1. Budget 2016: Prudence prevails over populism

Budget 2016: Prudence prevails over populism

The economic backdrop against which the Budget was presented was the one where, globally, slow growth was fast becoming the new normal.

Published: March 1, 2016 12:36 AM

By Girish Vanvari, Head of Tax, KPMG in India

The economic backdrop against which the Budget was presented was the one where, globally, slow growth was fast becoming the new normal. In contrast, the Indian GDP growth range of 7-7.75% forecasted in the Economic Survey looks respectable.

On the macro front, the decision to stick to the fiscal deficit target of 3.5% in the next fiscal, along with an assurance that the development agenda will not be compromised, sends out a positive signal.

The need for a ‘rural’ focus was imminent, considering the falling demand and to revive consumption. The minister has sought to address the issue by providing higher allocations to the rural sector and increasing the aid to gram panchayats and municipalities. This move, coupled with the targeted delivery of subsidies using the Aadhaar framework, should minimise leakages and assist in a revival.

The government had announced initiatives such as Make-in-India, Start-up India and Digital India last year.

Incentives such as a three-year tax holiday, capital gains tax exemption for majority shareholders in start-ups, and the proposal to set up 1,500 multi skill institutes for skill development are in line with expectations. However, the government has to carry out the requisite changes in allied regulations such as Companies Act and trade policy to ensure the success of these initiatives.

On the infrastructure front, significant allocation for expansion of highways and rural roads will be a big boost to the economy. The step to remove REITs from the DDT net is a big positive.

The move to reduce the corporate tax rate only to small companies considering that the benefits of the phasing out will be available to the government only gradually is logical. The Budget contains provisions that aim to put in place a simplified and less litigious tax regime. Steps like extending the presumptive taxation scheme for professionals and other taxpayers, automatic stay of demand at first appellate level upon payment of 15% demand, enhanced interest for delayed refunds are positive steps.

On the dispute resolution front, the Budget offers a one-time settlement of cases emanating from retrospective amendment of tax laws, by asking companies to pay the basic tax demand and getting a waiver on interest and penalty. While it is a welcome move, this may not assuage many impacted taxpayers since the disputed amounts are significant. A better step would have been to amend the law to do away with the retrospective nature of the amendment, sending out a bold message to the global investor community. The move to defer PoEM as one awaits the final rules would remove uncertainties that would have emerged if implemented as originally envisaged.

There were no major changes to policies around personal taxation, with income-tax slabs remaining unchanged.
On the indirect tax front, there has been no change in the peak rates for customs, excise and service tax, though a Krishi Kalyan Cess of 0.5% has been introduced on value of taxable services with effect from June 1, 2016, thereby taking the effective service tax rate to 15%. Although there was no announcement of the GST implementation date, the government reiterated its focus on passing of the GST Constitution Amendment Bill.

Budget FY17 puts prudence ahead of populism.

(With inputs from Krishnan TA, associate director at Deal Advisory, M&A Tax, KPMG in India)

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