At cross-purpose

Sebi’s mandate is to protect investors, while the finance minister’s objective is to maximise revenue

By Mohan Sule

The Union Budget 2014-15 proved to be disappointing for the opposition. There was not a single issue to whip the Narendra Modi government with despite it stealthily pulling the plug on Sonia Gandhi’s flagship rural employment guarantee scheme by linking wages to productive activities, which will ensure its slow death going forward. (Hint: FMCG companies are once again turning their focus on urban areas, with the looming drought being one of the factors.) The moaning on the absence of big-bang reforms could have turned into a weapon of torment had the government announced elimination of fuel and fertilizer subsidies or decided to get out of PSUs save for some minority stake. The uproar over the ensuing price rise and selling of the family jewels would have stalled parliament for the remaining budget session. No wonder neutral observers look to the stock market to gauge the impact of the exercise as equities, it is believed, discount all available information. On that count, leaving aside the temporary scare of the return of the debt crisis in the euro zone, the budget has scored spectacularly, with the benchmarks touching new highs some days later. Yet, it is not without blemishes. There are three sore points for investors, which were at odds with the finance minister’s stated intention of easing the tax regime. The first is the ambiguity on retrospective taxation. Despite assurance that his government would not backdate taxes, Arun Jaitley’s assertion that resorting to retrospection taxation remains the right of a sovereign government caused alarm. This implies that any Vodafone-like transaction, conducted to escape Indian taxes, could see a repeat of then Finance Minister Pranab Mukherjee’s amendment in Union Budget 2012-13.

The second is the lack off clarity on the implementation of the General Anti-Avoidance Rules. Mukherjee, who had introduced this provision, had suspended its execution for three years after the market slumped on withdrawal of foreign investors, who feared the discretion given to tax officers to initiate proceedings against anyone suspected of evading taxes. The third are two measures to reduce tax arbitrage by companies. The first is the application of dividend distribution tax on the gross amount and not on net basis. The second is the doubling of the long-term capital gain tax on debt mutual funds and extending the period to qualify for the income to three years from one year. Even investors who had bought the units earlier for their tax-efficiency compared with other fixed-income products will be subjected to the new rules. As such the budget gets low marks for providing tax stability and eliminating tax terrorism, which are essential to attract long-term capital into India. The silver linings are the imminent implementation of the Direct Taxes Code, which will enable assessees to take a long-term view on the tax rate as any changes will require an amendment, calling for three-fourths of the vote, and the proposed Goods and Service Tax reform merging all the Central and state levies into one. However, indirect taxes will be subject to changes annually like they are at present. This leads to the question if it is possible to have a consistent tax regime over a three- or five-year period.\

For this to happen, it will be necessary to change the way India looks at budget presentation. Shorn of hype, it should be reduced to tabling the country’s balance sheet rather than an opportunity to introduce reforms. For many years now, the government has been raising fares ahead of the Railway budget. Even customs and excise duties have been hiked or lowered mid way to dovetail with any import glut or slump in manufacturing. Nomenclatures such as countervailing duty, special additional duty or anti-dumping duty are used to tweak existing rates without disturbing the basic structure, which may be the result of multi-lateral trade agreements. Instead of being a yearly ritual, a taxation package can be presented to parliament with sunset clauses. This means specific revisions will be scrutinized in greater detail instead of passing the Finance Bill in totality or rolling back certain provisions under pressure. The finance ministry can also take a leaf from capital market watchdog Sebi, which frequently revises guidelines to weed out outdated practices. These updations factor in past experiences but are never applied retrospectively. But the objectives of the government and the regulator differ. While Sebi’s charter is protection of investors, the finance minister’s mandate is to maximize tax revenue and minimize expenditure. It will be historic if the finance ministry,too, changes its slogan to minimum taxes, maximum compliance.