 "Koushik Chatterjee")
Even as Finance Minister Arun Jaitley was presenting a grudging budget for law & justice and the Supreme Court, the Chief Justice was saying the judiciary's workload was "excessive and uncontrolled".
Though successive finance ministers who have been senior lawyers are aware of this, they have ignored the judiciary's long-standing gripe that it has been consistently ignored, securing only 0.2 of the Budget pie.
For 2014-15, the expenditure of the law & justice ministry is pegged at Rs 1,205 crore (Plan Rs 261 crore; non-Plan Rs 944 crore). This is less than last year's provision of Rs 1,973 crore and marginally higher than in 2012-13 (Rs 1,183 crore). Allocation to the Supreme Court was also poor - a provision of Rs 134 crore, about the same as last year.
The law ministry and the Supreme Court aren't the only ones facing a paucity of funds. There are about 40 central tribunals that deal with various taxes, company affairs, consumer rights and other vital segments. However, there were only nominal increments for these entities. For instance, the Income Tax Appellate Tribunal (which once operated from an Ambassador car, till a picture in this regard went viral) got Rs 56 crore, Rs 4 crore more than last year. The National Tax Tribunal received Rs 4 lakh, against Rs 5 lakh last year. The Appellate Tribunal for Foreign Exchange received Rs 8.25 crore, Rs 25 lakh more than last year, while the International Centre for Alternative Disputes Resolution was granted Rs 5.5 crore, the same as last year.
These days, at public functions, ministers and judges cite the mantra of computerisation of district and subordinate courts. However, in the Budget, the allocation towards this fell to Rs 58 crore from Rs 78 crore last year. Fast-track courts were granted a mere Rs 5 crore. For some reason, the column for 'infrastructure facilities for judiciary' was left blank; last year's Budget provided Rs 800 crore towards this.
The ministry's overall budget includes expenses on conducting elections, which has spiralled phenomenally these days, with more state elections due soon. Also, the ministry has a number of institutions to look after, such as the National Mission for Justice Delivery and Legal Reforms, the Study of Judicial Reforms and Assessment Status and SAJI (Strengthening Access to Justice-India).
The Union Budget has set a bad example. The Centre and states have always been haggling over sharing the expenses in running the legal system. Now, states have a model (rather an excuse) to be equally tight-fisted. The litigant's journey, right from subordinate courts, will be even more agonising.
In the legal segment, about 330 million litigants and those languishing in jail, as well as their families, have reason to be jealous about the Budget's munificence towards other ministries. Considering the high defence budget for a country that hasn't fought a war in a long time, it is the battle for justice that we seem to be losing.
MCA must be wary of pitfalls: Sai Venkateshwaran
INDIAN ACCOUNTING STANDARDS
As the ministry of corporate affairs (MCA) and India Inc prepare for this, they should learn from pitfalls encountered in the implementation effort in 2011 - lack of transition time, lack of clarity on tax, too many carve-outs, etc. There are three aspects that need to be addressed urgently.
Implementation road map
The MCA should announce the road map immediately, and should implement these standards in a phased manner for listed and other public interest entities, giving companies adequate time for a smooth transition.
The time and effort that companies require for transition will vary, depending on the complexity of their business model, group structure, inorganic growth history, financing arrangements. Further, changes may be required in the reporting systems and process, management information system, business and financing arrangements, etc.
Update standards and minimise carve-outs
MCA should also issue the updated Ind-AS standards at the earliest, as the drafts published in 2011 are outdated as the corresponding IFRSs, including on key areas such as revenue recognition, consolidation, financial instruments, etc, have undergone a significant change. The MCA should also minimise the carve-outs from IFRS to ensure global acceptability of Ind-AS; else the very purpose for this convergence with IFRS would be defeated.
Another challenge that the MCA should evaluate closely is the timing of introduction of Ind-AS; while India looks at 2015-16 for transition, several new IFRS standards are becoming applicable only in 2017 - eg, revenue recognition, financial instruments, etc. So the MCA should consider an early adoption of these IFRS standards rather than having a major revision in a couple of years.
Notify tax accounting standards
The Central Board of Direct Taxes should notify tax accounting standards at the earliest, as that would delink the calculation of taxable income from accounting income, as both are prepared using different frameworks. Taxation was the most significant concern leading to the pushback to adoption in 2011, as Ind-AS brought in use of fair values without clarity on how it impacts taxable income.
