Amarchand Mangaldas Managing Partner Shardul S. Shroff
In its pre-election campaign, the BJP had said it would provide a stable and rational taxation policy and would discourage tax terrorism. There was high expectation that the tax amendments pertaining to retrospectivity made in 2012 would be revoked. As a confirmation of the BJP's stand, Finance Minister Arun Jaitley has given the following assurance in his Budget speech:
"This government will not ordinarily bring about any change retrospectively, which creates a fresh liability."
A high level committee is proposed to be constituted by the Central Board of Direct Taxes to deal with any fresh disputes arising from the retrospective amendment of 2012 before any action is initiated in any case. I suspect that the apprehensions of the government about its existing deep fiscal deficit and the decline of GDP growth over the last two to three years have cast their shadow on the abolishing of the retrospective tax with retrospective effect.
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The fiscal imbalance has arisen from the rights based logic of the previous government and its spending on the social sector over the last decade, which has not been met by augmented tax or non-tax revenues or by borrowings or printing of currency. The drop in the GDP growth rate from a high of 8.91 per cent in 2010/11, to 4.47 per cent in 2012/13, is a significant decline. For the previous government to have improved its image and portrayed itself as investment friendly, it needed to bury the fallout of the Vodafone taxation case after having lost its case in the Supreme Court. By introducing the General Anti Avoidance Rules thereafter, it adversely impacted sentiments of overseas investors and Indian businessmen alike. They had to be assuaged by deferral of the GAAR up to 2015/16.
In the politics of the country, there has been a clean break from the past. This ought to have been followed on taxation too for the government's image to move in a positive direction and fill its coffers. The fall in the tax revenues as a consequence of giving up the retrospective law, would have been more than made up for by new industries and tax revenues arising thereby.
The government has been mindful to plug the tax loopholes so that the exchequer is supported and leakage of revenue is protected - for example, the loophole in leakage of taxation of dividend income has been plugged by providing that the dividend distribution tax will have to be levied on the entire amount of dividend and not on the dividend amount net of taxes.
Other significant steps found elsewhere in the finance minister's budgetary speech do give some certainty and succor to tax payers. Examples:
>> Advance pricing agreements for transfer pricing can now be made applicable in respect of the preceding four years
>> Advance ruling facility accorded to residents.
While it can be postulated that the finance minister intended that the facility of advance ruling should be accorded to residents in respect of direct taxes by making certain legislative and administrative changes, the fine print and the actual amendment proposed to the Income Tax Act do not carry this intention forward. Instead the advance ruling facility to resident tax payers is proposed only for indirect taxes in the nature of Customs, excise and service tax. This issue must be tackled to give effect to the finance minister's speech and the Finance Bill so that there is no mismatch between the two.
The Budget has sought to enhance certainty of the business environment in India. It is a first step in a long journey towards steering the economy in a manner that complements the economic environment and permits leveraging of our potential to the fullest extent.
(The author is Managing Partner, Amarchand Mangaldas)