Budget Session Part 2: Crucial Times Ahead

The latter half of the Budget Session which would begin next week (25th April) is expected to be a crucial one, not only in terms of economic reforms but also for PM Modi’s re-election bid in the 2019 Lok Sabha Polls. The senior leadership of the Bhartiya Janata Party, in the cabinet & otherwise, must tone down the nationalism sentiment; keep the Hindutva moron brigade in check and instead focus solely on conducting critical legislation cleared in parliament, thereby kick-starting the economy & providing them with some talking points before the 2017 Uttar Pradesh & Gujarat Elections, the results of which would provide vital indications of the disposition of the electorate before the 2019 polls.

The spirits would be tense in the legislature with the questionable dismissal of the Uttarakhand government by the center, the access to Patankhot given to JIT from Pakistan, the never-ending confusion over the Provident Fund withdrawals, droughts in various parts of the country, amidst the  usual Dalit-Muslim vote-bank securing tactics of the opposition. The Prime Minister must drop his statesman-like silence on issues that dominate the news cycle & lead from the front in countering all possible attacks in parliament. He must not play into the traps set up by the opposition and  instead concentrate on highlighting the many successes of his government so far.

Inflation has been down ever since the NDA government came to power; highway construction is on an all time high of 28 km/day; there is tremendous focus on infrastructure augmentation with the Inland Waterways Bill or the Sagarmala Project; the focal point of Budget 2016 was resurrecting the rural economy & with the weather department predicting a better monsoon this time around, the agriculture sector is expected to turn around with assistance from the new crop insurance scheme, national agriculture market which aims to provide better market access to farmers or the RURBAN scheme which aims to modernize rural areas, thereby increasing economic activity around the area concerned. The Prime Minister’s foreign policy outreach is starting to bear results, the latest being Chabahar Deal which would give India access to Central Asian Markets or the Logistics Agreement signed with the United States, ostensibly to contain Chinese maritime influence in the region. The two biggest successes of the government have been responsive, efficient governance & cutting of red tape. Every minister in the cabinet is being lauded for the initiatives undertaken by their departments, a track record of which has been compiled by Swarajya magazine  (Oil Minister Dharmendra Pradhan is a notable exception in the above compilation).

But the job is far from over. The Banking sector is still in stress, due to inadequate debt recovery mechanisms & exports have been contracting for 18 months in a row, due to weak global demand. The latter can only improve with time but the former can largely be dealt with the Insolvency Code, one of the many important economic reforms currently stuck in parliament.

The Insolvency Code would expedite the process of debt recovery by creating an autonomous body to oversee the same & put a 180 day time limit on the process. The Goods & Services Tax would subsume the many indirect taxes currently imposed & turn India into a single market, a crucial reform to augment GDP growth. The Small Factories Bill would encourage small-medium size business to invest in the manufacturing industry by exempting them from various labour regulations. The Labour Ministry further plans to introduce four integrated labour codes which would replace the colonial era laws that currently operate in the domain. All the above are just few of the many other bills that are currently in the offing & which need to be passed urgently to unshackle the Indian economy.

The Prime Minister must not waste any more time in pushing through the above reforms in the upcoming parliament session, not the least because pushing pro-business reforms right before state assembly elections would be a major political miscalculation. The politics in this country has always been confrontational and would continue to remain so in the future, but its economics must not suffer as a consequence. The Prime Minister understands this all too well & he must play his cards right while dealing with the opposition. ‘Coz come 2019, he would be judged by the very standard he set for himself, SABKA SAATH, SABKA VIKAAS.

India Introduces Google Tax – An Analysis

Amidst all the hysteria over the contentious provisions (EPF Tax & 1% Excise on Jewellery) that were introduced in the Budget last month, another extremely important announcement went relatively unnoticed. This was the decision of imposing an ‘Equalization Levy’ on companies providing online advertising services to businesses, ostensibly to tap the tax avoiding tendencies of tech giants like Google, Facebook etc. In simple terms, any advertising income received by such companies would now be taxed at 6% from April 1st, 2016 i.e. the new financial year. In this post, I shall present my analysis on who exactly are the stakeholders with respect to this provision and how would they be impacted by it.

