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A Litmus Test For New Government

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As the newly elected government would be presenting its first budget in the parliament next month, all eyes are eagerly waiting to see as to how the FM would play his cards. Inheriting a worrisome sub 5 per cent growth rate along with galloping inflation and meek industrial &service sector output, the FM would be walking on a tight rope. The critical objectives to be met would be retaining the fiscal deficitat an acceptable level, taming inflation, fiscal consolidation and more importantly, providing a much needed fillip to the economic growth. This budget could be a perfect opportunity for the FM to put the economy back on the growth trajectory.

Since past few years, country's fiscal deficit has been ranging between 5 to 6 per cent of the GDP. High fiscal deficit acts as a constraintfor any government to spend more as it could adversely impact the health of the economy. Though by a fraction, the lower fiscal deficit of 4.5 per cent in FY 2013-14 is encouraging as it gives room to the new government to take bolder steps in Budget 2014-15 to step up the growth. This should help the government to channelise the much needed outlays for infrastructure development. It should also provide leeway to revivesome of the stranded mega infrastructure projects and, inter alia, creating job opportunities for masses.

To encourage investment in infrastructure sector, the existing profit linked tax holiday benefits should be extended to newly set-up infrastructure undertakings. Also, weighted deduction of 150 per cent of the capital expenditure by certain businesses, which is currently available only to select businesses covered under the investment linked scheme, should be extended to all the businesses covered in such scheme. Further, sectors like healthcare, development of integrated townships, exploration and refining activities, airport support services, etc. should be granted 'infrastructure' status.

Special Economic Zones ('SEZ') were introduced with a view to promote exports and develop infrastructure.Certain tax benefits were granted to SEZs to make them attractive and encourage investment. However, levying Minimum Alternate Tax ('MAT'), currently 21 per cent, is a retrograde step and has significantly dilutedthe tax benefits granted earlier. Further, levy of Dividend Distribution Tax ('DDT') @17 per cent also dampens the investment in SEZs. Government should consider abolishing or substantially reducing the levy of MAT and DDT for SEZs to revive the investment.

The ailing manufacturing sector also deserves a fair share of fiscal incentives. Investment allowance, i.e. an additionaldeduction of 15 per cent of cost of new plant and machinery acquired by a manufacturing company, is allowed for investments made during FY 2013-14 and FY 2014-15. Such deduction should be extended to few more years. Further, the minimum investment threshold of Rs 100 crore should also be reduced to cover small industries.

India Inc would want to see a budget which sends out a strong signal to the investor community at large and reposes their confidence in India. Atop India Inc's wish-list is a non-adversarial, conducive and fair tax regime. Tax payers are facing wrath of the officers who are aggressively pursuing their stringent target by resorting to totally biased approach. This has taken a toll on investor sentiment, leading to reduction in critical foreign inflows into the country and creating an environment of protracted litigation all around. Bringing clarity and stability in the tax laws is the need of the hour. The government should consider withdrawing the retrospective tax regime,bring clarity on much litigated transfer pricing issues and restore the investor confidence in India as a business friendly jurisdiction. I am reminded of a quote by Kautilyawhich goes as "Just as one plucks fruits from a garden as they ripen, so shall a King have revenue collected as it becomes due. Just as one does not collect unripe fruits, he shall avoid taking wealth that is not due because that will make the people angry and spoil the very sources of revenue."

On indirect tax front, introduction of the GST could prove to be a game changer. While, introducing GST in this budget seems to be a far-fetched dream, the government must endeavor to implement it at the earliest. Further, GST should be an umbrella legislation covering within its ambit all the taxes levied by the Centre and the State on the goods and services.   
If a proper balance between the growth drivers, fiscal deficit and inflation is directionally endeavoured, higher and an inclusive growth is a possibility.

The author is co-head of Tax at KPMG in India

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