Budget 2019: Disappointing to see continued incrementalism on disinvestments of PSUs

Updated: July 10, 2019 3:08:05 AM

Budget 2019 India: This government had promised to end tax terrorism. Sadly, because of the extreme pressure to raise resources, it has been unable to do anything. However, this is truly being penny-wise and pound-foolish

Budget 2019-20: An impediment in reviving the private sector investment cycle is the credibility- problem of government as a counter-party. (Illustration: rohnit phore)Budget 2019-20: An impediment in reviving the private sector investment cycle is the credibility- problem of government as a counter-party. (Illustration: rohnit phore)

By Rahul Bhasin

Union Budget 2019 India: In trying to raise resources to achieve its very ambitious social intervention, the government is taking taxes to too high a level, which is impeding entrepreneurship, investment growth and jobs. It is making the classical mistake of first delineating its spending list and then looking for resources, instead of defining the optimally available resources and then prioritising allocations.

The good intention of doing the maximum for the most and, consequently, living beyond its means—this leads to desperation and irrationality in raising resources.

Taxing dividend distribution is damaging. It is not a tax on income, but an impediment to capital mobility. It curtails the proclivity to move capital from an inefficient allocator to an efficient one. When you have a problem of transmission from M1 to M3 in the economy, not abrogating it was a big miss.

Introducing a tax on buybacks from listed companies compounds the harm as it makes a bad extortive charge more comprehensive. It is difficult to understand how such an economically harmful and distorting charge can pass through the in-house economists within the system.

Another miss in the budget was not correcting the capital gains tax regime. That too should not be distorting capital mobility. To the extent capital gains is reinvested, it should attract a zero tax rate;, else, it should simply be added to the investors’ income and attract the tax rate depending on the assessee’s slab. The tax on dividends in the hands of investors should have been similarly treated.

When trying to revive private investment that has been declining since 2013, the taxation philosophy guiding these actions is incredibly retrograde as it impedes domestic capital formation.

When entrepreneurs are migrating out of your country in droves annually, increasing taxation at the top level makes no sense from a signalling perspective, even though it is the cleanest, least-distorting tax. Investing more in data mining and AI analytics to curtail avoidance and broadening the tax base was a preferable way to go at this juncture.

An impediment in reviving the private sector investment cycle is the credibility- problem of government as a counter-party. Permitting the oil and gas sector access to market prices—the regime that they were promised when they invested matters—is yet to happen in the true measure. The long-festering Vodaphone, Cairn, Telenor, Nokia issues need settling. An empowered committee to settle all disputes with vendors and taxpayers was an urgent need that was bypassed.

This government had promised to end tax terrorism. Sadly, because of the extreme pressure to raise resources, it has been unable to do anything. This is truly being penny-wise and pound-foolish as none of the global majors looking to diversify their supply chains out of China are considering India seriously, regardless of their public posture. The loosening of rules on single-brand retail in an attempt to attract FDI and build integration into global supply chain is commendable.

Income Tax Calculator: Know post-Budget 2019 Income Tax out go here

After such a strong mandate, a government which has had the political will to bring in the bankruptcy code, GST , RERA , DBT, and the wisdom to abrogate Octroi, etc, should have been more decisive on divestments of PSUs. It is disappointing to see continued incrementalism. The proposed divestment of Rs 1.05 lakh crore is less than 15% of the government’s annual interest costs.

The temptation to borrow in foreign currencies at low rates is deceptively benign. The government should only resort to it if the currency swapped cost is attractive and or if it is used to facilitate export growth. Not facilitating the participation of the corporate sector into agriculture and thereby facilitating technology adoption diffusion is a huge miss. Not migrating the government accounting to an accrual basis is a large reform miss. This would have killed the problem of perpetually delayed payments and refunds to all vendors and tax assesses.

Rectifying the badly drafted Act meant to inhibit money laundering that ended up inhibiting startup funding is a positive. Making Aadhaar and pan interchangeable is a positive, too. It would have been even better if a path had been laid out to subsume all other Ids (voter ID, driving licence, etc) into Aadhaar. Allowing tax deferment for uncertainty created by delayed repayments to NBFCs is a positive, but there was no logic in discriminating between the large and small NBFCs, especially since the smaller ones are more vulnerable. The first- loss guarantee to banks to incentivise purchase of assets from NBFCS is creative and apposite for the situation.

The merging of NRI portfolio investments with FPI is positive. The proposed steps taken to increase India’s weight in the MSCIs, is another positive.

Increasing the tax deducted to 150,000 for the interest paid on affordable housing loans is good and germane to helping revive real estate demand. The tax clarification on AiF category 2 is a positive. Not doing the same for category 3 is a miss. Streamlining and automating tax interface is a welcome move.

Consolidating the many labour laws into four is a step in the right direction.

The government’s intent to incentivise electronic, EV, semiconductor and other technology industries is a positive, but to succeed in engendering these industries, we need a comprehensive policy to create clusters. Introducing one card to pay for all public transportation is a big plus.The spending priorities on ubiquitous sanitation and harvesting rain water access is excellent. In healthcare, social spending on capacity creation in vaccination and treatment of infectious diseases is the right step forward; however, nutrition, education and access should be facilitated ahead of comprehensive coverage for lifestyle and old-age diseases.

One wishes one saw more capital outlays and initiatives in reforming the institutional architecture to facilitate planned urban growth under the smart city initiative.

Ultimately, the budgeting exercise has been a sincere work-in-progress, but it needs to tilt the balance back to encouraging income and wealth generation back from the sharp focus on redistributive allocations. The government’s track record in efficient execution and in cleaning the system, and sincerity of purpose gives hope that the necessary course corrections will be taken.

The author is Managing Partner, Baring Private Equity Partners India

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