Budget 2020 came at a tough time. Our economy has been sluggish. The government, despite delivering a material corporate tax rate cut mid last year continued to be under pressure. Each action of the FM was under scrutiny. Expectations from the government were high and maybe, even unreasonable – that this one Budget will somehow magically address structural issues, resurrect the economy, bring growth and yet, balance deficits.
The government has shown clear intent in this Budget. They have used the 0.5% window available under the FRBM ( Fiscal Responsibility and Budget Management)and upped spending with an expansionary stance. Expenditure allocations to two major sectors have been enhanced: $40 billion has been allocated to the agriculture sector along with a 16-point action plan, $24 billion has been similarly allocated to the infrastructure sector with the promise to deliver five new smart cities. To raise resources, taxes have not been increased. The corporate tax cuts of last year have been preserved. Rather, the disinvestment target has been enhanced – with the interesting step of listing LIC – a move that may create a significant market cap on the Indian stock exchange. Resources are also sought to be raised in the immediate short term by offering a one-time window to discharge taxes without interest and penalties in respect of money locked up in tax litigation with the government.
On the tax side, two major themes have dominated. The first (and that to me is a very important signal) is the government indicating that it is responsive to industry voices, by conceding foreign investor demand for the abolition of dividend distribution tax. This move to a classical more globally accepted system of taxing dividends in the hands of shareholders, will reduce tax leakage for foreign shareholders and enable, flow-through of credit under the treaty mechanism. This may, of course, lead to higher tax for Indian business owners, especially those where holdings are held through Trusts or in individual hands.
The second theme that one has seen across a number of proposals on the tax side is in respect of easing some of the tax payer’s challenges. Legal sanctity to a tax-payer charter, use of technology to enhance frictionless interaction, even for appeals, increase in tax audit thresholds, etc. are clear signals of intent. Transmission of this thinking to the ground level will indeed go a long way in increasing the credibility of the tax administration.
Even with the expansionary stance, it is heartening to note that the government understands the importance of private investment to kick-start the economy. That ‘government spending’ by itself cannot take us to the next level, is well understood. The FM acknowledged it in public interaction. More importantly, in its policy enactments, the government has shown clear intent to listen. And hence, some steps that the government could now take, to enhance the risk appetite of the private sector to invest, are as follows:
1. The government and the RBI, in the past, have dabbled with the thought process of permitting hybrid foreign capital to flow into the economy. Today, the law permits foreign investors to invest in two formats – pure equity, with unlimited risk and return, or debt, with fixed return, in a highly regulated format. Global pools of capital include mezzanine or hybrid funds–funds that incorporate elements of both equity and debt–attracting those would be of vital importance, particularly for investments in spaces such as infrastructure. The development of a balanced regulatory framework along those lines will enable additional long-term investing flows, into the economy.
2. In order to develop the risk appetite for investment, apart from seeking to address demand-side concerns, which this Budget has touched upon, it is also critical to indicate clear consistency of policy. To a large extent, investors can price and take decisions, even where regulatory regimes are not entirely favourable. However, where laws are changing frequently and there is uncertainty in policy frameworks, investment decisions tend to get postponed. One direct example of this theme from the current Budget is the perhaps inadvertent amendment to the provisions with respect to REITs and InvITs, where a substantial change in economics results from the new system of dividend taxation. Addressing this frontally will go a long way in building confidence in the investment ecosystem – a fundamental need of our times.
3. Some thought needs to be given to whether there should be parity in taxation between foreign and Indian investors. Foreign investors are subjected to lower taxes on returns from investments – whether as capital gains or interest or dividend. The logic for that is clear – making India an attractive destination for these investors. That being said, India is now showing green shoots in terms of domestic capital pools, being available for investment as well. A debate on whether some sort of directional parity on these two investor classes must commence.
In summary, the Budget is clear in terms of vision and the government intent to kickstart the economy is on the table. The key lies in successful implementation. And openness to build an environment where private investment can match government spending, in resurrecting the economy. The Industry is hopeful that the Government will deliver on both.
Views are personal.
Vivek Gupta is partner and national head, M&A and Private Equity, Tax, and Radhika Rastogi is associate director, M&A and Private Equity, Tax, KPMG in India.