In all of the above, time is of essence, and the MCA should act fast.
Sai Venkateshwaran
Partner and Head - Accounting Advisory Services, KPMG in India
Focus on speedy dispute resolution: Sarosh ZaiwallaPartner and Head - Accounting Advisory Services, KPMG in India
FOREIGN INVESTOR SENTIMENT
India needed a Budget that would capture the imagination of foreign investors, following the buzz generated in the international investment market by the arrival of the National Democratic Alliance government, headed by Prime Minister Narendra Modi. For this, the Budget ought to have indicated the government's preparedness for a new visionary approach to convert India into one of the world's leading, stable economic markets through the next few years.
What foreign investors are most concerned about is the long-term security of their investment. For this, it is necessary to have a content population in the long run to avoid turmoil such as those related to Naxal insurgencies. This can only be achieved by the government's emphasis on creating new jobs to address the large unemployment in India. For this, priority ought to be given to foreign investment, which will increase the job market in India.
The Budget's focus on infrastructure development is a positive step in that direction, as is the commitment to desist from retrospective taxation. The rise of foreign investment in the defence and insurance sectors - from 26 per cent to 49 per cent - is a welcome sign. Now, the government should make it clear it will take various steps to remove the regulatory hurdles inherited from the old colonial regime and make it easier for foreign investors to invest in the country.
Foreign investors always want to be assured of the existence of an independent and speedy mechanism to resolve disputes, just in case things go wrong with their investment in India. In the near future, the government will also need to focus on this.
Sarosh Zaiwalla
Senior Partner, Zaiwalla & Co
Investors in wait-and-watch mode: S M SundaramSenior Partner, Zaiwalla & Co
RAISING FUNDS
I was in meetings with a series of investors before the presentation of the Budget, and soon after. Frankly, there was not anything in the Budget to make these investors sit up, and take notice of India. For foreign investors, the risk premium for India has shot up substantially over the last three-four years. This arose largely out of investor perception emanating from issues like retrospective taxation, the government's indecisiveness on many policy-related issues, tax administration, among others. This Budget has not done enough to mitigate India's risk profile among the investor community. Investors are still in the wait-and-watch mode. The Budget missed out on an opportunity to communicate better with foreign investors on what the policy road map would be over the next few years, along with assurances of its stability.
The government has been vague about pending tax litigation related issues. Though the finance minister did make references to the issues of retrospective taxes, and on the need for an effective transfer-pricing regime, along with provisions of advance ruling, he did not give a clear signal to foreign investors on how he plans to deal with over $70billion stuck in tax-related litigation.
Uncertainty around tax administration continues to exist. The resources - currently locked-up in litigation - would be better utilised in various government developmental projects. Importantly, any policy initiative to unlock this resource would have given a clear message to foreign investors that the government means business, and does not believe in sitting over investor's funds.
Though the Budget has tried to unleash a spirit of entrepreneurship by facilitating growth of start-ups through a Rs 10,000 crore fund, it perhaps misses out on a big-bang booster shot that would make investors sit up, and take note.
S M Sundaram
Partner & CFO, Baring Private Equity Partners India
Don't use it to meet fiscal deficit targets: Koushik ChatterjeePartner & CFO, Baring Private Equity Partners India
TAX ADMINISTRATION
It is also based on the premise of increased spending by public sector undertakings, enabling the banking system to fund infrastructure more effectively, as well as development of industrial corridors and reviving special economic zones.
The finance minister has also focused on making Indian manufacturing globally competitive through a policy framework that facilitates the creation of competitive capacity in the manufacturing sector and enables inclusive growth, with sustainable and employment-oriented growth. The manufacturing sector will keenly track the government's policy moves in this direction.
While tax collections for this year will be crucial to meeting fiscal deficit targets, I hope the approach to tax administration will change towards a more stable, non-litigious and transparent regime. A robust tax policy that is forward-looking and in tune with best-practices, along with an efficient and objective tax administration framework, can be a great catalyst for new investment in the country, for both domestic and international investors. Most investors see taxation as a fair and equitable cost of investment. However, it is equally important for the government and the tax authorities to focus on efficient and fair tax administration, and not use it as a lever to meet the targets of fiscal deficit.
