Budget 2013: It's a Budget with balance

As anticipated, the Budget's announcements were predicated on social and financial inclusion to catalyse economic growth.

Given that 2012-13 saw the lowest growth this decade (five per cent) and mounting deficits, the finance minister was faced with the daunting task of reviving growth, and at the same time, addressing the expectations caused by social and demographic changes.

He has delivered a well-rounded Budget -- albeit one with an overdose of allocations to social schemes and with an eye towards attracting all forms of foreign direct investment.

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Deficit management and reinstating fiscal discipline were at the top of the FM's agenda. His assurance that fiscal deficit in the current year would be restricted to 5.3 per cent is comforting, and next year's target of 4.8 is achievable -- although a rising current account deficit would depress macroeconomic indicators in the short term unless he expects robust FDI and institutional investments.

Revised targets for fiscal and revenue deficits (three and 1.5 per cent, respectively) for 2016-17 reaffirms the government's commitment of returning to the path of fiscal consolidation in line with Kelkar's recommendations.

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Pushing infrastructure and finance

The Budget, besides singing paeans to India's demography, contains measures to refuel growth in the infrastructure and financial sectors.

Mindful of the need for $1 trillion worth of investments in the 12th Five-Year Plan (47 per cent to come through private sector participation), the FM promised to allay investors' apprehensions of a regulatory impasse through improved implementation.

Enhanced limits for tax-free infrastructure bonds and a boost to infrastructure debt funds would catalyse resources for the sector to a large extent, as should tax breaks to investors.

The proposal to review the oil and gas exploration policy to move from production-sharing to revenue-sharing contracts is a major policy shift, and champions long-pending reforms in the energy sector.

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A policy framework for shale gas exploration should encourage overall energy production, as well as foreign investment in the sector, hitherto muted.

The Budget lays much emphasis on the importance of financial soundness of discoms, and pushes state governments towards the former's financial restructuring proposals.

The proposed regulatory authority for the roads sector is positive, and should help attract private sector participation for the new road projects due to be bid for in the next financial year.

The fine print contains multiple proposals for catalysing financial sector growth.

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While applauding the robustness of capital-market regulations, the FM has proposed progressive reforms for foreign institutional investors.

The proposal that entry formalities and KYC (know your customer) norms for FIIs be simplified, and the delineation of FII investments from FDI (with a stake threshold of 10 per cent) are intended to do away with unintended ambiguity in regulations.

The Budget proposes to accord tax-exempt, venture capital fund-like status to angel investors' pools, to encourage inflow of experience and capital in the capital market.

A renewed commitment to consider the recommendations of a commission set up to review the laws governing financial markets suggests the importance of the sector.

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Tax proposals: no shocks, but a few misses

Income Tax rates for individual and non-individual taxpayers and tax slabs for individual taxpayers remain unchanged; the pressure to garner additional resources cornered the FM into tweaking surcharges though.

For taxpayers with taxable income in excess of Rs 1 crore (Rs 10 million), the message from the FM was to grin and bear the additional surcharge of 10 per cent.

There are reasons to cheer for the aam aadmi though, since the FM provided a tax-credit sweetener (of Rs 2,000) for the low-income bracket (with an income below Rs 500,000) and the additional tax deduction of interest for home loan not exceeding Rs 25 lakh (Rs 2.5 million).

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Besides, introducing an investment allowance (in addition to currently applicable tax depreciations) for investments in excess of Rs 100 crore (Rs 1 billion) is a well-timed move that should help reviving sagging industrial growth and revive investment sentiment.

Then, there is the levy of additional income tax on buyback transactions.

Without beating about the bush, the FM indicated that, increasingly, the buyback of shares is being used as a mechanism for tax avoidance and, therefore, it is imperative in equity to levy an identical distribution tax on such transactions as exists for the dividend distribution by domestic companies.

There was much apprehension that an inheritance tax would be introduced; the FM has done well to skip it.

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In so far as foreign investors' claims under various tax treaties, the Finance Bill states that a tax residency certificate will be de minimus, but not sufficient conditions for allowing such claims; although at first brush, it may appear a reiteration of the intent stated in the last year's Budget memorandum (though the statute was not amended to give effect to the intent), I would not be surprised if the revenue could use this as a handle to invoke "look through" rules, even though the implementation of the General Anti-Avoidance Rules, or GAAR has been deferred to April 2016.

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The introduction of the direct taxes code in the current Budget session would carry the momentum forward, and suggest that the government is serious about key tax reforms, signalling April 2014 as the date of implementation.

In indirect taxes, I am not surprised to see the median rates for Customs, excise duty and service tax remain unchanged, barring minor tweaks to duties on 'demerit commodities' such as cigarettes, to imported motor vehicles, and so on.

At a policy level, the FM's statement on the implementation of the Goods and Services Tax is encouraging; the approval of a fund of Rs 9,000 crore (Rs 90 billion) to compensate states means the ball is in the states' court.

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If they bite the FM's offer, the GST Bill and the requisite Constitutional amendment bill could be introduced in the monsoon session, paving the way for a rollout of GST in 2014-15.

The introduction of voluntary disclosure schemes (subject, of course, to the fine print) for defaulting service taxpayers is a well-intentioned move, and should encourage settling disputes and ease the case backlog.

I wish he had extended it, though, to income tax, which has mounting litigation.

From an administrative reforms standpoint, the proposal to set up a 'Tax Administration Reforms Commission' is a positive move, and would go far towards overhauling India's image among foreign investors in particular.

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I would be circumspect, though, before declaring this as a panacea for shortcomings in the framing of policy and the administration of tax law.

Overall, I would rate the Budget as balanced, given that the fear was a populist and tough Budget.

In hindsight, though, I expected him to do more on tax reforms and dispute-resolution measures to encourage FDI and calm investors' nerves, particularly after the retrospective amendments in last year's Budget.

It would have signalled benevolence on the part of the Indian government.

The writer is the chairman, BMR Advisors.
(With inputs from Sumit Singhania, associate director at BMR Advisors)

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