Most optimists in 2004 would not have predicted that in less than four years, the country?s fiscal and revenue deficit would align more or less with targets set out in the Fiscal Responsibility and Budget Management Act, a law that was introduced by the NDA and legislated by the UPA. It was a masterstroke. P Chidambaram should go down in history as the first FM to have achieved progress on the fiscal front. Furthermore, the pattern of unprecedented tax buoyancy in the past three years is attributable not just to increased corporate earnings, but also improved tax compliance and administration, though a lot needs to be done on administrative front at the ground level.
Delivering a Budget in the backdrop of a high growth trajectory and revenue mobilisation would also make Chidambaram one of the luckiest FMs ever, as he himself acknowledged. Can the FM repeat the performance, given the reductions in Cenvat and individual income-tax (not to forget Rs 60,000-crore loan waiver)?
Though industry expected a lowering of corporate tax rates, I was not surprised that he did not oblige. Another guiding factor is the FM?s long-term objective to increase the direct tax kitty in the overall revenue portfolio of the government. By giving away excise duty benefits, he is trying to kill two birds with one stone. This would appease the middle class, resulting in high demand for consumer products?which could boost the manufacturing sector and thereby address the industrial deceleration currently underway.
The hike in short-term capital gains tax could act as a dampener, though the underlying objective seems to be to curtail short-term transactions. I can?t see much impact on FIIs, particularly since most of them are structured to operate through countries with beneficial double-taxation treaties with India.
The much-awaited weighted deduction on R&D is welcome. The FM, though, could have revisited tax holiday provisions for R&D units, which expired on March 31, 2007.
On the energy front, frankly, I could not follow the rationale for setting March 31, 2009 as the sunset date for tax holidays to refineries?another instance of unpredictability in tax policy. Similarly, a clarification (slipped in the memorandum document of the Budget) suggests that the tax holiday for mineral oil production shall exclude petroleum and natural gas. This will bother producers of natural gas. Why discriminate between crude oil and natural gas production when both are important sources of energy? Surprisingly, the FM himself acknowledged the importance of the latter in his Budget speech: ?We can encourage use of gas which is the most cost benign hydrocarbon.?
Though the FM?s preference is not for significant legislative changes as part of his Budget proposals, there?s a lot in the fineprint. A few instances that could be a cause of worry for corporate CFOs and tax directors include:
1. Broadbasing of the levy on minimum alternate tax (Mat);
2. Widening the ambit for levy of penalty on concealment of income;
3. Pro-revenue administrative procedures for issuance of notice.
In all these instances, courts/tribunals have given verdicts in favour of taxpayers, and now legislative amendments are being made to override the judiciary. To add insult to injury, all amendments have retrospective applicability. It?s a settled position that a constitutional right is conferred on the legislature to override the judiciary. This brings the debate about India being a difficult tax compliance jurisdiction to the forefront. Further, successive Supreme Court decisions empower the legislature to clarify the intent of legislation, particularly in situations where it has been interpreted incorrectly by lower courts. That?s the thing about having an ace lawyer as the country?s FM, I guess.
If the FM also has ace economic brains on his Budget team, the outcome on fiscal discipline says it all. In an election year, the FM is tactfully seeking to pause insofar as achieving the fiscal targets are concerned.
In Chidambaram, we have the rare combination of a lawyer-economist-politician, and it shows.
?The author is partner, BMR & Associates. These are his personal views