Budget 2014: Defence gets leg up, retrospective tax status quo, silence on FDI in multi brand retail

Updated: Jul 18 2014, 22:12pm hrs
BudgeThere are a few key policy considerations that remain at status quo, like retrospective taxation.(Reuters)
The union budget this year was a subject matter of extensive debate for one additional reason that it was the new incumbent government's maiden budget.

Given the current status of the economy, the very limited time the new government has had in office and from an overall policy and strategy announcement, the budget seems a fairly balanced one. There has never been a budget satisfying all quarters and industry alike and therefore this budget cannot be said to be disappointing on that count alone.

There are a few key policy considerations that remain at status quo, like retrospective taxation. The Hon'ble Finance Minister's statement that the government's right in such matters remains 'unquestionable' does raise many questions having caused more than mere ruffles despite the soothener that it will not be resorted to in the ordinary course and that this power has to exercised with extreme caution.

The clarification on the nature of taxation for foreign portfolio investors as one of capital gains and not business income is one that comes as a breather for many. The same holds good for a uniform withholding tax on all bonds issued by Indian corporates abroad, hitherto enjoyed only for infrastructure bond holdings by FIIs.

Transfer pricing methodology based on a range concept for determination of arms length price is also a key change.

Foreign direct investment in defence and insurance is now permitted up to 49% under the government approval route with full Indian management and control. This was clearly necessary and the budget may have been a sitter had these not been addressed. Considering the defence budget allocation and the current annual forex outflow on this alone, there is more than enough reason to adequately support and encourage domestic manufacturing in the defence sector. It however remains to be seen how effective these measures prove to be in encouraging foreign investments.

REITs will now be entitled to tax pass through benefit, a long pending industry demand. Smart cities that have been conceptualized for a while now are more likely to attract foreign investments with the conditions otherwise imposed on companies, having foreign direct investment and engaging in construction development activities, being encouragingly diluted. The minimum area has been reduced to 20,000 sq mtrs and the minimum capitalisation is now down to USD 5 million from the otherwise applicable USD 10 million for wholly owned subsidiaries of foreign corporations. Additionally, even these conditions are entirely exempt should 30% of the total project cost be committed for low cost affordable housing. Slum development as a qualifying activity for CSR is also a positive move.

The tweak on treatment of dividend distribution tax is a clever one, though this will effectively result in less money in the hands of the shareholder. The inadmissibility of CSR spend as expenditure also seems likely, although logical given that one of the key conditions for CSR compliance is that the spend should be in activities that do not relate to the business activity of the company. Some other populist measures for the common man under personal taxation heads seem to have spelled some joy.

The demand of the banking sector has also been considered in that long term borrowings deployed for infra projects will be subject to minimum regulatory pre-emption such as statutory liquidity ratio and cash reserve ratio and priority sector lending. This is intended to support long term borrowings and directly encourage channelization of funds towards infrastructure and other long term projects - which should address two key aspects, one of stability in the banking sector and the second - a much larger and fundamental support to infrastructure as a sector which will provide definite benefits to the economy as a whole in the long run.

A key point that remained untouched was foreign direct investment in multi brand retail, which was conspicuous by its absence, but the government has no reason to hurry and open up all its cards. There was however the much required clarification provided that manufacturing units will be allowed to sell its products through retail including e-commerce platforms without any additional approval.

Unlike the German thrashing of Brazil, the budget did not have rude surprises but that was never expected in any case. On an overall foreign investment analytical scale, the budget clearly is an encouraging and forward looking one.

By Raj Ramachandran, Partner, J. Sagar Associates.