The forthcoming Budget should follow a pragmatic approach to reduce the fiscal deficit, and contain inflation, even while ensuring sustainable growth, says Jayesh Sanghvi, Tax Partner, Ernst & Young. The Indian economy has been showing signs of a recovery with the gross domestic product (GDP) growth, industrial production, and core sector performance, he mentions, during a recent pre-Budget email interaction with Business Line.

“First time since the downturn is there some conviction that the GDP growth rate in the current financial year could be around 7 per cent. However, overall dip in export performance, rising cost of raw materials, weak market demand, and high interest rates are causes for concern. Tax reforms aimed at further stimulating the economy would provide the much-needed impetus for accelerating economic growth,” avers Sanghvi.

Excerpts from the interview

On DTC

While the Budget 2010 is expected to incorporate the recommendations of the 13th Finance Commission, it would also pave way for the implementation of Direct Taxes Code (DTC). With evidence to suggest that decrease and rationalisation of tax rates leads to greater compliance and widening of the tax base, corporate India would anticipate that the corporate tax rate should be lowered, but it needs to be seen how Government manages it amidst growing fiscal deficit.

At the same time one hopes that the much-resisted proposals of the DTC – mainly those related to Gross Asset Tax (GAT), General Anti-Avoidance Rules (GAAR), treaty override and so on – would not be introduced in haste.

On tax incentives for agriculture, infrastructure

It is no secret that India survived the meltdown partly due to the domestic demand. To this end, there is a need to strengthen the agriculture sector that has for too long focused on the price/ subsidies on fertilisers and outlays for irrigation schemes. Long-term plan needs to address availability of quality seeds, access to credit and facilities such as cold storage and transportation. There is a strong case for incentivising investment in the agriculture sector by way of tax breaks on investment/ operations in any part of a farmer’s value chain.

At the same time, incentivising capital investments for the infrastructure industry would boost overall development. The retrospective amendment to Section 80-IA of the Income-tax Act, denying tax holiday to an enterprise in respect of profits from execution of works contract resulted in ambiguity. The provisions should clearly articulate the Government’s intentions to provide tax incentives to developers of infrastructure facility.

On benefits to IT industry, eco-friendly initiatives

The recent economic uncertainty has had an adverse impact on the Indian IT/ITES sector, which is a significant foreign exchange earner. There is certainly a case for extending the benefits to this industry.

Furthermore, for providing impetus to the carbon credit developers, creating eco-friendly environment and at the same time earn foreign exchange, carbon credits should be treated as capital reserve free from any taxes.

On the preparation for IFRS convergence

Convergence with IFRS (the International Financial Reporting Standards) will require significant changes/ clarifications on certain taxation issues relating to fair valuation of fixed assets, computation of book profit under MAT, taxes on business combinations and so on, and the Budget needs to address the same and assure the corporate sector, a hassle-free convergence.

On managing the parallel economy

The Budget would also have to address the 16-year high fiscal deficit of 6.8 per cent of the GDP. Extraordinary times demand extraordinary action. This is not an attempt to stir up the hornet’s nest regarding the justifiability or desirability of an amnesty scheme for the tax evaders.

Undoubtedly, a Government can ill-afford to give an impression that it is willing to look away while the parallel economy flourishes and at regular intervals allow legit means of flushing the system with amnesty schemes.

While there can be no scientific way to estimate the size of this parallel economy, there is consensus that it is astounding. The only solution to this malaise is stemming corruption that breeds the parallel economy, which is achieved by vigilant enforcement and effective punishment.

If clear action is demonstrated in this direction, there is a case for considering a one-time amnesty for the evaders to commit their ill-gotten wealth to help the economy in its moment of need.

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