Analysis of Budget 2012

By Accommodation Times Bureau
By Advocate K.K. Ramani
Beset with shrinking confidence in the governments’ ability to undertake big-ticket economic reforms which could steer the country back to high growth trajectory of 8 to 9%, the Finance Minister had a challenging task to balance ground realities with expectations. The mounting fiscal deficit with commitments of
large social spending required bold initiatives which could boost growth, tame inflation and borrowing, effect disinvestment and in general create environment for productive investment. Inspite of repeated promises the government has been unable to deliver and push through any of the promised reforms – be it multi brand retail,
pension and insurance sector reforms, fiscal reforms or reforms relating to land acquisition. Pressure on inflation continues to be on the upside and a significant softening from 6.5 to 7%, as admitted in economic survey, is unlikely. The monetary measures taken from time to time to tame inflation have proved ineffective and have further contributed to declining industrial growth. The policy paralysis witnessed since United Progressive Alliance-2 came to power and governance deficit for whatever reason has created wide
credibility gap leading to exodus of foreign investment and volatility in domestic stock market partly fuelled by Eurozone imbroglio and debt turmoil.
2. To a large measure all economic indicators are pointing to decelerating fundamentals. One may attribute it to factors -controllable and uncontrollable – including political compulsions in coalition set up, global slowdown particularly in Europe, global inflationary trends, internal and external security concerns and ever
increasing price of fuel. On a positive note the fact remains that while India is not impervious to global factors, the economy still retains enough resilience to be a leading engine of economic growth. This budget was an opportunity for the government to re-establish the fading credibility and show that it means business.
This requires not allowing politics to prevail over sound economics atleast in vital matters of economic administration.
3. It is in the above scenario that the budget 2012 presented by the Finance Minister as his 7th budget will be viewed by different people based on their focus, perception and expectation. To what extent, the budget proposals will take the reform process forward and provide much needed solace to the ‘aam aadmi’ by containing of individual judgement. The Finance Minister has projected growth in 2012-13 at 7.6% against the expected growth of 6.9% in 2011-12. To achieve this growth rate a proper investment environment is to be created. The hitherto contentious matters of FDI in multi-brand retail, aviation and insurance remain ndecided.
Although a target of 30000 Crore has been set for disinvestment, it is to be seen that like last year it does not remain a mere pious wish. The fiscal deficit which was of the order of 5.9% of GDP in Financial Year 2011-12 has still been pegged at 5.1% for 2012-13 which is definitely a cause of concern.
4.Coming to the area of tax reform, it may be mentioned that, with the introduction of Direct Taxes Code Bill in August 2010, it was expected that the code will come into operation with effect from 1st April, 2012. In indirect taxation, the Goods and Services tax was expected to be operative with effect from April, 2012. This
is not likely to happen. The Finance Bill, therefore, seeks to induct certain provisions of far reaching importance contained in the Direct Tax Code The propriety of bringing such provisions through the budget is
questionable as it circumvents the procedural requirement for passing regular bills. One such provision is relating to General Anti Avoidance Rules (GAAR) which permits the tax authorities to disregard an arrangement in case it is considered as impermissible avoidance agreement lacking commercial substance
which is not normally employed for bonafide business purpose. The provision is of far reaching consequences and, if not implemented properly, might create serious problems for genuine tax payers. It was but proper that the same had undergone the legislative process prescribed for an Amendment bill instead of being inducting as a provision through the budget. Even though the Parliamentary Standing Committee suggested precautions by way of prior approval of independent review committee consisting not entirely of departmental people, yet the proposed provision envisages Approval Panel Consisting of departmental officers only.
5. Another provision proposed to be inducted through the Finance Bill which was to come in the DTC is relating to capital gain arising from transfer of shares outside India between two non-residents if major part of underlying assets are located in India. This is sought to be done by clarifying that any asset being share or
interest in a company registered outside India shall be deemed to have been situated in India, if the share or interest derives its value substantially from assets located in India. The provision is a direct fall out of the much publicised Vodafone case. Even though technically justified, the provision before being made a part of Act needed to be seriously debated. Having been brought with retrospective effect it will have a direct bearing on the case which had gone up to the Apex Court and decided by it after a prolonged litigation. Whatever be the rationale it cannot be denied that the decision has a significant impact on the foreign investment as foreign investors look for legal certainty. There are several other proposals which aim at reversing the Supreme Court decision.
6. In the field of personal taxation the Finance Minister has raised the basic exemption limit from 1.80 lacs to 2 lacs to bring it in line with the original proposal in the Direct Tax Code The tax slabs have also been adjusted which will provide some relief to the individual tax payer. A deduction of Rs.10,000 in respect of interest
on saving bank account and exemption from advance tax granted to senior citizens having no business income are good steps which will provide some relief to small tax payers.
7. The Bill, however, proposes certain retrograde steps like extending the MAT principle to persons other than companies and LLPs and obligating tax deduction out of sale proceeds of immovable properties even when sale is made to residents. Extending the area of tax collection at source to cash purchase of jewellery appears to be unjustified when made applicable even to buyers for personal use.
8. The Finance Act 2011 substituted profit linked incentives by investment linked incentives by providing for 100% deduction for capital expenditure in the first year itself in certain industries. The Finance Bill seeks to enhance the incentive by providing for deduction equal to 150% in respect of certain industries which include warehouse for storage of food grains, hospitals and affordable housing. The enhanced weighted deduction for research and development for in-house facility has been extended for further period of five years.
Stashing of money abroad has been a burning topic. In the last budget the Finance Minister mentioned a five pronged strategy to tackle the malaise of generation and circulation of black money and its illegitimate transfer outside India. Apart from entering into 82 DTAAs & 17 TIEAs certain administrative steps have been taken and the Finance Minister has indicated that a white paper on black money will be placed on the table of the House. Certain other steps have been announced which include compulsory reporting and extending the period of reopening upto 16 years. It is hoped that these measures will be effective in tackling the problem of black
money stashed abroad.
10. In indirect taxation, the system of taxation of Service tax on the basis of negative list appears to be laudable step which is likely to remove lot of uncertainties in identifying taxable services. The negative list appears to have been framed thoughtfully. Further additions and deletions can be made as the system is implemented.
11. On the whole, the budget appears to be a modest exercise swayed significantly by the circumstances and mood prevailing in the country. On a positive note it needs to be hailed as it synchronises with the historic achievement of hundredth century by the cricket legend Sachin Tendulkar

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