Published Editorial

Budget 2017 - focused, prudent and steadfast

February 2017

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Business Standard


Mr. Rajiv Memani
Chairman, EY India

Budget 2017 displays a steadfast resolve to stay on course despite turbulent external factors. The emerging trends of increased protectionism and tax competitiveness from developed economies, hardening crude prices and a dynamic global interest rate environment are just some of the external factors that the FM had to contend with, resisting any temptations to mend course.   It is heartening that incremental steps in successive budgets have followed a consistent theme as originally envisaged – widening the tax base, addressing the menace of the parallel economy, bringing transparency to political funding, boosting startups, enhancing ease of doing business, rationalizing the tax administration, strengthening anti abuse provisions, spending on the growth areas of infrastructure and creating jobs and achieving inclusive growth, all while staying within the broad parameters of fiscal prudence.

It is noticeable that the Budget estimates on the tax revenue front project a very conservative scenario.  After nearly 17% growth in gross tax revenues over the last two years the FY 18 Budget estimates only 12.2%.  This leaves room for improvement in the aftermath of demonetization, which can yield dividends directly from RBI’s balance sheet readjustments and indirectly from bank deposits with the potential of formalization of a part of  the parallel economy.

Further, the overall 6.6% increase in overall expenditure is being financed by a nominal growth of 11% and tax buoyancy of 1.1% compared to 1.9% and 1.4% respectively in FY 16 and FY 17.

The limited give away on the tax front i.e. marginal relief to low income group between INR 2.5 lakhs to INR 5 lakhs and 5% tax reduction to MSMEs is also well targeted reaching out to the segment that has been the most impacted due to demonetization.

The government has showcased disciplined execution of its expenditure plan in FY 17 contributing considerably to GDP growth.  It is expected that such discipline will continue.   Despite the fact that total spending and revenue expenditure as percentages of GDP are estimated to be at a record low, the mix of revenue and capex has been tweaked as also aligned with the government’s resolve to check inflation.  RBI may then be encouraged to reduce rates – yielding cheaper credit access to the private sector, an imperative for sustainable growth.

The Budget remains bold in re-emphasising its resolve to address the menace of black money with landmark proposals for transparency in electoral funding by restricting cash funding and institutionalising anonymous funding through introduction of bonds.   

It is heartening to note that many proposals that were part of the Justice Easwar Committee on Income Tax Simplification have been addressed – reassuring taxpayers of a consultative approach which has become a hallmark of tax legislative process recently.

Anti-abuse proposal on the tax front remain bold and direct. The proposal to curb the Long Term Capital Gains (LTCG) tax exemption post introduction of the Securities Transaction Tax (STT) in 2004 only to cases where both the legs of acquisition and disposal have suffered such STT is well intentioned. Supplemental notification, exempting genuine transactions from the clutches of any unintended consequences of this proposal, i.e. acquisition of shares through IPO, FPO, bonus or right issue etc., will be eagerly awaited to ensure it is broad-based enough to carve out transactions of succession, contributions to trusts, and many more.

Further, proposals such as the retrospective clarifications provided on applicability of the indirect transfer taxation provisions to Foreign Portfolio Investors (FPIs), further FDI liberalisation and abolishing of FIPB, are significant messages to attract foreign capital.  

The much needed clarity on MAT applicability post Ind AS adoption has been provided, building largely on the recommendation of the Committee constituted in this regard.  The proposals are premised on the basis that existing adjustments provided in MAT computation shall be made to net profits before other comprehensive income.  The resultant will be further adjusted as now proposed-for items in other comprehensive income as also the transition adjustments.  What may need some clarification is with regard to fair value adjustments that are mandated through the profit and loss account in Ind AS.  Such adjustments, both losses and profits should be treated similarly if the same are considered eligible adjustments to distributable profits.  This may have been an inadvertent miss considering the matter rests between CBDT and the Ministry of Corporate Affairs.

The continued commitment to spend on infrastructure development was evident in the budget with INR 3.96 lakh crore spending in 2017-18. The thrust on affordable housing, stepped up investments in road, highways and railway infrastructure are expected to spur economic activity and job creation. Further, measures providing income security to farmers, improving skill development and job creation at the rural level, in addition to affordable housing are crucial for inclusive growth. Legislative reforms are also being contemplated for consolidation of labour laws to foster a conducive labour environment.

The FM has performed commendably to table proposals which address the needs of India’s economy in today’s global and domestic environment. The Budget sends out certain key messages on continuity in the policy of fiscal prudence and resisting counter cyclical measures to artificially boost the economy, consistency of purpose, drawing unshakably from the economic agenda set out in the manifesto, boldness of reforms resisting all socio-political hostility, pushing India towards a more digital and cashless economy and certainty in tax through a collaborative approach. The FM’s implicit message cannot be missed by any serious foreign investor seeking to place bets on the most promising of developing economies.