Budget 2015: FM needs to make it less taxing to boost India story

By Zulfiqar Shivji
MUMBAI: The new government's reform credentials gives India a distinct niche on the global economic map. Growth prospects seem augmented with inflation moderating from 9 per cent to 5 per cent, fall in crude prices and favorable foreign exchange reserve situation.

Progressive policy announcements and various initiatives like Make in India, Digital India, Smart Cities are looking to provide a comprehensive framework to boost investment and business sentiments.

In the light of this positivism, steps towards ease of carrying business in India and clarity on various tax positions could give the much-needed boost to investor confidence and the budget on February 28 seems to be the source code for businesses and investor community.

Retrospective tax amendment after the popular "Vodafone decision" upheld by Supreme Court in favor of assessee brought a point of instability in the Indian Tax regime. However, a statement by the finance ministry of not imposing any tax retrospectively that will impose a 'fresh liability’, cleared the stance of the new government, adding to investor confidence.

The stance was repeated recently when the government decided not to pursue a litigation involving taxation of share premium due to valuation differences. It would be interesting to see the measures being considered on budget day.

Within the expectation pile-up, one can look for any material changes that are made to benefit foreign collaborations and attracting foreign investors by way of reduction in overall tax rates, MAT and DDT, investment linked benefits, rationalize compliance requirements, reducing aggressive structuring for tax avoidance and making necessary provisions to stop flight of capital to overseas jurisdictions. Any rationalization of tax rates will boost savings by individual tax payers and will encourage the companies to invest in the country.

With respect to M&A transactions, a greater clarity is required involving taxation, earn-out based consideration, applicability of Section 56 in a situation where economic interest of the shareholders’ remaining unchanged, conversion of preference shares and taxation of swaps. Certain guidance is required on GAAR and possibility of ring-fencing the corporate restructuring and family arrangements wherein the control and management of the entities remain unchanged.

Another area of renationalization can be around the various valuation methodologies mentioned in the income-tax act, exchange control and other regulations and requirement of audited balance sheets as on the transaction date. Further, widening of carry forward and set-off of losses in amalgamations to all sectors / industries could fuel inter-restructuring and ability of utilization of tax assets for new business endeavors.

As promised in the manifesto, the Centre has already liberalized FDI in sectors such as construction development, medical equipments and defence. We expect additional attention to sectors such as e-commerce, retail trade, real estate and also in external commercial borrowings for working capital requirements in some of the sectors such as logistics and trading.

Alongside, the government also needs to focus on the effective implementation and clarification for Companies Act on matters such as inter-corporate funding, reduce timelines for corporate restructuring strategies such as merger, demergers. One can also expect the government to lay down a road map and eliminate hurdles in implementation of Goods and Services Tax, the biggest highlight of Indian tax reforms.

(The author is International Liaison Partner & Head of Transaction Advisory Services, BDO India LLP)