The government is preparing Budget FY16 with policy advice from the NITI Aayog. Experts from outside the government can also contribute to policy formulation, nudging the nation towards cooperative federalism, along a trajectory of high growth propelled by predictable tax regime, fiscal prudence, and rapid infrastructure development.
Resource allocation is expected to be designed for attaining high growth. Conventional budget-making methodology may be undergoing innovations. The accounting codes and classification and tools for monitoring must facilitate better budgetary control and expenditure management. Audit findings must also add value for better fiscal consolidation, budget management and outcome.
The Fiscal Responsibility and Budget Management (FRBM) Act 2003 is intended to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in the fiscal operation of the government. The rules made under the Act, the FRBM Rules 2004, specify the annual reduction targets for fiscal indicators—reducing fiscal-deficit to 3% of the GDP by FY09, with annual reduction target of 0.3% of GDP per year for the central government. The revenue-deficit had to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by FY09. The finance ministry is responsible for monitoring and taking corrective action to reach targets.
The FRBM Act provides a legal institutional framework for fiscal consolidation, making the central government responsible for taking measures to eliminate revenue-deficit that leads to revenue-surplus. The Act prohibits borrowing by the government from Reserve Bank of India, making monetary policy independent of fiscal policy and thereby preventing monetisation of government deficit. To impart fiscal discipline at the state level, the Twelfth Finance Commission gave incentives to states through conditional debt restructuring and interest rate relief for introducing Fiscal Responsibility Legislations (FRLs). All the states have implemented their own legislations. The implementation of FRBM Act and FRLs improved the fiscal performance of both the Centre and states. However, due to the global financial crisis, this was suspended and the fiscal consolidation, as mandated in the FRBM Act, was put on hold in FY08.
The Finance Act 2012 made amendments to the Fiscal Responsibility and Budget Management Act, 2003. In addition to the existing three documents, the central government is required to lay the medium-term expenditure framework statement (MTEF) before both Houses of Parliament in the session immediately following the session of Parliament in which the medium-term fiscal policy statement, fiscal policy strategy statement and macroeconomic framework statement are laid. The amendments to FRBM Act in FY13 specify the CAG’s review of the implementation of the FRBM Act and the finance ministry preparing a medium-term expenditure framework to be presented to Parliament. The concept of effective revenue-deficit and medium-term expenditure framework statement are the two important features of amendments to the FRBM Act in the direction of expenditure reforms.
The International Monetary Fund’s recent World Economic Outlook estimates India’s economy will overtake China in terms of annual growth rate by 2016, with the growth rate moving above 6.3% and 6.5% over the next two years, making India the fastest-growing major emerging economy in the world. The IMF’s reasoning is primarily based on its expectations from prime minister Modi’s reform plans, ably backed by concrete measures to Make-in-India a reality. The United Nations World Economic Situation and Prospects report noted that India will post a “smart recovery” in 2015—placing growth at 5.9%, in line with the IMF’s estimate. External factors also look promising for the Indian economy. The falling oil prices will help reduce fiscal deficit and allow allocation of more investment in infrastructure and public services. Economic reforms are expected to further growth.
The author is former director general, Comptroller and Auditor General of India
Clear the air on MAT
The AAR has given contradictory rulings on applicability of MAT on FPIs
It is intriguing that at a time when the government is eager to make India a global investment destination, foreign investors are struggling with the uncertainty of tax provisions. Foreign Portfolio Investors (FPIs) Regulations is a tax-friendly regime governing taxation of FPIs in India. Recently, tax authorities have issued notices to FPIs, seeking to levy minimum alternate tax (MAT) on their income earned in India.
FPIs are taxed at an effective tax rate of 16.22-32.445% on short-term capital gains and 0-10.815% on long-term capital gains. In case MAT is levied on them, their minimum effective tax rate would increase to 20.01%. While MAT credit would be available for future set-off, its absorption remains uncertain.
MAT was first introduced around three decades ago to ensure companies having huge book profits and declaring substantial dividends to shareholders paid a fixed percentage of their book profit as MAT. The provisions of MAT are applicable to all companies under the tax laws of India. However, there has been a lot of ambiguity on the applicability of MAT provisions on foreign companies, not required to maintain books in India.
The Indian jurisprudence has further complicated this issue. The Authority for Advance Ruling (AAR) has given a contradictory view on this issue, adding fuel to the debate between the taxpayer and Indian revenue. The AAR, in its ruling in the matter of The Timken Company, held that MAT liability cannot be fastened on a foreign company with no presence in India. Whereas in a recent ruling in the case of Castleton Investments, the AAR held that MAT would be applicable to a foreign company as well, irrespective of the fact whether the foreign company has a permanent establishment in India or not.
The starting point for computing tax under MAT are the book profits of an entity. In case of foreign companies having no presence in India or business income in India, there is no requirement under domestic law to prepare profit & loss account and balance-sheets. Thus, no obligation to prepare/maintain financial statements in India is cast on FPIs that carry out only investment activities. However, disregarding the practical difficulty and the specific tax regime for FPIs, the AAR, in the case of Castleton, held that the liability to tax does not depend on accounting and that it arises from chargeability to tax under the Act.
It will not be out of place to mention that various tax treaties provide relief primarily in relation to levy of ‘income tax’. Under the domestic law, MAT is also an ‘income tax’. Thus, any beneficial provision in respect of charge of ‘income-tax’ should be applicable to MAT as well. The FPIs from treaty countries can take recourse of the beneficial provisions of the treaty contending that provision of MAT is not applicable to them. Based on various jurisprudence, it is well settled that AAR ruling is binding only on the taxpayer who sought the ruling.
Indian revenue has not only issued notices for applicability of MAT to corporate FPIs but also to FPIs which are structured as non-corporates in their home country such as trusts, partnership firms and mutual funds. There is an alternate provision under the Act as Alternate Minimum Tax (AMT) which provides for payment of tax by a taxpayer other than a company. AMT provisions are applicable only to a taxpayer claiming investment-linked deductions under Chapter VI-A of the Act or deduction available to units in SEZs by virtue of Section 10AA. Since FPIs do not claim any investment-linked deduction or SEZ-related deduction, the provisions of AMT would not get triggered.
In view of the ambiguity around applicability of MAT provisions on foreign companies including FPIs, one can only hope that the Supreme Court will throw some light on this issue while disposing the special leave petition filed by Castleton Investment against the AAR ruling.
One can also expect that the much-needed clarification would be brought in the statute by Finance Bill, 2015, which would provide a breather to FPIs. Considering the finance minister’s assurances of preserving tax certainty when he presented his last budget and also in his speech in the recently-concluded Vibrant Gujarat summit, it is expected that the government would clarify its position on this issue in the forthcoming Budget.
Manoj Purohit & Swati Mishra
The authors are with Walker Chandiok & Co LLP