Published Editorial

An inclusive and pragmatic budget

2 February 2018

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Rajiv Memani

The budget this year was presented against a backdrop of a strong economic revival, with the Economic Survey estimating a real growth of 7.5% in the second half of the current fiscal and 7-7.5% growth in the next fiscal. There have been strong expectations of a lower tax regime to spur investments, more disposable income in the hands of smaller taxpayers and measures for inclusive development of the economy. The budget scores well on the last aspect, while leaving the first two aspirations partially addressed. Investors and markets have appreciated the fiscal discipline maintained by the government over the last three years. Some slippage in the fiscal deficit target was expected, primarily driven by revenue expenditure, and so the revised target of 3.5% is no surprise. The steadfast focus on maintaining fiscal discipline is thus commendable.

The budget has focused in a large measure on agriculture and rural development, increasing infrastructure spend and providing welfare and healthcare programmes to cover 100 million poor and vulnerable families. All these are welcome and laudable steps. The government has also continued its focus on domestic manufacturing by increasing the customs duty onhandsets to 20% and several other consumer products. The FM has kept his promise to provide a 25% tax rate for 99% of firms. However, the remaining 1% contributes substantially to production and employment and deserves a competitive tax environment.

The combined burden of corporate tax and dividend distribution tax on Indian firms is 46% and increases further with the enhanced education cess. A cut in the corporate tax rate or in the dividend distribution tax would lakh at 10% without indexation and exchange fluctuation benefit may lead to some complexity considering the concessional rate of 10% tax for equity shares is conditional on acquisition being subject to securities transaction tax and applicability to shares acquired as bonus, preferential issue, prior to listing, etc. These may be addressed before enactment or through a circular. The proposal has grandfathered gains prior to 31 January, which reinforces the stand against retroactive amendments. It is heartening to see recognition for alternative investments (venture capital funds, angel investors, alternative investment funds) in the FM’s budget speech.

However, the convergence in taxation of gains from investments in listed and unlisted companies significantly reduces the historical tax arbitrage between asset classes and should raise domestic capital allocations to the PE/VC (private equity/venture capital) asset classes. The proposal to align the business connection rule with broadened PE rule under the multilateral instrument and also the introduction of the concept of Significant Economic Presence (SEP) under the domestic law to create a negotiating position under the double taxation avoidance agreements (DTAA) for tackling digital economy are clear indications of the government to resolve to address issues under the OECD’s BEPS (base erosion and profit shifting) agenda.

The move to provide standard deduction of Rs.40, 000 in lieu of the medical and transport allowance will provide marginal relief to individual taxpayers with income up to Rs.1O lakh. Some more relief in the tax burden would have helped push consumption and demand, particularly in the lower and middle income groups. On the other hand, the FM has brought cheer for the senior citizens through tax deductions on deposits, enhanced medical insurance premium deduction and increase in expense deduction for critical care illness.

With buoyant revenues from both GST and direct taxes, the government’s fiscal consolidation path should remain intact. What is critical is the continued focus on incentivizing investments, crucial for propelling India’s growth momentum while accelerating the vision of inclusive development.

Rajiv Memani is chairman and regional managing partner, India region, EY.