MARCH 17, 2015

By Shailesh P Sheth, Advocate

"THE budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign land should be curtailed, lest Rome become bankrupt."

[Cicero - 63 BC]

"He came, He announced and He conquered!" This probably best describes the first full-year Budget presented by the Finance Minister, Mr. ArunJaitley! It may not have been a performance 'par excellence' - unlike his illustrious predecessor's - by the Lawyer-turned Politician-cum-Finance Minister, but when the 'show' was over, he left the audience with strong but mixed feelings of delight, disbelief, disappointment and dismay!

A 'neatly bundled package' delivered by FM has been drubbed as 'dull', 'drab affair', 'damp squib' or even 'directionless' by the critics and hailed as 'growth oriented' or 'catalyst for growth' by the supporters, in equal measure.   May be, the truth is not on either extreme. May be, the truth is not even somewhere between these extremes.  May be, the truth lies beyond that.

Undeniably, most of the euphoria created by the Budget is due to various 'Macro Level' policy proposals announced by FM.  On the other hand, his 'Micro Level' proposals - particularly on Indirect Tax side - have not enthused many and have actually left the trade, industry and common man a much worried lot.

One cannot dispute various policy initiatives announced by FM while claiming to 'lay out the road map for accelerating growth, enhancing investment and passing on the benefit of the growth process to the common man, woman, youth and child: those, whose quality of life needs to be improved'. Such rhetoric would invariably be present in the Budget Speech delivered by any Finance Minister on behalf of any Government of the day and there is no reason why the present FM should be an exception?  However, implementation of these policy initiatives requires funds and here, many faultlines are visible in the arithmetic of Budget. Laudable though the policy initiatives of the Budget, if one were to pierce through the 'smoke-screen'  created by the numbers, projections and promises, the true picture that is revealed tells  an  altogether different story.

GDP Growth - 'Not Stratospheric, after all!'

Riding on the revised definition and base year released by Central Statistical Organization (CSO), FM has estimated GDP growth for 2014-15 at 7.4%.  This represents a marginal rise of 0.5% over the GDP growth of 6.9% in 2013-14 (on old base) as per the data put out by CSO.  This certainly does not reflect a 'dramatic turnaround' of the economy in a short span of 9 months as claimed by FM.  For 2015-16, GDP growth is expected to be between 8 to 8.5%, again a marginal rise of 0.6% to 1.1%. This would hardly justify the tons of confidence exuded by FM that 'India is about to take-off on a faster growth trajectory once again.'

In fact, Economic Survey, 2015 is more realistic on this count and acknowledges that 'India should be viewed as recovery economy rather than surging economy'.

FM, while being optimist, has also taken some solace in the fact that 'the world is predicting that it is India's chance to fly.' (Courtesy: 'India's chance to fly' - The Economist - Feb. 21^st - 27^th 2015) At the same time, the Paper has also noted that for India to become 'global economy's high-flyer', FM must focus on three inputs: land, power and labour and has emphasized that these three critical inputs require 'bold reforms and political courage to match'. No doubt, the limping Power Sector urgently requires bold initiatives and prompt action. However, whether, in this country with extremely scarce land and abundance of labour, the types of reforms which are being talked about in respect of land and labour are advisable at all is a highly debatable issue.Any way, it would be interesting to see whether and how FM meets the challenges on these three critical issues head-on in the coming days. 

Fiscal Deficit - 'A target everyone loves to miss!'

FM has revised his fiscal deficit target for 2015-16 from 3.6% to 3.9% as he needs funds to increase public investment.  Further, he has to also take into account 'the drastically reduced fiscal space, uncertainties that implementation of GST will create and the likely burden from the report of the 7^th Pay Commission'. The mention of GST here is bit curious since GST is expected to be introduced in 2016-17 and it is difficult to understand why it should have any bearing on the fiscal deficit target for 2015-16.

