Budget 2015: Black money moves can up tax-GDP ratio: Ashok Wadhwa

By Ashok Wadhwa, CEO, Ambit Holdings

With the new government having settled down after coming into power in May, 2014, expectations from businesses and investors had sky-rocketed for blockbuster policy measures and re-validating the business community's faith in the NDA. Positively, the Budget did adopt a fairly reformist tone. With this Budget being the most awaited financial statement by the new government, the finance minister guided towards a clear path going forward.

He, early on in his Budget speech, pre-ambled that his focus would be around five key areas: a) agriculture reform; b) boosting infrastructure spending and growth; c) encouraging ' Make in India'; d) building fiscal discipline and e) providing a social net for the common man.

Two very interesting points on tax reform were made by the finance minister — the path towards goods and services tax and money-laundering. Whilst the government will strive to achieve its April 1, 2016 deadline for goods and services tax implementation, the challenges towards achieving the same are well-known. The first steps towards tax rate rationalisation were made – service tax rates were hiked from 12.36% to 14% and excise was increased from 12% to 12.5% while several exemptions were withdrawn.

The next Budget will likely see a further hike in both taxes, as they converge to a rate closer to 16%, making the environment more conducive for goods and services tax. Secondly, the move to attack black money overseas could be a revolutionary legislation in the Indian context. Whilst the provisions sounded draconian in nature, it is likely to instill fear in the largest and boldest of individuals. This can also meaningfully boost tax collections and, in one shot, boost the tax-GDP ratio by 400-500 bps. One hopes that this is correctly implemented and not abused like several other well-meaning legislations.

For the first time, a finance minister has laid out a four-year direct tax roadmap in the Budget. He intends to reduce corporate tax rates to 25% over the next 4 years while at the same time, do away with several exemptions so as to increase the effective tax rate from 23% to 25%. He highlighted his focus on boosting manufacturing and advancing 'Make in India'. Infrastructure was given increasing priority with dedicated funds set up for increasing infrastructure activity in the country as well as making significant allocations towards infrastructure.

Facilitating four ultra mega power projects of 4,000 MW on a pre-cleared basis evidently brings out the seriousness with which the government is focused towards supporting infrastructure growth. Corporatization of ports and disinvestment of PSUs should also support building efficiency into the Indian systems. The focus to improve the ease of doing business in the country was also given strong impetus. India has been ranked 142 among the 189 countries as per the World Bank — not a fact we shout about.

FM Arun Jaitley proposed appointing an expert committee to prepare a draft legislation for obtaining regulatory clearances expeditiously. Besides, he has recently launched an ebusiness portal which integrates 14 regulatory permissions at one source and intends to meaningfully reduce the number of approvals required across businesses. On the fiscal discipline front, the FM intends to achieve a fiscal deficit of 4.1% in FY15 and reduce it to 3.9% in FY16 and 3% by FY18. It is commendable that he opted for the 3.9% deficit number and not the expected 3.6%, a step his predecessors were unlikely to have followed.

In sum, whilst the Budget did not satisfy all, with no blockbuster reforms, it slowly walked the path of creating a suitable business environment in India as well as setting guidelines for long-term tax and policy reform. It moves us slowly towards creating a more plug-and-play environment, making doing business in the country easier and supporting economic growth.