Budget FY16 will be a broader, deeper economic instrument. The direct tax code (DTC) is also being revived. The budget must stimulate agriculture and business—especially manufacturing. In three words, the prime minister has said it all—“make in India”.
Automation has increased the taxpayer base ten times, taking tax collection to record levels. With the implementation of GST and the expected GDP growth, this will increase. Measures are needed to accelerate the individual- & corporate-savings and investment, to stimulate demand for consumer durables and enhance competitive capacity for export-led growth. Supply-side management for wage-goods, infra and energy is essential for an efficient economy.
Under FTAs between South East Asia and India, MNCs can manufacture there, pay lower taxes, and exploit India’s demand, thus pulling away FDI; this has to be countered.
Policy must drive productivity-growth through modernisation, thus improving the incremental capital output ratio (ICOR) and competitiveness. Investment is driven by FDI policy, the ease of doing business in a level playing field and competitive tax rates. Economic and tax policy—with the twin objectives of enhancing existing businesses’ growth with competitiveness—stimulating new investment in infra and manufacturing projects are some of the necessary measures. The kick-starting of stalled projects by the prime minister’s office will have spin-off effects.
As per a 1983 World Bank study, countries with lower effective average tax achieved substantially higher real GDP growth rates than others. With tax rates reduction, India also witnessed tax buoyancy as the accompanying chart shows.
Similar results were achieved when tax rates were further reduced to 33%. The 2009 draft of the DTC proposed a maximum marginal tax rate of 25% in line with South East Asian countries’ taxes. Now is the time to implement this immediately. The MAT rate should also be rolled back from 18% to 12%. Lower taxes and investment allowance will lead to better tax compliance, generate larger internal resources for growth, modernisation and capital investment. Group taxation for corporates is also long overdue. It will benefit both the tax department and corporates.
Malaysia, Indonesia and Vietnam give tax deductions related to (a) capital investment and (b) production in specified industrial zones.
Domestic and corporate savings rate and investment growth should be targeted. Investment allowance should be stepped up to 40% for investments up to 2020 from the meaningless 15% today. Any loss of direct tax is compensated for by 18% in indirect tax collection on plant purchases and the perennial direct tax and employment growth. For new infra projects, the sunset date for tax deductions should be extended to April 2020.
The business trust rules need to be revisited as the contribution of shares to core capital invites MAT taxation on profit and deferred business tax, and given pass-through rules are not clear. Extension of pass-through to shares of manufacturing and services companies also will open up sources of promoter-funding to catalyse new investments.
There has to be strategic, time-bound focus on Maha and Mini Ratna companies using surplus funds investment for expansion. Leveraging these PSUs resources through investment in subsidiary companies that are going public should be encouraged. They had about R1,75,000 crore of investible resources. R1,00,000 crore invested in 51% equity of subsidiary companies, public issue of R99,000 crore therein and debts of R3,00,000 crore can trigger off projects of R5 lakh crore. For this, the cost- and time-monitoring would have to be strong.
Budget FY15 withdrew the residential housing as an ‘eligible asset’ for parking capital gains; this has dampened demand. This should be reinstated at least for five years to stimulate housing.
Industrial policy and tax policy must be aligned for the housing sector, and with regards to mega industrial parks, SEZs, infra corridors, etc, as well. Meaningful tax exemptions should be provided to these to attract large investments.
The draft DTC 2010 proposed tax incentives and MAT linked to investment—a retrograde step that has been partially adopted in the 2010 amendments. The profit-linked tax holiday is an incentive for the efficient conduct of profitable business while investment-linked holidays are an incentive for gold-plating of project costs! Is the latter in the national interest? Also, an individual’s investment limit in new issue equity for tax exemption should be raised to R10 lakh to give a boost to investment.
Is this a propitious time for the new DTC’s roll-out? The new company law has created headaches, especially with the Sebi’s changed rules. A new GST is coming, too. Business needs to devote time for growth. Why destabilise the direct tax law at this stage? The GAAR provisions and domestic transfer-pricing have already been built in to the law. Further, the 2009 DTC draft stimulated growth and compliance, while the DTC 2010 draft was only an instrument abetting the taxman’s oppression, not growth.
Transparency, through suitable changes in the Income Tax Act 1961, should be the aim, followed by stability in tax environment. India cannot afford the aftershocks of a second Vodafone or Nokia litigation. For share capital gains, the system of STT should continue.
The stalled and sick infra projects have to be revived by attracting new investment. A new set of NPA rules, credit over a longer period apart from removing of the bottlenecks and facilitating a capital fund for last-mile projects must be expeditiously designed.
Tax exemptions for infrastructure and power are withdrawn if the unit is transferred in any scheme of merger or de-merger, as per Section 801A (13)); this amendment was introduced on the ground that profit-making units should not be transferred. However, the move is not logical, especially when any manufacturing unit can be merged. Today, the scenario is that over 50% of the new infra and power projects are not viable with coal and regulatory delays. These can become strong only if they are merged with other efficiently-run, resource-rich companies. The CBDT has, in the past, issued circulars that tax holiday to new industrial undertakings (under Section 80 J) or for 100% export-oriented units or export companies (under Section 10 AA) moves with the units if the unit changes hands. Yet, in infra projects or power companies, tax exemptions are lost where transfer is in a Court Scheme. Therefore, Section 801A should be amended.
Interest subvention of 5%, under TUFF, has worked wonders for the textile industry’s expansion and modernisation. A similar subvention scheme for SME engineering companies should be introduced. They generate high employment. The ICOR and competitiveness vis-à-vis FTA countries will dramatically improve due to this, combined with investment allowance.
Finally, central grants to states should be incentivised with linkage to improvement in agriculture and irrigation, particularly, the revival of the almost non-existent agri-extension services; and efficeny in the power sector. A network of efficient soil-testing laboratories, combined with advice on appropriate water, fertiliser and pesticides application and seeds selection will hugely reduce their consumption and therefore, the farmer’s costs.