“Inflation is taxation without legislation.” – Milton Friedman
The Union Budget 2013-14 holds special importance this year as it was announced in the backdrop of high inflation, rising oil prices and a challenging macroeconomic environment where India achieved its lowest GDP growth in a decade.
Characterized by a weak global economic outlook and prevalence of domestic policy bottlenecks, the year started with news that the previous fiscal’s fourth quarter GDP had dropped to 5.5%. Expectations were therefore high as to the path the Finance Minister will take in guiding the Indian economy to recovery.
Though there were no high profile announcements or big recovery plans outlined, the Finance Minister did not disappoint. He acknowledged the pain points in the economy and recognized that to boost industrial sector growth, proactive actions would be needed.
Despite the above, in the recent past, the Indian Government displayed a renewed zest for reforms by allowing foreign FDI in multi-brand retail, liberalized FDI norms in insurance and pension funds and permitted overseas airlines to buy stakes in domestic ones, among other moves, and these measures have been duly appreciated by the global economies.
“It’s better to have beer in hand than gas in tank.” – Anonymous
Who ever said that fuel could be cheap? In the context of investment pre-supposedly acting as fuel for stimulating and lubricating the engine of the Indian economy, it probably does not come cheap (not so in the literal sense though). In other words, it does act as a precious element required to lift and put the Indian economy back to its buoyant days.
This thought has been projected well in the Budget Speech, whereby the Finance Minister laid critical emphasis on the fact that the key to restart the Indian economy is to attract more investment, both from domestic investors and foreign investors. He showed cognizance to the fact that investment is an act of faith and the government needs to improve communication of its policies to remove any apprehension or distrust in the minds of investors, including fears about undue regulatory burden or application of tax laws.
Though the Union Budget is reflective of the Government’s intention to bring about policy changes, but expecting ignificant changes in the economic policies by way of Budget proposal may not entirely justified, as from a macro-economic standpoint, one may appreciate that policy making cannot only be restricted to Budget proposals and is an ongoing and indefinite process.
Having said so, certainly one cannot state that the Budget 2013-14, has been a one sided road. There are several positives to appreciate from an economic standpoint, although these cannot in a way be considered as big-bang reforms.
The Finance Minister announced capital market reforms including rationalization of KYC norms for foreign portfolio investors such as FIIs and QFIs. FIIs will be allowed to participate in exchange traded currency derivatives, thereby improving their hedging options. The development of a robust debt market and boost to infrastructure debt funds is a welcome move.
The investment allowance of 15% provided for specific investments into plant and machinery will provide some of a boost to the infrastructure industry.
The decision to defer GAAR till April 1, 2015 will provide taxpayers with much needed time to understand the new provisions and rationally plan and (re)organize their affairs. GAAR shall now apply only if the main purpose of an arrangement is to obtain a tax benefit. The Government’s decision to accept some of the recommendations of the Shome Committee is definitely a relief, especially at a time when investors have become increasingly wary about India’s tax reforms and the prevailing uncertainty.
Coupled with the positives, there are certain areas of concern, which could have an impact on the investor community and the economy as a whole.
The Budget proposals included an amendment stating that Tax Residency Certificate (‘TRC’) required by a foreign company will not constitute sufficient evidence for the purpose of relief under a tax treaty. Although the ministry in its post budget press release clarified that the TRC would be acceptable as evidence, however this caused unnecessary apprehension in the minds of the investors. Accordingly, the Government should ensure that there is appropriate and timely communication on critical matters, failing which could result in confusion and apprehension for the stakeholders.
While the deferral of GAAR has been appreciated, there is still lack of clarity on its scope and application.
Unlisted Indian companies buying back shares will be subject to a 20% tax (on the lines of a dividend distribution tax), to be ultimately be borne by the investor, without any treaty relief or credit available in the investor’s home country.
Withholding taxes on royalty, technical and consultancy fees paid to non-residents is proposed to be increased from 10% to 25% on a gross basis. This will directly impact FDI in joint ventures and technology transfers and the additional tax burden may be shifted to the Indian company.
Tax on offshore share transfers has given rise to immense challenges for foreign investors due to the elusiveness in the provisions. Addressing concerns of the stakeholders, the Shome Committee recommended incorporation of specific definitions, clarifications and safe harbours which seem to have not been addressed adequately.
One of the key industry expectations from the Budget was the roadmap for implementing GST. However, there is still not enough clarity on the date and the manner of its implementation. In order to boost investor confidence, GST could play a pivotal role, of which the Government should take due cognizance.
The Finance Minister did announce certain sector specific measures that will have farreaching consequences on the companies operating in such domain. While some sectors have reasons to cheer, others may not find relief in the measures that have been initiated.
Let’s have a look at what certain priority industry sectors may have to look forward to or otherwise.
On the contrary, the Finance Bill, 2013- 14 has proposed a new provision, whereby the consideration received from the transfer of an asset, being any land or building or both, is less than the value assessable by the stamp duty authorities, such value shall, for the purposes of computing profits and gains of business or profession, be deemed to be the full value of the consideration as a result of such transfer.
This could adversely impact potential (re)structuring by real estate companies looking to introduce foreign investment in SPVs where the land / building has been held at the holding company level, as the transfer by the holding company of the land / building at book value to the SPV into which foreign investors may invest may attract tax at the Indian holding company level.
Prime Minister, Mr. Manmohan Singh is of the view that the Finance Minister has laid out a roadmap which has “plenty of food for every ministry to chew there.” But is that really the case? The moot question is whether a path has been charted to bring fiscal deficit under control, to tame the latent levels of inflation and most importantly, fostering a better climate for growth and investment?
Probably the answers to these questions are best left for the Government to answer. However, it may be worthwhile to note that the incentives announced by the Government will not make any material difference unless the investor confidence is restored in the Indian economy.
Therefore, in order to boost investor confidence, the need of the hour lies in liberalization of reforms, which is not a one-off or a one-time process, but a series of measures taken over a period of time. Although, this appears to be the intent of the Finance Ministry, however such proposals would need the nod of the Parliament to notch ahead on these measures.
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