Having said so, 0.3% (i.e. 3.9% minus 3.6%) of GDP translates into an additional borrowings of nearly Rs. 42,300 crore. It may be pointed out here that as per Budget Estimates (BE) 2015-16, GDP is projected at Rs.1,41,08,945crore. [Source: Budget Documents 2015-16]. Let us see how this additional sum is proposed to be used and whether the Budget Documents provide any clue in this regard. It will be observed that the Non-Plan Expenditure for 2015-16 is projected to increase to Rs.13,22,200crore as per BE 2015-16 from Rs.12,13,224crore as per Revised Estimates (RE) 2014-15. This marks an increase of Rs.98,976crore in absolute terms.  However, significantly, the Plan Expenditure is projected to decrease from Rs.4,67,934crore  as per RE 2014-15 to Rs.4,65,277crore as per BE 2015-16 i.e. a decrease of Rs. 2,657 crore. It thus appears that the additional borrowings of Rs.42,300crore will entirely be eaten up by Non-plan Expenditure. FM's claim, therefore, that the 'additional fiscal space will go towards funding infrastructure investment' becomes debatable. This also raises the question of quality of fiscal deficit.

If one turns to revenue deficit, it is projected to decrease only by 0.1% i.e. from 2.9% as per RE 2014-15 to 2.8% as per BE 2015-16.  In absolute terms, however, it goes up by Rs.31,986crore i.e. from Rs.3,62,486crore as per RE 2014-15 to Rs. 3,94,492 crore as per BE 2015-16.  This reflects highly poor quality of deficit.

Finally, with GDP growth projected at 8 to 8.5% for 2015-16 and global crude and other commodity prices ruling low, was there really a need to stretch the fiscal deficit target by one year?

Infrastructure investment - 'Living on borrowed money!'

One of the proposals announced by FM which was greeted with all-round cheer has been his commitment to provide a booster-dose to the infrastructure sector.  Acknowledging that 'the major slippage in the last decade has been  on the infrastructure front' and stressing the 'pressing need to increase public investment', FM has proposed increased outlays on both the roads and the gross budgetary support to the railways, by Rs.14,031crore and Rs.10,050crore respectively. Significantly, the CAPEX of the Public Sector Units is expected to be Rs.3,17,889crore, an increase of approx. Rs.80,844crore over RE 2014-15. 

There is no denial of the fact that the crippled infrastructure is the 'bane of Indian economy'  and a serious obstacle to the path of recovery. However, the Budget documents 2015-16 reveal that the massive increased capital expenditure by Public Sector Enterprises (PSE) at Rs.3,17,889crore is expected to be funded through borrowings. The capital outlays of PSEs at Rs.3,17,889crore in 2015-16 represents an increase of Rs.80,844crore over RE 2014-15 of Rs.2,37,045crore.   The borrowings through issuance of Bonds/Debentures are estimated at Rs.61,395crore  in  2014-15 (RE), the same shows a significant increase to Rs.1,17,577crore in 2015-16 (BE) i.e.  an increase of  Rs.56,182crore in absolute terms that represents a whopping 91.5% of RE 2014-15 at  Rs.61,395crore.  This also shows that nearly 69% of the increase of Rs.80,844crore in capital outlays of PSEs is expected to be funded through issuance of Bonds and Debentures. The moot question here is whether the Government would be able to actually raise the debt even while planning grandiose plan to revive the infrastructure sector? The prospects of PSEs being able to raise such massive fund through Bonds/Debentures appear to be quite ominous. The onus would then fall upon the country's Banking Sector which is already facing serious challenges of varied nature at present.

In such a scenario, the FM's claim to rejuvenate the ailing infrastructure sector by pumping in massive dose of funding may be debatable.

Tax Revenue Estimates - 'Numbers bare it all..!'

Given below are the figures of Tax Revenue Estimates for 2014-15 (BE); 2014-15 (RE) and 2015-16 (BE) and the quantum of variations therein [Source: Budget Documents, 2015-16]

(Rs.wherever in crores)

The above tax revenue estimates reveal some interesting facts.

Firstly, the gross tax revenue receipts for 2014-15 are expected to fall short of BE by a whopping Rs/1,13,133 crores or 8.9%.  What is, however, significant is the fact that the RE in 2014-15 put the revenues from Corporation Tax, Excise duty and Service Tax substantially lower over BE 2014-15 by Rs.24,926crore, Rs.21,630crore and Rs.47,841crore or 5.52%, 10.44% and 22.15% respectively.  If the economy has been 'dramatically turned around' and it is on 'faster-growth trajectory once again' as claimed by FM, then this is nowhere visible in the revised estimates of Tax Revenue Receipts, notably Corporation Tax, Excise duty and Service Tax.