With Budget 2016, the Indian Revenue Department vowed its allegiance to the Base Erosion & Profit Shifting (BEPS) Action Plan; a series of proposals prepared by the Organisation for Economic Co-operation & Development (OECD) aimed at curbing profit shifting from high tax to low jurisdictions by multinational enterprises. Out of 15 Actions proposed, India announced three in the budget. One, the Country-by-Country (CbC) reporting structure which introduces a more robust compliance mechanism for MNE’s undertaking intra-group transactions across jurisdictions; two, the Patent Box Regime wherein income from patents developed & registered in India would be entitled to a tax benefit and three, a digital tax, so to speak, on income earned by online advertising service providers.

The third proposal presents an interesting case study. As we know, in the digital economy, establishing a strong internet presence is imperative for long term success and usually, the best way to do so is by advertising on a popular platform, thereby reaching millions of internet users. Yahoo, Google, Facebook are all examples of such platforms which provide space for online advertising. But, their global structure and until now, outdated tax legislation, has allowed them to escape taxation. The strategy is simple; the recipient of the advertising income is not the regional subsidiary that the concerned MNE may have in the jurisdiction where the payer is located (say, Google India) but usually  another subsidiary located in a tax haven (say, Google Cayaman Islands). That, along with Revenue Authorities’ reluctance to include digital presence while interpreting the meaning of Permanent Establishment (PE) in litigation, has the reason behind the continued subversion of the tax process by large internet companies. In response to this, BEPS Action Plan 1: Addressing the Challenges in a Digital Economy, the OECD has proposed either expanding the definition of PE to include digital presence or imposing an equalization levy on certain transactions, the latter being christened as ‘Google Tax’ by commentators in Britain which became the first country to introduce such a provision.

Out of the two options, India made the right choice by adopting the latter. This is because a flat-out tax would certainly be better administered than a broader PE definition since that might increase the risk of arbitration, thereby going against the PM Modi’s promise of ‘ease of doing business’. Also, the provision is introduced as a separate chapter in the Finance Bill and not as part of the Income Tax Act, the companies receiving such income would not be liable to file the complicated Income Tax Return (a separate return would be filled), thus making life a wee bit easier for the companies in question. Of course, the flip side to that is the non-availability of tax credit for the amount payed to the Indian exchequer and the government has made a wise move by keeping the rate at a low 6% so as to not frustrate the companies too much. Finally, limiting the levy to B2B transactions as well as imposing the annual monetary limit of INR 100,000 is indeed a step in the right direction thereby sparing small businesses from an additional compliance burden.

One can argue that such a legislation would hurt new businesses the most, who might find themselves being coerced by these large MNE’s to pay the taxes over and above the advertising bill. Thus, to that extent it goes against the spirit of the ‘Start Up India’ scheme launched by the Prime Minister a few months back.

But that being said, this is a crucial provision in terms of minimizing tax avoidance, while at the same time providing a predictable tax regime for MNE’s operating in India. How it manifests itself is yet to be seen.

 

Budget 2016: A Step Forward

The Narendra Modi government presented it’s third budget on 29th February 2016 with hopes riding high that it would finally deliver the ‘big-bang’reforms that have been keenly awaited ever since the BJP swept away the national elections in May 2014. Although the budget did not present any major reforms, it focused on fiscal discipline, resolving the banking crisis and rebooting the rural economy. In this post, I shall attempt to analyse how Budget 2016 impacts the economy at large, the private sector and ultimately, the ordinary taxpayer, along with a special emphasis on the international tax proposals therein.

Stabilizing the Economy

Before the budget, there were speculations whether the Finance Minister would stick to the fiscal deficit target of 3.9% or miss the same in order to increase spending. Experts agree that by maintaining the fiscal deficit target of 3.9%, the Finance Minister made the right move, giving way for a rate cut by the Reserve Bank of India. Also, one needs to appreciate the government’s efforts to deal with the Non-Performing Assets (NPA’s) crisis which has gripped the Public Sector Banks (PSB’s), in a systematic and practical manner.