Creating an environment of speedy disposal of litigation and avoiding needless disputes, through clear and unambiguous legislative provisions, will make the entire system of tax governance more robust. The finance minister's focus on a flexible and effective transfer-pricing regime, along with provisions of advance ruling, will go a long way in developing a transparent and friendly tax regime for companies. Equally important is the proposal to implement the new Indian Accounting Standards, which will facilitate the convergence of the financial reporting standards to the global level.
To summarise, the government has been prudent and practical in its Budget announcements and has demonstrated a sense of purpose to ensure India's economic priorities are appropriately aligned to the aspirations of the people. I will certainly give credit to the prime minister and the finance minister for sending the right message to stakeholders, though the Budget may be short on specifics.
Koushik Chatterjee
Group ED (Fin & Corp), Tata Steel
Can government mandate a business to carry out a non-business activity?: Shardul ShroffGroup ED (Fin & Corp), Tata Steel
TAX TREATMENT OF CORPORATE SOCIAL RESPONSIBILITY EXPENDITURE
Chambers of industry and commerce had contested the introduction of CSR through the Companies Act as a mandatory expenditure, contending that it would be akin to a money Bill and an exaction in the nature of tax and would be ultra vires the Constitution of India or the pith and substance of company law. The company law could not propose a two per cent Corporate Expenditure Tax, on basis of a turnover or net worth or net profit basis as that is arbitrary and ultra vires whilst re-enacting company law.
The government in the Finance Bill has proposed an amendment to Section 37 of the Income Tax Act. Any expenditure (not being an expenditure of the nature described in Sections 30 to 36 of the Income Tax Act) and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purposes of the business or profession, shall be allowed in computing the income chargeable under the head "Profits and Gains of the Business or Profession".
In the matter of CSR, the government has made it clear and beyond doubt that it considers CSR expenditure, (being an application of income) as an expense not incurred wholly and exclusively for the purposes of carrying on business and hence a disallowable deduction in computing taxable income.
The government's memorandum for the Finance Bill makes it abundantly clear that the object of CSR under the Companies Act is to share the burden of the government in providing social services by companies eligible and required to participate in CSR. It reasons that if expenses are allowed as a tax deduction, this would result in subsidising of around 1/3rd of such expenses by the government by way of tax expenditure.
The memorandum provides the reason for disallowance by stating the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business. The amendment, therefore, to Section 37 of the Income Tax Act is based on the general principles of expenditure allowable for deduction for business or professional activities and clarifies and provides certainty on the issue of non-deductibility of CSR expenditure as expenditure not deemed to have been incurred for the purposes of business. This amendment to the Income Tax Act is to be effective from April 1, 2015, and applicable in relation to assessment year 2015-16 onwards.
Now, therefore, the basic question of whether the government by law can mandate a business or professional company to carry out a non-business or non-professional activity such as CSR through the Companies Act remains a question at large.
If a board of directors or a committee of CSR declares a policy to be adopted for CSR activities, can an ordinary shareholder challenge the provisions of Section 135 as an ultra vires intrusion on companies and consequently violating his fundamental right to carry on business by mandating CSR expenses for a non-business purpose.
The present provisions of Section 135 contemplates that if the company does not expense the two per cent of average net profit of the company, the company has to merely specify the reasons for not spending the amount.
Can the shareholder or the board of a company otherwise within the eligibility net object that since the CSR is not a business object, CSR as an activity cannot be a corporate business object mandatorily required to be performed by a business company? If CSR is a mandatory requirement for a company to carry on business in India, then it is an integral part of the right to do business and a condition required to be fulfilled to enable a company to carry on business after attaining certain thresholds of turnover, net worth or profit prescribed. If such a condition is mandatory for carrying on business in India, it has to be considered as business expenditure for tax law and to contend otherwise is contrary to common sense.
NGOs and industrial groups through the chambers of commerce require to focus on the impact of the amendment to Section 37 of the Income Tax Act. They must highlight the anomaly, which necessitates that all CSR expenditure which is directed to be carried out by a company, as a condition of carrying on business, must be in the nature of a business expenditure, and not a disallowable expenditure. A company cannot be mandated either to perform a charitable expenditure or a disallowable CSR expenditure without business purpose, as such disallowance of expenditure would be an exacted tax in the nature of a corporate expenditure tax, which expropriates two-thirds of two per cent of a company's net profit, contrary to our Constitutional Law.
Shardul Shroff
Managing Partner, Amarchand & Mangaldas & Suresh A Shroff & Co
Managing Partner, Amarchand & Mangaldas & Suresh A Shroff & Co
