Budget 2015-16: Dependance on indirect tax collection disturbing: JPM

Sachin Menon of KPMG India was a bit surprised with the nominal increase in excise duty from 12.36 to 12.5 percent because if in the impending GST regime, tax on manufactured goods is supposed to come down then why increase it now.

This excise duty increase is going contrary to the Make in India campaign, adds Menon.

Below is the verbatim transcript of the discussion.

Latha: There is a significant move even on the macroeconomic front, the fiscal deficit target has not been adhered to, it has been pushed back by one year all the targets and Reserve Bank of India (RBI) will be clearly an inflation targeting bank with that 6 percent target being given for the current year by parliament or by the government, first thoughts on these and other things?

Aziz: There are clearly elements in the Budget which are very progressive, very forward looking but then they are mixed with aspects which I don’t particularly like but going back to the points that you have made that the move of getting the Central Banking Act to be changed and inflation target to be formalised. The move to get in the independent debt management office, those are clearly positive on the monetary fund.

I am a bit more sceptical about the sense that we are sort of moving away relying less and less in direct taxes and more and more in direct taxes. The problem with India’s tax regime was never that we did not collect enough tax in the indirect tax bracket. We did not collect very much in the direct tax bracket but if you look at what we are doing on the direct tax bracket, I will concede to you that we do not know what the exemptions are but look at the rates, we are cutting down rates and we are narrowing the base in terms of giving more exemption on the income tax front. So the reliance on direct tax is becoming less and less and we are more and more relying on indirect taxes, services taxes are going up, excise duties are going up, import duties are going up, they may have other reasons to it but the shift towards getting away as much as possible from the difficult thing which is direct tax collection. I find that disturbing.

Latha: Section 6 of Foreign Exchange Management Act (FEMA) is getting amend and all capital controls on equity instruments, issues is now going away from Reserve Bank of India (RBI) to the government. Now does this mean all this option pricing for which we used to get clarifications from RBI now are out of the RBI net and is that good or bad as a citizen?

Kanabar: Two separate things. First, we are seeing a merger of foreign portfolio investor (FPI) and foreign direct investment (FDI) limits therefore we are seeing a composite limit now, which is something which industry has been asking for a very long time. Second, we are seeing this moving away from RBI to government and this is a welcome move I will tell you why? As of today there were things which were falling between two stools; there was policy announcement by the government, then RBI notification took period of time to come and I can give you innumerable examples foreign investments in Limited Liability Partnership (LLP) is a classic example where just because the two arms of the government one of talking to each other things were just got delayed. So it is just moved from two to one and it is a welcome step.

Latha: What are your thoughts on the tax changes?

Ranina: I think the tax changes are extremely beneficial. He has taken care of every section of society. His emphasis on the poor, on the middle-class, the older generation, the new pension schemes, I think all these are very path breaking proposals. Making the people of India more dependent on pension in future because they are going to have a longer life – all these are excellent measures which have been announced.

I think he has given a lot of sympathetic trust towards vulnerable sections of society. So, I think it is a very welcome Budget apart from the fact that corporate taxes are going to be brought down to 25 percent in the coming four years. I think this is very good proposal which the finance minister has done. I am very happy with the Budget.

Senthil: I saw your earlier press release where you said you welcome the timetable but they delayed by a full year now?

Menon: Yes, but there was enough reservation in the mind of the corporate whether we will be in a position to commit that or implement that from April 1, 2016. As a result whatever discussion happening on goods and services tax (GST) was taken very lightly and I am sure that with this announcement it will gear momentum.

Senthil: But we have had deadlines before, so what gives you confidence that this one will be met?

Menon: It is of course a challenging task. The government has to move faster because everything is hinging up on whether they are in a position to pass this Constitutional Amendment Bill in the Budget session. If that happens then things can happen faster, so that is the key as far as GST is concerned.

For entire discussion, watch accompanying videos.