Secondly, despite the drastic reduction by 8.9% or Rs.1,13,133crore in absolute terms in estimated Gross Tax Revenue Receipts in  2014-15 (RE) over BE 2014-15, FM expects the Gross tax revenue to increase by a massive Rs.1,98,099crore in FY 2015-16 or by 15.83% over RE 2014-15.  It is also pertinent to note that whereas Corporation Tax is expected to rise by Rs.44,549crores or 10.45% in BE 2015-16 over RE 2014-15, revenues from Excise duty and Service Tax are estimated to see phenomenal increase by Rs.44,328crore or 23.90% and Rs.41,642crores or 24.76% respectively over corresponding receipts in  2014-15 (RE).  It is difficult to comprehend the basis for such massive increase in estimated tax revenues in 2015-16?  Isn't FM being over-optimistic?

Please note that economy is not projected to grow at a scorching pace in 2015-16.  Rather, nominal GDP is expected to grow 11.5% (including inflation) in 2015-16, exactly at the same rate as in 2014-15.  That being the case, where is the justification for such substantial estimated increase in gross tax revenue in 2015-16?  How can we have increase of 15.6% in Gross Tax Revenue in 2015-16 at nominal GDP growth rate of 11.5% when the same growth rate has resulted in lowering the estimates of Gross Tax Revenue by 8.9% in 2014-15?

The answer probably lies in the changes effected or proposed relating to Excise Duty and Service Tax.  The marginal increase of 0.50% in the rate of excise duty and the proposed increase of 2% in the rate of Service Tax [both, on the pretext of withdrawal of Ed. Cess and S & H Ed. Cess] coupled with withdrawal of a few Service Tax exemptions and bringing some new services under the tax net may actually bring home a substantially higher revenue for FM or he apparently believes so.  Let us not lose sight of the fact that estimated increase in revenue from Excise Duty and Service Tax taken together in 2015-16 stands at nearly 43.39% of the estimated increase of Rs.1,98,099crore in the gross tax revenue for the year.  This estimated increase in revenue from Excise Duty and Service Tax cannot be attributed to any substantial spurt in the economic activities which are expected to remain quite subdued in 2015-16. This is borne out by a rather modest increase of 10.45% estimated in revenue from Corporate Tax in 2015-16 (BE), though in absolute terms, the increase looks attractive at Rs.44,549crore over RE 2014-15.  Thus, the drag on Corporate profits is expected to be there even in 2015-16 belying the growth claims.

Thirdly, the projections from Taxes on Income from non-corporate assessees i.e. personal Income Tax also make quite an interesting reading. The receipts from this tax is estimated to be lower by a meager Rs.5,667crore or 1.99% in 2014-15 (RE) over BE 2014-15. However, in 2015-16 (BE), it is expected to surge by an eye-popping Rs.48,768crore or 17.50% over RE 2014-15. Does this mean widening of tax base? But then this seems quite unlikely as the Budget hardly has any concrete proposal to widen the tax base. On the contrary, FM claims to have extended substantial tax reliefs to the individual tax-payers who form bulk of the non-corporate assessees. It is therefore, rather intriguing that such tremendous increase is estimated in tax revenue from non-corporate taxpayers!

Revenue impact of Tax Incentives- "'Giveaways' or 'Takeaways'?"

Revenue impact of Tax incentives was laid before the Parliament for the first time during Budget 2006-07 as Annexure – 12 of the Receipt Budget 2006-07 by way of a ‘Statement of Revenue Forgone'.  Since then, this statement has formed an integral part of every Budget by way of Annexure-12 of the Receipts Budget and also by way of a separate Budget document titled "Statement of Revenue Forgone". In the present Budget, it has been termed as the "Statement of Revenue Impact of Tax Incentives under the Central Tax System" since what is actually being analysed is the revenue impact. [Source: Budget Document 2015-16]

The estimates of revenue impact of tax incentives or ‘tax expenditures' are made mainly on the basis of following assumptions: -

(a) The estimates and projections are intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions and similar measures.  The estimates are based on a short-term impact analysis.  They are developed assuming that the underlying tax base would not be affected by removal of such measures.

(b) The impact of each tax incentive is determined separately, assuming that all other tax provisions remain unchanged.

