Dont expect major policy changes on Feb 17

Updated: Feb 13 2014, 07:57am hrs
As the government gears up for the general elections scheduled to be held in April-May 2014 in India, a vote-on-account would be presented in Parliament for FY15, in lieu of the regular and rather comprehensive annual budget. Finance Minister P Chidambaram will present the interim and final budget of the UPA-2 government to Parliament on February 17, 2014, to seek approval for expenditures proposed, to ensure that sufficient funds are at the disposal of the central government for administrative purposes until the new government is able to present a full budget for FY15.

Chidambaram may be tempted to present his partys outlook on the reforms agenda if the UPA is voted back to power. He may also take this opportunity to highlight the key achievements of the UPA government during the past decade.

Vote-on-account relates to the expenditure side of the government's budget. Typically, the government put forth an estimate of funds it would require to meet the expenditure that it incurs during the first three to four months of the election financial year. Possibly, the vote-on-account will seek Parliaments nod for expenditure for the full year, however the incoming government will then update the estimates on presenting its regular budget expected in July 2014.

The Finance Minister is expected to announce the fiscal deficit for FY14. The proceeds from divestment and from the auction of 2G spectrum could help the government in reducing the fiscal deficit. This shall provide the much needed cushion to the Finance Minister to compensate for the subsidy bill of oil marketing companies, specifically considering the governments recent announcement of raising the quota of subsidised cooking gas cylinders. Similarly, as a pre-poll sop, the government has announced 10% hike in dearness allowance which is expected to benefit approximately 8 million employees in the country.

Electoral politics could evoke expectations of certain pre-poll sops; however, as the vote-on-account generally deals with the expenditure side of the budget, it is unlikely that there will be any major announcement in economic policy involving direct tax rates. The service tax rate is also unlikely to see a change in the upcoming interim budget, however, certain end-use specific exemptions in service tax are expected. Region-specific indirect tax breaks such as excise duty exemption in hill states, expiring in May 2014, may see a further extension. On the indirect tax rates front, viz. customs and excise duties, the government can reduce the rates without Parliaments nod till the time the model code of conduct for general elections comes into effect. In 2004, the then Finance Minister, Jaswant Singh, had reduced the customs and excise duties before the NDA quit office. The two major reforms announced during the UPA regime, i.e., Goods and Service Tax (GST) Code and the Direct Tax Code (DTC) have taken a backseat and the wait for these tax reforms is set to get longer with the upcoming dissolution of 15th Lok

Sabha. Originally, the DTC, a law to replace the over five-decade-old Income Tax Act, 1961, was set to be rolled out from April 1, 2011. Similarly, the GST was planned to replace the existing indirect tax law from April 2010. The current government missed its last chance to table the Bills even in the last Winter Session of Parliament and thus the fate of these reforms would depend on the new governments policies and outlook on tax reforms. The higher foreign direct investment (FDI) limit in the insurance sector is also not likely any time soon. Also, considering the lack of consensus regarding FDI in retail sector among all political parties, the government is unlikely to relax and liberalise conditions to attract foreign investors in the retail sector.

The vote-on-account is likely to be in force up to July, 2014 until the full budget is presented and passed in the new Parliament.

Gokul Chaudhri

With inputs from Puneet Gupta, manager, BMR & Associates LLP

Chaudhri is leader, Direct Tax practice, BMR & Associates LLP. Views are personal