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Budget 2012: Fiscal Discipline v Taxpayers’ Expectations

15 Mar 2012

In the run up to the penultimate budget of the reigning administration, taxpayers at large are anticipating this year's Budget to be a precursor to the Government's impending policy reforms agenda. In a survey conducted by Taxand India that elicited participation from corporate and individual respondents, close to 50 percent of respondents expected the Government to extend fiscal incentives despite rising fiscal deficit (which is almost certain to miss the initial target of 4.6 percent). Taxand India presents a look at the takes a look at the budget 2012 and examines what it holds for the Indian taxpayer.

Download the results of Taxand India's pre budget survey results

Whilst taxpayers' expectation could weigh in heavily on the Finance Minister's mind, in reality this year's Budget could well turn out to be a relatively tougher budget as the Government would look to reign in fiscal indiscipline, primarily attributable to rising fiscal deficit, subsidy burden and other unplanned budgetary expenditure.

From the macro economic reforms standpoint, the Government is also expected to usher in policy level reform by way of relaxing foreign direct investment (FDI) limits in sectors strategic to accelerated economic growth, viz defense, insurance and retail sector.

Budget to take forward tax reforms agenda

Given the backdrop to this year's budget, the Government is also expected to lay out a clear roadmap for implementation of the Direct Taxes Code (DTC) and Goods & Services Tax (GST) regime, the two key tax reform agenda which this government embarked to pursue at the beginning of its tenure. It is increasingly becoming clear that introduction of GST would be delayed by another year in view of pending constitutional amendment to pave the way for new indirect taxes regime. The revised DTC bill is expected be introduced in the monsoon session of the Parliament later this year and it is expected that the DTC will be introduced from 1 April 2013.

Close to two-third survey respondents expect the Budget to usher in anti-avoidance rules such as General Anti-Avoidance Rules ("GAAR"), Controlled Foreign Company ("CFC") regulations and treaty override principles, albeit implementation of these new pieces of legislation could be calibrated to ensure smooth transition to a robust yet transparent tax regime. The latest development in this direction is a report submitted by the Expert Committee constituted by the Parliament wherein the committee has recommended important changes in the proposed framework of anti-abuse legislation under the DTC, including provision for ensuring independence of GAAR panel, and allowing credit to non-resident taxpayer in their home country (where CFC rule is invoked).

Following the Apex Court's verdict in the Vodafone case, another important legislative change widely anticipated is the introduction of provision to tax indirect transfer of Indian shares resulting from transfer of shares of offshore holding company, albeit taxpayers are hopeful that such amendment would not be retrospective.

The Budget is also expected to introduce stringent disclosure requirements for foreign bank accounts and other assets. Whilst the task force constituted by the Ministry of Finance would submit its report in the budget session of the Parliament, an overwhelming 70 percent of the respondents expect the Government to tighten the noose for delinquent taxpayers by introducing enhanced disclosure rigors.

There could be certain relief in store for individual taxpayers as well. The survey reveals that more than two-thirds of respondents are hopeful that income threshold liable to tax at the maximum marginal rate of tax (i.e. 30 percent) would be enhanced, leaving increased disposable income for marginal taxpayers. Also, investment limits for specified savings and housing instruments should be increased to mitigate adverse consequences of inflationary trends.

As far as indirect taxes regime is concerned, expectation of any significant policy reforms in the upcoming Budget is low. While GST rollout is increasingly being viewed as delayed reality, it is expected that the Budget could propose tweaking in the present regime with a view to align with impending GST rollout. With the grant of in-principle approval for introduction of the negative list based approach for taxing services, nearly 51 percent of the respondents expect some of the pre-GST reforms such as 'negative list based service tax' and 'Place of Supply Rules' to be introduced.

As an aid towards fiscal consolidation, it is expected that the median rates of indirect taxes would undergo change by way of hikes in the median rates of excise duty and service tax - a possibility that does not seem to surprise too many given the recent state of fiscal deficit in India. Around 46 percent of survey respondents expect change in median rates of indirect taxes like hike in excise duty and service tax and/or reduction in basic customs duty. Further, a majority of respondents expect reduction in CST rate to 1 percent in line with planned CST phase-out and GST transition plans.

Gradual phasing out of CST by reduction in rates has turned out be a tough promise for the Government to keep up, particularly after 2008. This continued reluctance on part of the Government is testimony to the fact that reduction in CST rate is largely uncertain as per the expectations especially given the failure to reach an agreement with the States on CST compensation quantum.

With the growing need for environmentally sound fiscal initiatives and increased trading of Carbon Emission Reduction certificates (CERs) in global markets, lack of clarity on the tax treatment of CERs has hindered such an initiative. Given the lack of clarity on whether the CERs should be treated as 'goods' or 'services' and the resulting tax treatment till date, there is no significant hope that the upcoming budget would provide any clarity on the issue. Overall, it is a mixed bag of expectations from the indirect tax side.

Taxand's Take

To conclude, we anticipate that the overall focus of the budget would be to usher in fiscal reform proposals, albeit partly; thus paving the way for implementation of DTC and GST over next year or so. The Budget is also likely to announce measures to plug potential tax leakages in existing framework and giving a fillip to tax collections. On the other hand, trade and industry will anxiously hope the Government to extend stimulus with a view to provide momentum to economic growth.

It will be interesting to watch out if the Finance Minister would be able to pull off a delicate balancing act to please divergent stakeholders, like he has adroitly done in the past.

Your Taxand contact for further queries is:

Mukesh Butani
T. +91 124 339 5010

Taxand's Take Author