Revenue Proposals Expected from Budget 2010

By MANAS MODY and SIDHARTH J. NEGANDHI

We expect Budget 2010 to lay down the roadmap for
achieving a 10% Gross Domestic Product growth rate
while containing inflation and the burgeoning fiscal deficit.
This appears to be an impossible trilogy given that increased
government spending and tax benefits are likely to be key
growth drivers which would make inflation and fiscal deficit
controls onerous tasks. Balancing these would be the most
important task for the finance minister on Budget Day.

This article focuses on the revenue proposals expected from Budget 2010.

 

There has been an engaging debate on the rollback of the
stimulus in the wake of the recovery. Opinions vary on both
the timing and extent of the rollback. One school
of thought argues that a withdrawal of the stimulus
is imperative to contain rising inflation, while an opposing
thought is that this would nip the economic recovery in the bud.

Let us split the stimulus into fiscal and monetary measures.

The Reserve Bank of India's decision to begin a rollback
of the monetary measures augurs well for inflation control.

Fiscal measures were meant to reduce production costs for
both consumer and capital goods and thereby stimulate
consumption and investment demand. Withdrawing these
measures is likely to result in cost-induced inflationary
pressure, especially if increased taxes are passed on to consumers.
Needless to say, the likely impact on growth will only spoil the party.

Also, with the much awaited Goods and Services Tax likely to
be unveiled in April 2011, any increase in the excise duty or
service tax would only be short term. However, measures
such as exemptions to exporters should be selectively
withdrawn given the strong recovery in exports.

Revenue proposals on indirect taxes
need to focus on widening the tax base to augment revenues

Area-specific excise duty exemptions have outlived their
purpose and are best withdrawn.

A single rate structure for excise duty
would pave the way for the GST rollout and
also augment revenues.

While the service tax net has been expanded
over the years to include a large number of services,
certain significant exceptions such as doctors are yet to be included. Also, the scope of certain taxable services must be expanded to widen the net.

An important focus of the budget must also be on plugging the procedural loopholes.

Manas Mody

The direct tax proposals are to be seen in the light
of two important developments – the introduction of the Direct
Tax Code bill and the growth of direct tax collections by 8.5% despite
the economic slump. Budget 2010 is significant as it will bridge the gap
between the current tax structure and the propositions made
by the new bill.

This promises that there would be considerable
relief for tax payers, encompassing the reshuffling of slabs,
reduced rates, increased deduction limits and so on.

The budget should take sizable steps towards a more
liberal and tax-payer friendly regime.

Hence, besides the rate of levy, a critical look
at some other provisions is vital.

The effective introduction of the much-hyped Limited Liability
Partnership has been marred because of the ambiguity in
spelling out taxation laws in the case of conversion from a
company to an LLP.

Otherwise, ambiguity prevails as the tax code
is not completely synchronized with the LLP memorandum.
Another grey area is the Minimum Alternate Tax for companies.

A complete shift in the basis of the levy of MAT puts in question
its applicability and relevance.

Search and seizure provisions have been at the dynamic
end for a long time. Amendments from a block assessment
to the assessment under section 153A have failed to achieve
the fine balance between increased collections and reduced litigation.

Budget 2010 should lay the pathway for the law going forward.

While tax exemptions have acted as investment catalysts for a
long time, many of these have outlived their purpose.

For a region to experience sustainable long-term growth,
the economics of investing there must exist beyond just tax benefits.
Withdrawing these exemptions would ensure a simplified structure
and equity for all regions, in addition to an expanded tax net.

Sector-specific exemptions linked to investments as opposed
to income, such as tax holidays for development of social
infrastructure like hospitals, schools in rural areas,
would be a more effective stimulant.

Sidharth Negandhi

Divestment claims importance in light of the increased fiscal deficit
and public debts. The government sees it as a means to soothe
its current fiscal stress.

However, the tall order of raising 25,000 crore rupees
annually puts pressure on the government for the
selection and modus for divestment. Given the current
market volatility and the low key response to the
government's share sale, the possibility of divesting
stakes through strategic partners must be considered
in the budget.


The long term objective of the budget's tax proposals would be
to provide ease of tax compliance to ensure ease of business
and to expand the net of taxpayers in India.

Steps taken towards simplifying tax compliance
have had a positive impact on direct tax revenues,
which contributed about 56% of the total tax
revenue in 2008-09 as compared to 41% in 2003-04.

However, procedural issues continue to remain the
proverbial "thorn in the flesh" and reforms on this
front would go a long way toward making India
a business-friendly destination.

Simplifying withholding tax norms, export
refund claim procedures and tax audit requirements
would be some of the steps expected in this direction.

The current tax administration is also burdened by longstanding
disputes and litigation. The 4-tier appellate system coupled
with ad hoc administrative discretion adds to the number of
outstanding cases. The introduction of a National Tax
Tribunal seems a possible way forward and must be kept
on a fast track to ensure the speedy disposal of tax disputes,
as well as serve as a way of releasing our already-stretched
higher judiciary.

The most significant part of the rationalization
would be the reorganization of tax treaties.

While some critics argue that this would impact foreign
investment, the crux of the investment rationale is strong
economic fundamentals; tax exemptions are only the icing
on the cake. Re-negotiating treaties would plug tax
leakages and also reduce money laundering practices.

About the authors:
 
Manas Mody is currently pursuing the Post Graduate
Programme in Management at ISB. He is a Chartered
Accountant and Lawyer, and was previously
working as an independent professional dealing
with appellate and assessment
stage work in direct taxes.

Sidharth J. Negandhi is a qualified Chartered
Accountant and currently pursuing his Post Graduate
Programme in Management at the ISB. Sidharth is the
President of the Finance Club and has keen interest in
Corporate Finance and Strategy.