Budget 2014 reflects a number of priorities identified in the BJP election manifesto – the need to simply the taxation regime, provide a nonadversarial tax environment, revamped dispute resolution mechanisms and the need to build a consensus with state governments to introduce GST expeditiously.
Beyond this, the other material priority was to leverage tax policy to the extent possible to kick start the investment cycle leading to job creation and economic growth. Budget 2014 addresses each of these priorities to varying extents. Budget 2014 takes a number of steps to mitigate tax disputes.
A mechanism of advance rulings which is only available to non-resident taxpayers (and public sector undertakings), it is now proposed to be extended to cover resident taxpayers as well. While it is a laudable move, there are concerns about the efficacy of the forum. Acknowledging this, the finance minister has proposed to augment the capacity of the ruling authority. Disputes emanating from the transfer pricing domain are sought to be curtailed through a number of amendments, the most significant being a 4-year ‘roll back’ of an advance pricing arrangement. The scope of the Settlement Commission is proposed to be redefined to make it a potentially more effective dispute resolution forum. Details in this regard are to be released in the current session of the parliament.
A high level committee which will interact on a regular basis with industry and issue clarifications on a current basis on direct and indirect tax issues is proposed to be constituted. The finance minister reiterated the government’s intent to provide a nonadversarial and business friendly tax environment.
A widely anticipated move that would have signalled this intent was an abolition of the retrospective ‘Vodafone’ amendment in the income tax law. While the finance minister stressed that the government would consider retrospective amendments only in exceptional circumstances, it did not repeal the retroactivity of the ‘Vodafone’ amendment. It has proposed that CBDT will constitute a committee which will review indirect transfer cases, thereby perpetuating uncertainty that envelops such transactions.
Finally, a government-appointed committee had made a number of recommendations with regards to how these provisions should operate, clarifications in this regard do not find any mention in Budget 2014. Accordingly, and at least in this area, greater clarity and certainty remained elusive.
The financial services sector and the capital markets received focus. A taxation framework for real estate and infrastructure investment trusts has been proposed. The finance minister reiterated his government’s commitment to implement the recommendations of the FSLRC and also indicated that the government would implement a number of recommendations made by the Sahoo Committee to permit greater flexibility in the market for ADRs, GDRs and Indian depository receipts. There is a proposal to permit trading in and settlement of trades in government securities outside India, with enabling tax provisions.
Infrastructure financing has been given a boost by relieving long-term funds raised by banks for this purpose from statutory reserve obligations. FDI in insurance has been enhanced to 49 percent. Largely, the budget proposals of this year have sought to address key concerns in indirect taxes, without being reformative or populist. It appears that the government will probably make reformative changes in the next year.
However, not all curative amendments made this year have been accurate, leaving many questions unanswered. The biggest expectation this year, was introduction of a road-map to GST, however, there was no commitment from the finance minister on a firm deadline with respect to its implementation and neither was there any indication on a clear way forward for its introduction.
The only statement made was in readying key enablers of GST in the coming year – the Constitutional Amendment Bill and draft GST legislation. This non-commitment of the government has been disappointing for all stakeholders considering the amount of clamour made off late regarding its implementation. The centre would now be faced with the task of gaining the support of all the state governments and also ironing out other important aspects like rate of GST, items to be left outside its scope and IT preparedness. On service tax, the approach has been to widen the tax base and thinning down on existing exemptions.
On the excise front, there has been a focus on boosting domestic manufacturing and addressing the issue of the inverted duty structure in some specific industries like IT hardware, chemicals and petrochemicals. The government has given special attention on enhancing growth of the nonconventional energy sector by providing customs duty concessions and exemptions on inputs.With a significant increase in excise duty rates on tobacco products, aerated drinks with sugar, increase in clean energy cess, it seems that the government is keen on environment sustainability and well-being of individuals.
All in all, while the budget announcements have tried to address current tax issues of the industry for bold reforms, we will have to wait for the government to present its first full-year budget in the next year. However, possibility of tax law amendments during the course of the year cannot be ruled out.
Towards Rebooting Growth: A BMR Analysis of Union Budget 2014
