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BW Businessworld

Steering The Reforms Wheel

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The Indian economy has managed to register a relatively lower growth rate of 6.9 after registering growth rate of 8.4 for last couple of years and, therefore, policy reforms to bring back the economy to the growth trajectory is the need of the hour. With economies world over failing to recover, down trend in industrial growth, weakened rupee, ever widening fiscal deficit and challenge faced by the government in clearing various legislations pending before the Parliament, Budget 2012 was anticipated to be bold enough to take measures on the reforms front and provide the roadmap for its effective implementation.

The Tax proposals contained in the Finance Bill 2012 will have far reaching impact. In an effort to bridge the widening gap on fiscal deficit, the Budget proposes to bring all services under the service tax net except 17 items. The increase of service tax and excise duty by 2 per cent which would translate into 2 per cent to 2.5 per cent higher price for goods and services across the board, for the common man.

On the Direct Tax front, some of the significant proposals are:

Introduction of anti-avoidance provisions, viz. General Anti-Avoidance Rule (GAAR) and "indirect transfers" are some of the measures proposed in an attempt to plug tax avoidance. The Budget has retained the GAAR provisions as proposed in DTC without paying any heed to the measures suggested by the Standing Committee on Finance. The existing safeguards on implementation of GAAR are ineffective and likely to result into huge litigation. The retrospective amendment on taxability of Vodafone type transactions is indeed a big setback. The question that we need to answer is that are we respecting the judicial system or not. The Government may or may not agree with the Supreme Court but it needs to respect it. If a taxpayer gets an answer after years of litigation only to find the law amended retrospectively, why litigate?

Similarly, there is retrospective amendment to clarify that consideration for use of or right to use computer software would constitute Royalty. This issue has been subject to extensive litigation for more than a decade with the outcome largely in favour of the taxpayers, except for some contrary judgments.  Such a retrospective amendment clarifying the position of the Government when the issue has been a subject matter of litigation is not a welcome thing. 

The introduction of Advance Pricing Agreement (APA) is indeed a welcome move and if implemented in the right manner, this should boost foreign investment. Industry can breathe some sigh of relief with introduction of APA. This should reduce transfer pricing disputes which had touched Rs 46,000 crores in fiscal year 2010-11.

A white paper on tackling the black money will be tabled in Parliament in the current session. If implemented in the right perspective, this measure will go a long way in reducing the fiscal deficit of the country. Many of the provisions relating to the infrastructure development are welcome.  The opening up of the window of ECBs, the lower withholding tax on the interest on ECBs, the weighted investment linked incentives for investment in warehouses, etc. are all very welcome. 

Some of the key misses in this Budget are provisions to strengthen the existing set-up of Dispute Resolution panel , stringent accountability measures for tax officer's action in making high pitched and frivolous assessments, removable of surcharge and education cess for corporate which has far lived its purpose, etc..

On the non-tax reform front, last year's budget had an ambitious target of divestment of Rs 40,000 crore. However, lusterless growth of capital markets ensured that even 5% of the target was not met as on 31 December 2011. The capital market is still not showing any signs of recovery and continues to be volatile. In this backdrop, the Finance Minister has taken a bold decision of setting a target to raise Rs 30,000 crores through divestment in 2012-13. Considering the fact that the government lagged way behind in achieving its targets for the year 2011-12, even this reduced target is quite ambitious and would be interesting to see how the same is achieved.

The Finance Minister hinted during his budget speech that the time has come to take some hard decisions in order to sustain the high growth and accelerate the pace of reforms. With the recent rail fare hike after almost a decade, substantial reduction in interest rate on EPF and announcement of series of tax as well as non-tax reforms, clearly reflects the intention of the government to strengthen the domestic growth drivers and shape the Indian economy in the long run. However, with the present compulsions of coalition politics coupled with strong opposition, it will be challenging to see how the government will transform its reforms dream into reality.

(The author is Deputy CEO and Chairman, Tax, KPMG)