Finance Minister Shri Arun Jaitley will be presenting union budget on 29th February and economic survey which will be released before the budget will provide the initial outcome of the policy initiatives taken by the government. Although economic reforms are an ongoing process but budget proposals outline the direction of the government over the next fiscal.
Macroeconomic indicators suggest that the despite of weak global economic scenario, India remains a bright spot among the emerging economies. However just going by the GDP data will not tell the true story as it will be underestimating the nominal growth and overestimating the real growth. GDP growth only suggests that we are growing faster as compared to other economies but are the dividends of growth reaching the poor & needy is a question which needs to be looked seriously.
On the basis of recommendation of the finance commission, central government increased the allocation to the state governments in the previous year and therefore accountability of the state government has also increased for implementation of development & welfare schemes.
As far as common man is concerned, inflation is still pinching them and despite of decrease in wholesale price index the retail prices are not coming down. Recommendations of the seventh pay commission will not only impact the resource allocation mathematics but it will also make the RBI’s job tougher to contain the inflation after salary hike of the millions of government employees.
Government will be completing its two years in the month of May and now the focus should be more on the implementation of the policy measures already announced with a proper stock take. Some of the areas which finance minister should consider in the upcoming budget are as below-
- Make in India and Startup India – Make in India is an ambitious project of this government and it will naturally take some time to get some tangible results in the form of increased production & employment generation coming out of this initiative. Reviving the investment cycle is a must for the success of dream project of PM Modi and our public sector undertakings should lead in this process. Some of the PSUs are sitting on huge cash and government should use this money for setting up new undertakings. Overreliance on disinvestment to achieve the fiscal deficit target is unnecessary and revival of Air India is an example that if government manages the affairs of PSUs in a professional manner then they can be revived.
Very recently the government has unveiled Startup India scheme and some concessions have been given to new entrepreneurs under income tax for encouraging them and venture capitalists. However tax concessions needs to be given under indirect taxes also and monetary exemption limit applicable to Small Scale Industries (SSI) should be increased to increase the competitiveness of the new entrants. Some restrictions should be introduced in the budget to ensure that there is no diversion to get the tax breaks available to startups.
- GST and impact on end customer- GST will change the entire indirect tax structure of the country and it is definitely going is help the overall economy. The idea behind GST is to introduce single taxation regime for indirect tax and bring the taxability of goods & services at par. However currently rate of service tax is lower as compared to tax levied on goods (excise plus sales tax) and accordingly a higher GST rate will impact the service providers as well as common man. Therefore reaching a conclusion on a tax neutral GST rate is precondition for implementing it.
- Direct benefit transfer – Subsidy is reality as well as necessity for the Indian economy and it should be continued for targeted population. However the real problem is that the benefit of subsidy reaches only partially to the beneficiaries. A big step has already been taken towards checking the leakage after successful implementation of Jan-Dhan Yojna and now there is a need to integrate all the schemes through JAM (Jan-Dhan, Aadhar and Mobile). Although this matter is more of procedural in nature but finance minister should address this issue in the upcoming budget.
- Road and Power Sector- These sectors are considered as primary infrastructure for development of economy and better infrastructure facilities are a must for attracting investment.
Government constituted Kelkar committee to revisit the “Public-Private-Partnership (PPP)” model which submitted its report in November’15 and gave some suggestions. PPP in road sector is matured a bit now but the government should consider introducing sector specific minimum guaranteed rate of return to increase the private participation in the infra projects. Provision should be included in the PPP contract itself that cost of project and return will be audited by Comptroller & Auditor General (CAG).
In power sector the real problem is the ailing situation of DISCOMs. After the initiatives taken by the government now there is abundant availability of coal for power generation but cash strapped DISCOMs are not able to buy power which is the main reason for generators running their plants at lower plant load factor as electricity cannot be stored. State governments have been giving subsidised or free power to certain category of consumers like farmers but they did not pay the DISCOMs which resulted in mounting debt year after year.
