Balance Budget with business

Entering the third year of a five-year term, it’s showtime for the National Democratic Alliance government, which in spite of taking some positive initiatives — setting up committees to address the investor community’s concerns — is under constant scrutiny and an expectation overload.

In the wake of the recent outcry by economists and corporates over the subsidies provided to farmers, a strong reaction condemning the same was delivered by Prime Minister Narendra Modi while addressing a global business summit.

Speculations are rife over the withdrawal of incentives and exemptions, which have been enjoyed by corporates over several years.

A two-year trend analysis reflects the clear agenda of the government, which is a shift from incentive-based taxation to investment-based taxation. This intent is likely to gain further impetus given the recent debacle faced by the government in two large and important state Assembly elections.

A further thrust to the government’s motive is a drop in the direct tax collection over the budgeted numbers, leading to a slowdown in the gross domestic product (GDP) of the country.

With budgets unmet and state elections looming large on the horizon, the NDA government will have to tread the path cautiously.

So, what are its options?

Except the exemption/deduction provided to units operating in a special economic zone, capital expenditure incurred on specified businesses and research and development activities undertaken by companies, most other exemptions or deductions come with a sunset clause — a premature withdrawal of the same will do more harm than good.

Further, plugging what Mr Modi considers leakage of exemption ought to be linked with the reduction offered in corporate tax rates.

While the sunset of most exemptions or deductions is set at March 2017, the respite in corporate taxes is spread over four years, with uncertainty around the application of the same.

Another major cause for concern is the tax law administration — while our tax rates are reasonable, what is worrisome is the way our tax regime is administered. Lack of certainty, frivolous tax demands and delayed justice often create chaos and reflect poorly of our systems, warding off what could potentially make India far more attractive as an investment destination.

There are rumours that the government is considering a withdrawal of the preferential tax regime for capital gains and an introduction of tax on dividend income.

This draconian move would have serious consequences as the tax on dividend could be significant and the levy or increase of tax on capital gains will remove the competitive edge of India as an investment destination, as most other countries offer low/nil rate of tax on capital gains.

Having announced several initiatives, such as “Make in India”, “Digital India”, “Start-up India”, the focus of the government should be aligned to further the implementation of these initiatives and clarify the roadmap ahead.

It is certainly encouraging to uplift the poor strata of society and any attempt in that direction will be a welcome move.

However, the same should not be at the cost of the existing policies designed to encourage and nurture industries and businesses. What is required in a collaborated approach and not a mutually exclusive one!

While the NDA government has made India more visible on the world map, it’s time to deliver on the promises and assurances made. Will we get there? How soon? How far? We’ll know on February 29.

Riaz Thingna is director Grant Thornton Advisory Private Limited

Pallavi Talavlikar is a chartered accountant from Mumbai

This article appeared in Asian Age on 27th February, 2016.