The big 4s verdict

Written by fe Bureau | Updated: Mar 1 2011, 06:24am hrs
Rajiv Memani

Country managing partner, Ernst & Young

Budget 11 A Fine Balancing Act

The Budget reaffirms the Governments priorities of sustaining the current economic growth and ensuring inclusive development. Fiscal consolidation and rising inflation, necessitating a review of the government spending while keeping the GDP on the high growth path are huge challenges. It is commendable that the FM has chosen to address the situation through greater expenditure restraint compared to enhancement of tax burden. The reaffirmation by the FM about the implementation of the Direct Taxes Code from 2012 has signaled that tax policy is gaining stability. In keeping with the thinking of phasing out the surcharge under the DTC, the lowering of the surcharge on domestic companies from 7.5% to 5% is a welcome measure, even with the base MAT rate being hiked from 18 to 18.5%. The marginal relief provided to the individual taxpayers by enhancing the exemption limit from existing R 1.6 lakhs to 1.8 lakhs is a positive move that would put some extra funds in the common mans pocket. Budget 2011 has introduced MAT on LLPs which will restore the earlier inefficiencies. Infrastructure projects which are otherwise eligible for tax incentives shall be taxable under MAT at the rate of 20% on such incomes. The MAT provisions so introduced for LLPs provide for taxation of tax deductions / incentives claimed under normal provisions. An interesting change from the current MAT framework for companies is a different way of computing income for MAT specifically with regard to long term capital gains exempted for listed stocks. On the indirect taxes front, the FMs conscious decision to maintain the peak excise duty rate at the current levels is laudable. Concurrently, the removal of excise exemption for 130 consumer goods by taxing them at a low rate of 1% is a sure move towards the GST rate structure, while meeting the revenue needs of the government. The effective tax rate however would be closer to 4-5%, as the manufacturers wont be able to claim any credit for tax paid on inputs. The Budget has set the direction for many other reforms, the key to the success of these measures would lie in effective implementation.

Russell Parera

CEO, KPMG, India

Well Said Now Lets do Well

The reiteration of the Government to GST is welcome. The FM also did well to commit that the financial sector reforms will be taken to their logical conclusion during this session of the Parliament, including the introduction of the Additional Banking Licences to corporates as well as the Companies Bill. The proposal to permit FDI in Mutual Funds is a big ticket reform and should positively address the decline in the growth of FDI in the recent past.

Increasing the limit for FIIs to invest in Corporate Infrastructure Bonds, should partly address the issue of deficit of funds in the Infrastructure sector and the concerns over hot money. As expected, there were no dramatic direct tax proposals, considering that Direct Taxes Code is on the anvil. The imposition of MAT on SEZ developers and units, coupled with removal of DDT exemption on SEZ developers is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption. Proposal for Levy of MAT on LLPs came as one of the biggest surprises of the budget proposals, which is a negative step and contrary to the purpose of introducing the LLP concept in India. The reduction of tax to 15% on foreign dividends, received from subsidiaries of Indian Companies is a welcome step facilitating eventual imposition of CFC regime. Another welcome step is the proposals to simplify the refund process for Service Tax, given that huge refunds have been stuck up in procedural delays. The governments announcement to tackle the black money menace with a five point agenda is encouraging, but the policies announced would need to implemented to its logical end, with complete political support, to achieve the desired purpose.

So while we have seen a plethora of reform oriented measures and new legislations announced by the Government, the economy growth track would finally depend upon the political will to implement these legislations in a time bound manner, coupled with a buoyant monsoon season. Let us wish that it happens!

Deepak Kapoor

Chairman, PwC India

Budget to provide the necessary stimulus for Indian economy

The Finance Minister has placed a positive and responsible Budget. One of the major challenges in the domestic front was food inflation. The FM has risen to the occasion by adopting pragmatic measures to improve the supply chain for agricultural products, which includes recognition of cold chain and post harvest storage as an infrastructure sub-sector. The FM has shown a positive intent in permitting foreign investors other than FIIs to directly invest into permissible mutual funds, which should mobilise greater funds and also give a fillip to the Indian stock market, which has already reacted positively to the budget. The FM needs to be lauded for taking efforts to simplify tax administrative procedure and eliminate bureaucratic delays in tax administration through introduction of several e-governance measures. With the DTC round the corner, not much was expected in this years budget on the field of direct taxes, however, the levy of MAT on developers of SEZs and also units operating in SEZs, is significantly harsh, keeping in mind that companies had made huge investments in SEZs under a clear understanding of tax holiday. The FM has virtually provided a one time opportunity to repatriate profits locked in foreign subsidiaries of Indian MNCs as dividends, by offering to tax such foreign dividends at a marginal rate of 15%. It is not clear as to why the incentive is proposed to be restricted to only one fiscal year, since continuity of such incentive would only encourage Indian MNCs to bring back foreign profits for greater resource mobilisation in the Indian economy. The FM expressed his commitment to implement GST and with a view to prepare ground for transition to GST, the exemption from central excise duty / VAT was withdrawn for 130 items and a nominal excise duty of 1% has been imposed on such items. Overall, the Budget is likely to provide the necessary stimulus for the Indian economy.

Udayan Sen

CEO & managing partner, Deloitte Haskins and Sells

Good reasons to remain bullish about Indias growth

The commitment made by the Finance Minister on not resorting to market borrowing to finance the central fiscal deficit is commendable to retain the momentum in private investment and not being a borrower in the domestic market will also help rein in inflation. The current account deficit at 3.7% of GDP is higher than the target of 1.5% and there are concerns on the economys ability to finance this gap owing to the volatility of capital flows witnessed in recent times.

One of the key success factors of economic policy for sustaining high growth levels is predicated on the tax policy adopted. In this regard reaffirmation by FM for introduction of the new Direct Tax Code from April 1, 2012 is reassuring, as it does provide an opportunity to lay down a tax framework that is aligned to the economic policy. It is, therefore, understandable that no significant changes have been proposed on the direct taxes in this years budget. The proposal to increase the threshold limit for individuals and senior citizens, who constitute a large tax payer base, is welcome as also simplification of compliance requirements for salary earners. The FM has also recognised need for transparency and governance to bring in accountability in tax administration. However, the form and manner in which it may be implemented is not yet clear. Bringing certainty in taxation is one important objective of a good tax policy. In this regard, one would have hoped that the budget could have addressed the issue of pending tax litigation and used this opportunity to put a mechanism in place to fast track an end to disputed tax demands exceeding R 245,000 crores. All in all the tax proposals in the Budget have sprung no significant surprises except the imposition of MAT on developers of SEZ and units operating in them, which could have adverse impact on the economics of the business.