1. Union Budget 2017: Financial world, more of the same is good

Union Budget 2017: Financial world, more of the same is good

One of the least expected turn of events in this year’s budget was the lack of change in the taxation eco-system.

Published: February 1, 2017 7:10 PM
Besides lower taxes for the lowest tax slab of individuals and the medium and small enterprises, the entire tax structure of past years has been retained in structure and rates. Besides lower taxes for the lowest tax slab of individuals and the medium and small enterprises, the entire tax structure of past years has been retained in structure and rates.

Economists term the four factors of production as land, labour, capital and enterprise. This piece will discuss the third of these. But it would be useful to discuss the others briefly. There have been no major land reforms announced, but that is mainly because reforms have occured at the state level. Labour laws are intended to be collapsed and simplified into just four laws, which can be termed a big bang reform in that area. Enterprise is the most disappointing of the four. For enterprise to prosper, the government has to be much smaller in two ways. One, public sector enterprises in regular commercial activities like aviation and heavy vehicles should be privatized or shut where unviable. Two, more importantly, the extent of the bureaucratic interference with enterprise needs to be reduced. On both counts, the government has been timid.

One of the least expected turn of events in this year’s budget was the lack of change in the taxation eco-system. Besides lower taxes for the lowest tax slab of individuals and the medium and small enterprises, the entire tax structure of past years has been retained in structure and rates. This is a good thing. I believe we should broadly have steady tax policy and rates for extended periods of time. It provides certainty and ease of doing business. Similarly, a rude shock provided to foreign portfolio investors towards the end of December has been clarified and the dangerous ‘clarification’ has been revoked, which would tax investments in overseas jurisdictions.

On the divestment front, the FM has proposed listing of certain public sector entities but sticking only to previous divestment targets. Certainly, listing will provide a higher level of transparency and governance to such companies, but an aggressive divestment target would have carried the PM’s announcements over the years of the government getting out of regular commercial activity and reduce the oxygen sucking from the entrepreneurial world. Similarly, I strongly oppose the concept of divestment through public sector ETFs or exchange traded funds. They carry the worst of both worlds. They are often bought with public moneys run by the LICs and UTIs of the world and since there is no reduction in the control of the government, do not come with any improvement of governance and management.

FIPB (no need to remember the acronym any longer), the nodal agency which permitted foreign investment in certain cases is sought to be abolished. This is a good move. However, the purpose of setting it up was to reduce red tape of going to two/three ministries plus the RBI. If abolition means, making rounds of the various bhavans in Delhi, then it will not be a reform at all.

Finally, a bill to address illegal deposit schemes is welcome, but an institutional mechanism with state government’s assistance would be key to make it successful at the grassroot level in remote areas.

(The article is authored by Sandeep Parekh. He  is Managing Partner of Finsec Law Advisors)

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