Government should also introduce tax free bonds to meet the funding requirements for infra sector. Success of schemes which are introduced for the revival of infrastructure firms (like “Uday” for revival of DISCOMs) is dependent on response from the investors which will require tax breaks to attract them.
- Capitalisation of banks- Our economy survived the global financial crisis of 2008 primarily on account of two factors viz. our domestic market and strength of our banks. Third quarter results of several public sector banks shows that our banking system needs capitalization because significant part of the advances have become bad for recovery and the NPA is expected to increase in fourth quarter also.
Government has introduced “The Insolvency and Bankruptcy Bill, 2015” in the parliament and which aims to resolve the bankruptcy cases in a time bound manner. However in the meantime finance minister should act proactively and either setup a body which will take over the bad loans of PSU banks or infuse capital to meet the funding requirements.
- Controlled foreign corporations – In the previous year the government changed the provisions related to determination of residential status of companies and government relased draft guidelines in December related to manner in which residential status will be determined. These provisions are to be implemented from FY 2016-17 but the final guidelines are yet to be released. Accordingly either these provisions should be deferred to next financial year or some relaxation should be provided for the coming financial year.
- Impact of Ind-AS implementation- Ministry of Corporate Affairs (MCA) had notified its roadmap for implementation of Ind-AS from FY 2016-17. Income statement prepared under Ind-AS will be the starting point for computation of Minimum Alternate Tax (MAT) and in some cases companies may be required to pay more tax on the book profit even without they have realized any gains. Accordingly suitable amendments needs to be done in MAT provisions for excluding transition to the new accounting regime.
- Tax neutral transfer pricing- Basic idea behind inclusion of domestic transfer pricing provision was to check the shifting of profit to undertakings which are enjoying some tax exemptions and ultimately reducing the tax liability. However the blanket inclusion of entire domestic transaction above specified monetary limit has increased the compliance cost and tax neutral domestic transactions should be excluded from the transfer pricing rules.
- Reduction in tax rates including MAT along with managing fiscal deficit targets- In the previous year finance minister announced to bring down the tax rate to 25% in a phased manner. Finance minister should come out with broad timelines for reducing the tax rates (CBDT had already released the draft of phasing out plan of deductions under the Income Tax Act).
Applicable tax rates under MAT also needs to be considered for its downward revision as in substance MAT is no longer an alternate tax. Effective corporate tax rate is approximately 23% in our country and charging an alternate tax at the rate of more than 20% is unjust.
However government has to consider the impact of the above on revenue generation also before committing to any schedule for reduction in tax rates.
- Domestic savings- Over dependence on FDI will dampen the dream of “Make in India” and past trend shows that FDI has flown in only in those sectors which start yielding return within short time. In other words FDI inflow in priority sector is very nominal and as a country we must raise our “Saving-GDP” ratio which in turn will help to increase the “Investment-GDP” ratio which has decreased significantly. Government may consider increasing the deduction limit under section 80C which will achieve twin objective of achieving the economic goals as well as providing some relief to individual taxpayers. If we compare ourselves with China then “Saving-GDP” ratio is more than 50% in that country which is a reason that Chinese are less dependent on foreign inflows.
- Changes to be notified early- It has become a regular practice to extend the due dates for filing of returns and other compliances. Tax professionals arguments are also justified that changes implemented by the CBDT are notified very late which leaves a tax payer with very little time to meet the necessary requirement. Accordingly changes in forms, reports etc. should be notified early by the department.
- Rationalisation of CSR expenditure deduction- Companies are mandated by the Companies Act, 20013 to spend certain amount towards corporate social responsibility. As per the provisions of the Act, if a company donates the CSR amount to government projects like “Clean Ganga Fund”, “Swachh Bharat Kosh” etc. then it will be allowed as deduction but if any company carries out in-house CSR activity then no deduction is allowed for this expense. Government should bring uniformity in the taxability of CSR expenses irrespective of the mode in which such expenses are incurred.
By Shshank Saurav (Chartered Accountant and Anti-Money Laundering Specialist)