Given the number of high-impact measures that will affect next year’s budget, finance minister Arun Jaitley has done well to advance the usual pre-budget consultation process, from November to August. There will be the impact of the 7th Pay Commission that has to be factored in. After the 6th Pay Commission, central government salaries rose from Rs 46,230 crore in FY08 to Rs 89,860 crore in FY10 while pensions rose from Rs 33,735 crore to Rs 60,489 crore—both included arrears—as a result of which the fiscal deficit rose from 2.5% of GDP to 6.5%. In which case, what happens to the deficit, or should the government look to raise fresh taxes—and if so, where? There is also the issue of GST compensation that will have to be factored in—tax rates will also change, as will the collection mechanism since states will also be collecting taxes, so India Inc needs to have as many details as possible, followed by months of workshops for both businessmen as well as the taxman to prepare for GST. The GST compensation will also put pressure on the deficit. How the government will balance this will be the stuff of discussions with economists and fiscal experts. There will also be changes in the way centrally-sponsored schemes are to be funded, and that will require extensive consultation with state finance ministers.
Since the finance minister has already made clear his intent to reduce the corporate tax rate from 30% to 25% over 4 years, India Inc has to make suggestions on the sequencing of withdrawal of various tax exemptions—since the effective corporate tax rate is also around 25% today, there should be no revenue impact. But given how investment and production planning is done on the basis of this, it will be important that the government quickly conclude its consultations and let India Inc know what the future path will be for exemptions at the earliest.What is equally important is that the government takes decisions that have remained stuck for a long time. This includes dealing with R2.64 lakh crore of transfer-pricing cases since FY06 or, for instance, a decision on what is to be done with MAT in the case of FPIs—while the AP Shah committee report on this has been submitted to the government, there is no clarity on what action is to be taken. A host of old cases based on the retrospective law remain, and it needs to be seen whether they will be referred to the Shah panel or not. India Inc will also need clarity on tax treatment for items that are left out of the GST, such as petroleum products or real estate. A longer consultation process is important, but it is more important that the government provide clarity on vital tax issues that remain unresolved.