Thunderous silence on reforms
The Finance Minister Pranab Mukherjee was in an unenviable position this year when he crafted his budget proposals. The economic scenario was not great. From 12 quarters of 8% growth, the rate had plummeted to 5.8% and the fiscal deficit watermark had already reached 6.2%. If one reads between the lines of the Economic Survey, the slowdown is not just contributed by lower exports and the recession in developed countries. A decline in domestic consumption has been a major contributor to the slowdown. Batting on wicket where the spin bowling is turning in an unpredictable way, he has executed some lofty shots to the delight of the populist gallery. His direct tax proposals are revenue neutral while his indirect tax proposals will yield an additional revenue of Rs 2000 crores in a full year.
The irritant for the last few years-the Fringe Benefit Tax has been removed. It yielded just 3% of the total direct tax collections but the paperwork and aggravation it caused to corporate executives were a source of disproportionate nuisance. It will now be possible to weave in ESOPs in the benefits package to attract and retain talent specially in wealth-sharing companies. It will also be easier to build in superannuation and pension benefits in structuring compensation but watchful of the minefield that has been laid to treat these as perquisites in the hands of the employees.
While allocating dramatically increased funds for infrastructure, urban renewal, rural reconstruction and poverty alleviation for “aam aadmi” and “inclusive growth” –the FM has driven up the estimated fiscal deficit rate to 6.8% of GDP . There are anxieties that he will succeed in driving it higher. Hence the mayhem in Dalal Street. Coupled with inflation, the real interest rate is likely to go up as a result of increasing fiscal deficits. Ironically, at this juncture, more people are worried about economic growth and employment generation than prudent fiscal restraint.
Benchmarked against their Western counterparts, Indian companies invest much less in Research and Development. The proposal for a weighted deduction of 150% on “in-house” R&D expenditure is a step in the right direction. Of course, industries in the negative list will not benefit. This list includes companies which produce alcoholic beverages, tobacco, cosmetics and a few other products.
While the IT industry has not directly gained much beyond the extension of the tax holidays by one year, the introduction of “safe harbour” rules will be a sigh of relief. India has become the offshore back-office of the world. Numerous foreign companies who have set up offshore development centres or back offices in India were apprehensive of litigation and related uncertainties. The introduction of the “safe harbour” rules and the alternative dispute resolution mechanism which aims at speedy resolution of cases involving transfer pricing will help attract and retain more foreign investments at a time when some of MNCs were looking at cheaper and greener pastures in other countries in Asia.
To remove uncertainties and the risk of protracted and expensive litigations, the FM has proposed the merging of the two Authorities for Advanced Rulings. Thus, there will be a single authority for advanced rulings for both indirect and direct taxes.
The FM has also proposed a dual Goods and Services Tax (GST) structure with effect from April1, 2010. The presentation of the GST proposal has the hall-mark of a consummate political leader and bears testimony to his “change management “skills. He has praised the efforts of the Empowered Committee of State Finance Ministers for their role in preparing the roadmap and design of the new GST. He has reminded himself of the federal character of our constitution and complimented the state finance ministers for their “untiring efforts”. Although very much in the saddle, he has referred to his role as a “catalytic” agent and has re-assured that he will introduce GST “after due consultation with all stakeholders”.
The FM has also referred to the increased use of information technology and re-engineering of “business processes” which has not only led to impressive increase in tax collections but also simpler compliance procedures. As more re-design of processes and automation happen, the corporate sector can aspire for a more “hassle-free” environment.
The FM has also introduced a full deduction of all capital expenditure (except goodwill, land and financial instruments) to companies setting up and operating cold chains, warehousing for agricultural produce and for common carriers who lay pipelines for transport of petroleum and natural gas. These tax benefits will be investment-linked and not profit-based.
The negative for many companies will be in the hike of the MAT from 10% to 15% -this will raise discomfort for many in the corporate sector.
This budget has a shadow of the Sherlock Holmes story of the dog that did not bark. There was an expectation of the articulation of a long-term vision of bold economic reforms. There was, however, a thundering silence on aggressive reforms.
(Roopen Roy is the Managing Director of Deloitte Consulting, India. Views expressed here are his own)
Gamble on growth, populist measures