The 22 PSB’s in the country have been riddled with bad debts cumulatively amounting to 3.5 Lakh Crore and have thus proved to be the most significant impediment to India’s economic growth. The government had promised recapitalization worth 70,000 crore across four years while raising the balance from the markets. Although the current budget only allocates 25000 crore for recapitalization, it provides a clear roadmap to solve the crisis in an incremental manner. It proposes a Bank Boards Bureau which would advise the government on how to tackle the NPA problem as well as suggesting deserving people to occupy board positions of the banks, thus addressing the endemic problem of such positions being captured by cronies of the politicians in power. It further provides that the government may even contemplate privatising some of these banks, thereby reducing the government’s stake below 50%. More importantly, a new bankruptcy code is in the pipeline which aims at simplifying the insolvency process and would play a significant role in liquidating of assets of the defaulting borrowers in an efficient and timely manner, thereby providing a major relief not just to PSB’s but other corporate lenders as well.

The Budget places a big thrust on reviving the rural economy which has been in distress at the back of two consecutive bad monsoons. It allocates 87,765 crore across infrastructure, irrigation and other welfare schemes to augment the suffering agricultural sector. It unveiled the path breaking initiative of a common online market for agricultural produce of the farmers which would help them fetch the highest price available therein, a complete break-from-the-past move aimed at increasing agricultural income. Also, the government plans to institutionalize direct benefit transfer (DBT) schemes for various subsidies, including fertilizers and LPG, which would not only lead to better governance by eliminating middlemen and reducing corruption, but would also result in significant cost savings for the exchequer.

Growth Incentives

The Budget promotes the government’s pet scheme ‘Make in India’ by providing a reduced corporate tax rate of 25% for manufacturing companies incorporated after April 1st, 2016 and reduces the corporate tax rate to 29% from 30% for companies with a turnover less than 5 crore. It also promotes another government scheme ‘Start-Up India’ by exempting 100% of profits for start-ups set up during April 2016 – March 2019.

However, it provides for further 10% tax on dividends in excess of 10 lakh, aside from the dividend distribution tax (DDT) already paid by the companies, a major flop in the budget, which would result in double-taxation. The Budget further provides for an increase in taxes on people earning more than 1 crore by 3%, both amplifying the government’s intention of taxing the rich going forward. The above proposals have evoked mixed reactions from India Inc, with some expressing their discontent over the benefit of the reduced tax rate not being passed to the companies already in operation, while start-ups complaining that they expected a lot more from the government.

Middle Class Concerns

This budget provides a lot to smile about to BJP’s core vote base i.e. the ‘neo-middle class’ by providing a significant increase in rebates for low income individuals, first-time home buyers and rent-payers. But it balances that out by imposing additional tax on the purchase of cars and attempts to pluck the cash economy by imposing an additional tax of 1% on cash purchases of goods and services valuing more than 2 lakh. The Budget further increases the overall service tax rate by 0.5%, thus preparing the country for a higher tax rate under the Goods and Services Tax Bill which aims at unifying all the indirect taxes currently imposed in the country.

International Taxation

The Finance Minister reiterated the government’s commitment to adopt the Base Erosion Profit Shifting (BEPS) provisions which were presented at the G20 summit in late 2015. He adopted BEPS Action Plan 13 of Country-by-Country (CbC) reporting as well as imposing a tax on digital transactions in line with BEPS Action Plan 1 at the same time. But the corporate sector has something to cheer for with the announcement of the Patent Box Regime in line with BEPS Action Plan 5 which aims at providing the underlying tax benefit to those companies which are able to prove the ‘nexus’ between qualifying expenditure for developing intangible property (IP) and income received from those IP assets, signalling the government’s vision to turn India into an R&D hub. But at the same time, he announced that the government would adopt the ‘Place of Effective Management (POEM)’ residence test as well as General Anti Avoidance Rules (GAAR) from fiscal year 2017-18, preparing the MNE’s for a strict administrative road ahead.

Conclusively, I think Mr. Arun Jaitley, the Finance Minister has presented a pragmatic, forward-looking budget which might appear short on reforms, but provides a sensible road-map to transform the world’s fastest growing democracy. The key, however, lies in implementation, especially with regards to the resurrection of the rural economy and a hassle-free, responsive & efficient administrative system across all sectors. It is with desire that the country rallied behind the BJP in the May 2014 elections and one can hope that the government delivers on its promises.

