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Budget 2014: Tax Policy To The Rescue?

Published on Thu, Jul 10,2014 | 08:31, Updated at Thu, Jul 10 at 08:58Source : CNBC-TV18 

What we need is a tax policy that focuses on raising revenue by expanding the tax base and increasing the tax to GDP ratio. That means weeding out ad-hoc tax incentives, enforcing compliance...many things that the Arbind Modi version of the DTC had suggested. But this year the tax policy may focus less on revenue raising and more on improving India's image, enhancing ease of doing business and kick-starting the investment cycle.

IMAGE: Ease of Doing Business
INVESTMENT: Kick-start Investment Cycle
INCOME: Raise Revenue

Long lists of expectations are drawn up ahead of every Budget. The first Modi Budget has prompted even longer lists of expectations...many of which you can read here. Of those many expectations some will be relatively easy to deliver on. A clear time for adopting GST with well-defined milestones. Delaying DTC, especially after the shoddy implementation of the Companies Act, 2013 has reduced India Inc to tears. And a deferral of GAAR.

BUDGET & TAXES: Relatively Easy To Do
GST Timeline
Delay DTC
Defer GAAR

The 'less easy to deliver' list features the Vodafone problem at pole position. Will Finance Minister Arun Jaitley reverse the retroactive amendment pertaining to indirect transfers - that impacts not just Vodafone but several other similar cases currently in litigation? Will he find the gumption to turn his back on large amounts (billions of dollars) of potential revenue? Will he risk angering the tax bureaucracy that believes such overseas transactions must be taxed in India? Will he reverse just the retroactive amendment pertaining to indirect transfers or also the ones to do with Royalties and dozens of other issues that suffered retroactive changes these past few years? Or will he just promise never to retroactively change tax law and ask the nation and its investors to move on?
Also on that list is the Shell problem - transfer pricing litigation around the issue of shares. Big names, big amounts and big litigation - will he reverse the Government's position on these?
On this list the easiest to fix is the trouble arising from the Fiat judgment - in which the Supreme Court said tax should be levied on the sale price (not the discount price) if the goods are being sold at a discount for many years.

BUDGET & TAXES: Not So Easy To Do
The Vodafone Problem: Reverse Retroactive Amendments

- Indirect transfers, Royalties...
The Shell Problem: TP on Issue of Shares High profile litigations: Nokia Case Fiat Judgment: Selling at a loss

The Vote on Account expects tax revenue to grow at 21% in FY15 whereas last year it rose just 10%. If that's an unrealistic expectation so is the clamour for tax cuts. India can simply not afford any. Yet just last week the FM extended excise duty concessions to capital good, consumer durables and auto. Add to that the desperate need to kickstart the investment cycle and hopes are high that the Modi Budget will include tax incentives. MAT and DDT exemptions, especially for SEZs are on every wishlist. As is the hope that the investment allowance will be extended and tweaked. And that certain tax holidays will be revived.

BUDGET & TAXES: Sops To Industry
MAT & DDT exemption for SEZs
Extend tax holiday for power generation + MAT exemption Extend investment allowance

- Lower Rs 100 cr plant & machinery threshold

- Increase 15% tax deduction
NIMZ + tax incentives

The new Government says it will focus on infrastructure building. Will it design tax policy to support that mission?

BUDGET & TAXES: Infrastructure
MAT exemption
Exemption on income earned from funding infrastructure Infra status to Health & Education, Cement & Steel sectors CSR deduction Some of the demands on the indirect tax front have to do with cleaning up process, centralising registrations etc... I have picked 3 important expectations that deserve immediate attention. Many tax experts say the cost of collecting service tax from small units is more than the tax collected - hence the need to raise the threshold.

BUDGET & TAXES: Indirect taxes
Rollback 2012 restrictions on Cenvat credits Raise service tax exemption threshold of Rs 10 lakhs Reduce SAD to 2%

The Economic Survey suggests transactions taxes should eventually go. But I doubt it's time yet. STT collects some Rs 6000 cr but it's an easy to collect and non-litigious tax and hardly burdens the 'poor'. The withholding tax concessions though may get extended to keep the dollars coming in.

Abolish STT & CTT
STT on off-exchange transactions
Extend concessional rate of withholding tax on ECB & FII debt investments

The personal income tax exemption limit of Rs 2 lakhs was set many years ago. Just inflation would warrant a hike. But a move from Rs 2 lakhs to Rs 3 lakhs will lose an estimated Rs 60000 crores in revenue. The time is not right for that. An increase in the investment deduction limit will also cost us precious revenue but it may be one way to channel more savings towards financial investments. So that's has more chances of being raised at a time when revenue is precious but so is the need to increase private investments.

BUDGET & TAXES: Personal taxes
Raise tax exemption limit

- Currently Rs 2 lakhs
Increase investment deduction

- Currently Rs 1 lakh
Increase tax break for home loan interest payment

- Currently Rs 1.5 lakh
Maintain or increase 'Super Rich Tax'

- 10% surcharge on income of Rs 1cr p.a.

- DTC suggests 35% tax rate on income of Rs 10 cr or more p.a.

It may not do much now, but hopefully this Budget will atleast articulate long term policies on expanding the tax base, improving tax to GDP ratio and reforming the tax administration.

BUDGET & TAXES: Longer Term Goals
Expand Tax Base + Improve Tax to GDP Ratio

- DTC + Unearthing Black Money
Reform Tax Administration

- TARC Report

In short - here's what may happen. An increase in the personal investment deduction limit linked to investment in say long term infrastructure bonds...thereby helping raise private domestic capital to fund infrastructure building. It could be accompanied by including infrastructure in the list of CSR activities and permitting a tax deduction on that CSR spend. Together this could raise retail and corporate funds for infrastructure reducing the burden on Government finances. And if the FM comes up with innovative tax incentives for infrastructure and manufacturing then the boost will go a long way in creating jobs as well.

Increase personal investment deduction + link to investment in infra bonds Allow CSR to include infra projects + tax deduction on CSR Tax incentives to infra & manufacturing to create jobs

We'll know in a few hours from now...


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