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Budget 2014: Retro tax hammer remains but FM scores a goal

10 July, 2014

Arun Jaitley refrained from big-bang announcements and disappointed multi-national companies who have been expecting an end to retrospective taxation issues but still got a high five from investors as he provided clarity on taxation of portfolio investors, who will now pay capital gains tax and not come under ambit of business income tax.

However, the benchmark stock indices, which declined as the retro tax problem was retained, rose soon after the finance minister’s Budget speech and ended the day marginally in the red. The negative closing was attributed to European banks woes after Portugese lender Banco Espirito Santo shares plunged on capital shortfall concerns.

In his maiden Budget the finance minister left more money at the hand of the tax payer, announced measures to boost manufacturing and infrastructure, created a fund of fund to support micro and small & medium enterprises, provided incentives for alternative fundraising route for real estate among other measures and hoped to solicit consensus for implementing GST.

He also proposed new norms for reducing litigations in transfer pricing issues and said the government will review the Direct Tax Code (DTC) in its present shape and take a view on its implementation. The Direct Taxes Code Bill, 2010 had lapsed with the dissolution of the last government.

Jaitley said the aim of the first Budget of the new government is to lay down a broad policy indicator of the direction in which it wishes to take the economy and to achieve a sustained growth of 7-8 per cent or above within the next three-four years along with macro-economic stabilisation. 

At the macro level, Jaitley acknowledged the target of achieving 4.1 per cent fiscal deficit in the current fiscal is daunting but said the government would try to achieve it and set a target of reducing the deficit to 3.6 per cent in 2015-16 and bring it down to 3 per cent the following year. This sets a roadmap for fixing what has been a key fundamental concern of investors about the Indian economy.

Although he talked about setting up a commission to manage expenditure, he did not indicate any specific moves to cut subsidies which could be key for achieving the ambitious fiscal deficit targets. Indeed, the loss to exchequer by the incentives in direct tax is much more compared to what the government projects it would get from the indirect tax decisions.

On the controversial issue of retrospective taxation, he said, this government will not ordinarily bring about any change retrospectively which creates a fresh liability.

He said the cases which are already in the legal domain will naturally reach their logical conclusion but the government has decided that henceforth, all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the Assessing Officers will be scrutinised by a High Level Committee to be constituted by the CBDT before any action is initiated in such cases.

Jaitley said FDI in defence and insurance sectors would be hiked from 26 per cent 49 per cent and hinted that the huge amount required to boost the capital base of PSU banks would be not through the government budget but through public issues.

The FM put special thrust on measures to boost real estate as a sector and housing in particular with tax exemptions, budgetary allocation for urban development, including smart cities and inclusion of slum redevelopment under corporate social responsibility (CSR) spends.

The Budget also proposed to establish a Rs 10,000 crore fund of fund to act as a catalyst to attract private capital by way of providing equity, quasi equity, soft loans and other risk capital for startups.

Besides announcing a string of measures to fund social and soft infrastructure, the FM talked about boosting infrastructure in the economy.

He said that India has emerged as the largest public private partnership (PPP) market in the world with over 900 projects in various stages of development. “But we have also seen the weaknesses of the PPP framework, the rigidities in contractual arrangements, the need to develop more nuanced and sophisticated models of contracting and develop quick dispute redressal mechanism,” said Jaitley.

He said an institution to provide support to mainstreaming PPPs called 3P India will be set up with a corpus of Rs 500 crore.

Jaitley talked about proposals to boost shipping, inland navigation, development of new airports and roads, including expressways alongside industrial corridors and a national highway target of 8,500 km for the current financial year.

Referring to the existing impasse in the coal sector he said it would be resolved and adequate quantity of coal will be provided to power plants which are already commissioned or would be commissioned by March 2015, to unlock dead investments.

For the capital market the FM said the government will advise financial sector regulators to take early steps for a vibrant, deep and liquid corporate bond market and deepen the currency derivatives market by eliminating unnecessary restrictions.

The government also extended a liberalised facility of 5 per cent withholding tax to all bonds issued by Indian companies abroad for all sectors and extended the validity of the scheme to June 30, 2017.

He said the government will liberalise the ADR/GDR regime to allow issuance of depository receipts on all permissible securities and allow international settlement of Indian debt securities while revamping the Indian Depository Receipt (IDR) regime and introducing a much more liberal and ambitious Bharat Depository Receipt (BhDR).

Moving to taxes, the FM did not change the tax rates or surcharges but increased the tax exemption limit for individuals from Rs 2 lakh to Rs 2.5 lakh and pushed up the investment limit for tax saving purposes from Rs 1 lakh to Rs 1.5 lakh, while also hiking the separate tax exemption limit for interest paid on housing loans.

This would free up some cash with individuals at a time when they are facing high inflation and could boost consumer spending to an extent.

He raised the free baggage allowance for passengers coming to India from Rs 35,000 to Rs 45,000.

The FM also provided 15 per cent investment allowance for plants absorbing over Rs 25 crore investments in a year, which should boost manufacturing activity.

From an indirect tax perspective, the FM cut import duty on components to be used for small size televisions and photovoltaic solar cells, trimmed excise tax for footwear and components for renewable energy equipment.

He also cut duties for processed food and extended the reduced excise duty on automobiles by another six months to December 31, 2014.

But he hiked excise duty on cigarettes and other tobacco related products besides the customs duty on flat-rolled steel products which would help domestic steel producers but push up cost of making refrigerators, washing machines and cars.

(Edited by Joby Puthuparampil Johnson)


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1 Comment
Venkat Krishnan . 3 years ago

While the main thrust of the new Budget is play soft with the masses by increasing exemption limits to Rs 2.5 lakhs, it is still too early to judge the impact on the economy. To leave the retro tax slap untouched, itself is big backward step. This will create an unwanted stigma for the potential FDI and FII, waiting to come in, as the rules are still awful. The attractions now seem less colorful and might slow down the inflow of fresh capital But to commit Rs. 10000 Crores fund for future is worthy first move.

Budget 2014: Retro tax hammer remains but FM scores a goal

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