt out. The proposal to deny corporate tax deduction for expenditure incurred by companies on corporate social responsibility as mandated by the Companies Act, 2013, may be a disappointment for corporate India as it would effectively increase the rate of dividend distribution tax.

The minister also emphasized the need for convergence of Indian accounting standards (AS) with the International Financial Reporting Standards (IFRS). Accordingly, companies—other than banking and insurance firms—will need to prepare for implementation of Indian AS by 2016-17. The government also intends to separately notify tax AS which would apply for computation of taxable income.

The budget proposals would go a long way in addressing concerns which trigger risk aversion and had injected considerable uncertainty in investment activity. The steps announced are only the beginning of a journey towards a sustained growth of 7-8%, along with macroeconomic stabilization.