Budget Session: BJP on the Front Foot

With the backdrop of the Rohith Vermula Suicide in Hyderabad and the JNU crisis, political cynics expected that the Budget Session 2016 of the Parliament was heading for another washout. But, if the first three days of its functioning is considered reflective, then it can be said that it is this session where the sheer magnitude of differences between our political parties and in a sense, the people they represent, was truly on display. In this post, I give a quick summary of the first three days of the ongoing parliament session.

The stage was set was another round of meaningless demonstrations and benign accusations by the opposition on the ruling Bhartiya Janata Party(BJP), given their mishandling of the JNU crisis and the suicide of a Dalit scholar in Hyderabad, purportedly at the behest of two union ministers. But thanks to explosive revelations by our feisty HRD minister, Smriti Irani; fiery speeches by the likes of Arun Jaitley & Anurag Thakur and some reports in the press, the BJP has managed to divert the attention from the agrarian crisis or the troubled Public Sector Banks and put the ball in Congress’s court to defend their support for the unruly students at JNU or their distortion of a report in the case of Ishrat Jahan, a woman who was killed in an alleged fake encounter in Gujarat back in 2004 but has now been confirmed as a terrorist who was sent to assassinate Narendra Modi, then the Chief Minister of Gujarat.

The Congress party sought to attack the BJP on the arrest and subsequent sedition charge of Kanhaiya Kumar, initiated by the speech of Jyotiraditya Scindia, a Congress MP, which frankly sounded like a collection of angry tweets by a loony liberal, echoing the same half-literate rants which dominate our media and intellectual space. He said that the BJP was trying to impose the Hindutva ideology on the country and how freedom of speech should be unrestricted, even if it celebrates a convicted terrorist. His speech was immediately rebutted by Anurag Thakur, a BJP MP, who attacked on Rahul Gandhi for supporting the students raising the anti-national slogans raised in the JNU campus and how the Congress resorted to political opportunism without understanding the seriousness of the issue. After a round of political blame games, it was the speech by Smriti Irani which exposed the bigotry and absurdity that grips the JNU Campus.

She inundated, with damning evidence, that in the garb of free speech, how students at JNU constantly celebrate the Maoists who vow for the destruction of India and the killings of Indian soldiers who lose their lives defending them, apart from their not-so-subtle demonstration demanding Kashmir’s succession from the Indian state on the much controversial night of February 9th, 2015. She also presented evidence on how the Congress party sanctioned school curriculums which had a clear prejudice against the Hindus, leaving our eminent parliamentarians completely speechless. On the next day, she continued her attack on the opposition, presenting evidence that Rohith Vermula was in fact not even a Dalit, confirmed here by the Telengana Police. She asserted that the political elite in the country had reduced him merely to a caste and exposed the irony that it was that very problem of being labelled as caste which drove him to commit suicide, as expressed by himself in his suicide note.

Due to her, it can be said that the BJP has managed to at least put forth a formidable defence against the controversies which have rattled the party in the last couple of months. Never has been the Left hegemony of Indian politics such fiercely challenged.

That being said, the troubles for BJP are far from over. They still do not have a majority in the upper house of parliament and the opposition is bent upon stalling important legislation, no matter what concessions BJP makes. The Prime Minister’s silence on key national controversies doesn’t help their cause either. If he is indeed serious about legislative business being conducted, he needs to shred his hatred for the Delhi media or their political patrons and lead from the front, tackling every issue heads on, just like the way his HRD minister has been doing for the past three days.

Also, the ruling party is clearly in the driving seat after a far-sighted Railway Budget was presented by Suresh Prabhu and a sobering yet optimistic Economic Survey was presented in the parliament by the Finance Minister, Arun Jaitley. If the government capitalizes on the work of the past two years by presenting a strong, innovative yet practical budget, it will silence all its critics and retain its glory, which some say has been fading at the back of declining exports, debt ridden Public Sector Banks and falling stock prices, thus bringing back the focus on investment and growth.

As of Friday(26th Feburary), the BJP has steered itself out of controversy but the real challenge would only be addressed on the 29th, when the Budget is presented in parliament. India is keenly waiting.