While the euphoria of thumping mandate may still be settling down, the new government has its task cut out before the finance minister rises to deliver his Budget speech in a week's time. An unprecedented mandate not witnessed in last decade is evidently weighing in the minds of the Mandarins at North block as the Budget proposals are being given a final shape. The significance or should I say, the importance of this Budget could not have been underscored more, given the crucial juncture of India's economic cycle in light of global slowdown and supported by last week's World Bank findings estimating decent growth in the world's two largest Economies.
Budget expectations - a quick run over Strangely enough, the budget expectations are predictable even from the sidelines as India Inc and other representative bodies have been inundating relevant lobbies with their 'wish-list' which, if anything, seems bulging and unrealistic to meet. While corporate demands have been soaring high, particularly due to stability and anticipated fresh dosage of economic reforms, competing demands for management of fiscal deficit by stimulating tax collections through broad based tax reforms, enhanced allocations for social programs including due to anticipated shortfall in monsoon and infrastructure would figure on top of budget proposals. Expectations are rife insofar as FDI reforms are concerned, not to forget privatisation of select Government undertakings including nationalised banks.
More specifically, on top of tax payers' agenda are crucial tax reforms; particularly, a definitive roadmap for GST roll out, continuity of excise and service tax rate cuts, extension of income-tax incentives for export units in STP /EOUs, fiscal and non-fiscal sops to boost infrastructure, manufacturing and exports, and last but not the least, an overdue working paper on new Income Tax Code to replace a five decade old law. A reality check!
A cursory look at the long list prompts me for a reality check - is it something that the government is realistically expected to deliver or should it reconcile with a reality mirror in the backdrop? Undeniably, India is better placed than ever before to pursue its unfinished reforms agenda - both fiscal and non-fiscal; however, to me it appears clichéd wishful thinking to expect that the Government would not take tough decisions, given that the global economic outlook continues to be bleak and would continue to have a ripple effect on India's growth story.
Credible agenda waiting to roll
A credible outcome would be pacing of reforms initiated during its last tenure and defining the new growth targets and reforms agenda for the next full term. On top of Finance Ministry's agenda would be laying down new FRBMA targets (which can be crystallised once 13th Finance Commission submits its report in September 2009) for fiscal deficit management adequately aligned with the macro-economic realities. The balancing act would require the governance to be frugal with dole outs and stimulus packages industry is expecting. The last regime's achievement of FRBM targets, barring for fiscal 08-09, was predominantly revenue driven and supported by buoyancy in revenue collections. With sluggish growth in tax revenues, the FM will have to bet on better compliance, efficient tax administration, besides of course growth. We can expect a two year moratorium on fiscal discipline, though that would be bad economics!
On the fiscal reforms front, the two flanks which would need a balancing act include - pursuing tax administration reforms to stimulate 'tax collection to GDP' ratio; at the same time, continue with rationalization for specific sectors, particularly the growth engines of the economy -- services, infrastructure & manufacturing . There are tough choices to be made; there is certainly case for rationalization of taxes, both in term of tax rates and simplification of the tax regime itself. The effective corporate tax rate of 34 per cent coupled with dividend distribution tax and fringe benefits tax places India amongst high taxing nations. Though, I don't envisage room for reducing the effective tax rate due to fiscal compulsions, a reduction in dividend tax and revisiting the rigors for levy of fringe tax would reduce the cost and compliance burden. Similarly, the IT and ITES industry may have to live with a tax holiday extension for up to 2 years instead of the 5 year demand. On personal income-tax, more tha
A roadmap for GST roll out and the probability of meeting April 2010 deadline is expected from all the corners as tax payers are jostling to devise strategies for seamless transition from current multi-tax multi-tier system to a (most likely) two-tiered tax system. Given that petroleum products and stamp duty is outside the purview of the VAT regime, the Indian GST shall not look like the European VAT or the Australian GST. We may also perhaps have to live with different rate of tax for goods and services besides aligning all states to fall in the 5 category rate (nil, 1 , 4, 12.5 and 20) structure. Nevertheless, institutionalising the new regime underscores the importance to articulate a clear vision for transition without the taxpayers having to forego tax credit amassed under the extant regime. Assuming that all state governments play ball and April 10 rollout becomes reality, I am circumspect about Constitutional amendment for giving right to the states for levy of tax on specified services. Hence, we shall see a two phased if not a three phased rollout of GST. Given that our customs rates are more or less aligned to ASEAN levels, I don't anticipate any change. Similarly, the FM would be reluctant to tamper with the excise and service reduced rate and rather prefer to leave it unchanged until March 2010. We could witness flipping the service tax regime by providing a negative list of services that would be exempt to replace the ever increasing complex and inclusive list.
Ironically, A difficult Budget!
Ironically, despite a situation where the Government has a clearer mandate to pursue its agenda rather than being cornered by coalition partners, I sincerely believe that Pranab Mukherjee has a difficult though not an impossible task at hand, especially knowing his predecessors who have been deft at pulling it off in some of the most difficult situations. He will have to strike an incredible balancing act this time round to disprove the theory of decoupling. It would be interesting to see how comfortable one of the most admired politician of the country would be in the shoes of his lawyer predecessor!!
We are all ears, Mr Finance Minister!!
The author is a Partner with BMR Advisors and views are entirely personal.(With inputs from Sumit Singhania)
