Need to demystify the budget process

February 27, 2013





Pre-budget hype is like the first day of a test match — the excitement is over once the fiscal announcements are made just like the die-down in hype once the first ball is bowled. Year-on-year the mystery shrouding the budget-making process continues unabated.



The immediate need is to rethink the budget making process and make it transparent. One of the first steps in this direction needs to be the involvement of academicians and industry experts in the budget formulating process. Why not circulate a draft of the Budget and discuss the same with the public (similar to system followed in other countries such as New Zealand)?



'Aam admi's' Budget expectations



The double whammy of rising inflation costs and limited avenues for tax planning for individuals leaves them quite vulnerable. Towards this end, the government should consider increasing the basic exemption limits for individual tax payers to factor the rising cost of living (especially the salaried-class).



On the other hand, the government should also aim to increase the quantum of deduction under tax saving avenues (for example, Section 80C Act deductions). Offering tax deductions on savings is a time-tested method of luring citizens in tax saving instruments. Therefore, the government may consider increasing the quantum of deductions under such instruments to Rs.2.50 lakh.



As a corollary to the objective of increasing the rate of savings among the middle-class, and also to directly link the savings with the primary/secondary market, the government may consider allowing exemptions from capital gains where such gains are re-invested into shares of private unlisted and public listed companies.



This would help in achieving a faster rate of corporatisation of the unorganised sector leading to greater emphasis on responsible reporting and corporate governance.



Rising medical bills



Another aspect which the government should consider is the rising medical bills and cost of hospitalisation. The current caps on tax deduction for the same should be increased to provide relief to the middle-class. The government may consider increasing the same to Rs.1 lakh, given the absence of a national health care/social security system.



While the normal tax rate applicable to an Indian company is 30 per cent, the add-ons like DDT, surcharge and the like push it close to 42 per cent. The effective tax rate compares favourably with high-tax nations such as the U.S.and Japan. One also needs to factor the impact of the minimum alternate tax (MAT) of around 20 per cent. Therefore, one of the immediate demands of the corporate sector would be to reduce the applicable tax rate to 25 per cent and doing-away with the add-on taxes.



Secondly, the rising litigation on the difference between book profits for MAT purposes and the profits considered for normal tax purposes needs to be resolved. Bringing in the much awaited/anticipated direct taxes code (DTC) (with appropriate amendments) could be considered for the same. Extension of tax holidays (which have already expired in most cases) could also be considered to improve FDI inflows.



Last year, the government introduced the concept of transfer pricing on domestic transactions. The government may also consider bringing in the concept of advance rulings in the domestic tax scenario as well. "Clarity, certainty and cost effectiveness" is what corporate India wants today. Business plans and projections are made on this basis. Unforeseen tax demands could destroy business models.



Coming back to my earlier analogy, the Finance Minister needs to treat the Budget process as a 5-day test match as against a T20 spectacle. A stable tax regime, it is said, is akin to a stable family life. Hopefully, the Budget follows the same principle as well.



R. Anand is Tax Partner, Ernst & Young.
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