[Source: Budget Document 2015-16]

The statement forming part of Budget documents provides estimates of ‘Revenue Impact of Tax Incentives', both on Direct & Indirect Tax front, for financial year 2013-14 and also for financial year 2014-15 on the basis of tax expenditure figures of the F.Y. 2013-14 and are summarised as under:

Revenue Impact of Tax Incentives (Direct Taxes) in F.Y. 2013-14 and 2014-15

                                                                                                                        (Rs. in Crore)

*Based on E-Returns filed with the Income-Tax Authorities as on 30.11.2014.

Revenue Impact of Tax Incentives (Indirect Taxes) in F.Y. 2013-14 and 2014-15

(Rs. in Crore)

It will be seen that the various exemptions, etc. have cost the exchequer an estimated Rs.57,793crore and Rs.35,254crore in 2013-14 in the form of Corporate Tax and Personal Income Tax respectively. The corresponding figures for 2014-15 are estimated at Rs.62,398crore and Rs.40,424crore respectively. However, compared to Direct Taxes, the revenue impact  of tax incentives is quite huge so far as Indirect Taxes are concerned. As against the actual total collection of Customs and Excise Duty of Rs.3,42,283crore in 2013-14, the total incentives offered in 2013-14 has been estimated at Rs.4,56,937crore. The picture is no different in 2014-15. The RE 2014-15 puts the total collection of Customs and Excise duty at Rs.3,74,193crore whereas the revenue impact of tax incentives in 2014-15 is estimated at Rs.4,86,452crore.

It is, therefore, evident that at least, on Indirect Tax front and particularly in Central Excise, the 'Exemption raj' still prevails and this is only going to queer the pitch far smooth introduction of a comprehensive GST regime next year.         

Corporate Assessees - "A curious case of 'Vanishing Companies'!"

As stated above, there are 5,64,787 Corporate Assessees based on the E-Returns filed with the Income Tax authorities as on 30.11.2014 for F.Y. 2013-14 (AY 2014-15) [Source: Budget Documents, 2015]. This figure includes profit-making companies (total 3,10,716), loss-making companies (total 2,22,447) and the companies reporting nil profits (total 25,624). However, as per database of Ministry of Corporate Affairs, there were total 13.94 lakh registered Companies as on 31.03.2014 out of which 9.52 lakh companies were active. Total registered Companies include 4.42 lakh closed, liquidated, dormant and non-traceable entities. On the other hand, only 5.64 lakh companies have filed Corporate Tax Returns as on 30.11.2014. It mean that 41% of active registered companies have not been filing Income-Tax Returns. Neither the status of these non-filers is known nor is it known whether any steps are being taken to 'trace and trap' this 'vanishing breed'!

To sum up…

It is thus evident that even the much appreciated 'macro-level' proposals of the Budget have some serious flaws and inherent contradictions. The arithmetic is apparently flawed and the numbers are not convincing. But, as the cliché goes in the corridors of Courts, 'if you can't convince the court, then confuse the court!'. Naturally, FM, a seasoned lawyer  himself, has certainly presented a Budget with various projections that may not be convincing but are confusing enough to keep at bay any criticism!

Underpinning the various projections and policies of the Budget are two  fundamental assumptions viz.

++ that, the target of  Tax Revenue Receipts would be achieved (implicit in this assumption is  the assumption that GDP would grow at 8 to 8.5%); and

++ that, the ambitious target of receipt of Rs.69,500crore through Public disinvestment  and strategic sell-off would be met.

But then, as has been famously said by Jane Austine 'a Budget is as good as its assumptions'. The sharp reduction in estimated tax revenue in the current year i.e. 2014-15 and the moderate GDP growth in past few years do not inspire much confidence that the above assumptions would hold good. At the same time, much hinges on the Indirect Tax revenue estimated in 2015-16 and here FM has rather deftly articulated his Budget proposals, both relating to Central Excise and Service Tax.  The proposals are aimed at generating substantial tax revenue and at the same time, significantly improve the liquidity of the cash-starved Government! The major Indirect Tax proposals of the Budget may have to be viewed in this light.

"This budget is like an Enron budget - smoke the numbers, cook the books, hide the truth and hope no one finds out."

[Senator John Kerry]

(The author is Sr. Advisor - Indirect Tax BDOIndia  LLP.)

(To be concluded)