The Modi Budget is here and hopes are running high - will the Budget provide a holistic road map for revival, will the finance minister clear the air on the controversial retrospective tax amendment and end what his government claims is an error of tax terrorism. Will team Modi usher in policy reforms to improve the investments climate to attract new investors?
Retrospective taxation is just one of the issues, believes Annat Jain, Managing Director of Acropolis. "Foreign investors globally are concerned with a series of steps that the government has taken over the last four to five years which has created a trust deficit which just fails to go away," he told CNBC-TV18. Apart from that, he feels there is a need for a strategic withdrawal of the government from the economy.
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Despite the expectations, most experts would agree that Arun Jaitley has very little room to manoeuvre. Mukesh Butani, Chairman of BMR Advisors does not expect the finance minister to make any substantial changes in this year's Budget. He, however, adds that this Budget should not be seen as a one-year document, it should be seen as the government's agenda (framework) from medium to long-term perspective.
Foreign investors at their end will be looking out for certainty and clarity from the government through this Budget, says Butani.
Sumit Majumdar, Ombudsman of the CBEC expects the government to give positive and definitive statements on what is going to happen as far as tax reforms are concerned in this Budget.
Below is the verbatim transcript of Mukesh Butani, Sumit Majumdar, Annat Jain and Abhishek Goenka's interview with CNBC-TV18's Shereen Bhan.
Q: Hopes are running high at this point in time, fiscally he is extremely constrained. If you look at the comments that came in from Arun Jaitley just day before yesterday saying that populism does not win you votes, that prudence must be the prevailing thought and the idea that the government should follow, what should foreign investors expect?
Butani: They should tame their expectations - that is the first thing. You are right, expectations are running high. He has got limited room to manoeuvre besides giving benefit to the common man I don't expect substantial changes in this year's Budget. I don't think we should view this year's Budget as a one year document. What is important is that this Budget is likely or expected to set out an agenda from a medium to long-term perspective, for example what is the timeline for roll out of tax reforms.
Q: So high on intent?
Butani: Well not necessarily high on intent because this is an intent by a new government so it is not that they can make a statement that Goods and Services Tax (GST) roll out will happen for example in 2015 and then not make it happen so it should be high on a framework that he is going to lay down for the Budgets ahead of us.
Q: What is the single-biggest thing to your mind foreign investors are going to be watching out for?
Butani: Certainty and clarity. Those are the only two aspects. If these are the precise issues why we have got labelled as a country, the way we have got labelled in the last few years that there is very limited certainty and stability in our tax policies, which is the only single aspect. They are not looking out for any kind of tax incentives. They are looking out for timelines, for rollout of tax reforms and certainty and stability in the law.
Q: As someone who has worked on previous Budgets let me ask you this, foreign investors are not going to be concerned whether excise duties are cut by two percent or hiked by 2 percent, etc. As Mukesh was pointing out they want statements of intent and follow through action from the government to provide a stable policy environment, a stable policy regime and to end what this government has called tax terrorism. Do you believe that we are likely to see steps towards that? Do you believe especially as far as the controversial retrospective tax amendment is concerned we are going to see clarity from this government?
Majumdar: This government will definitely in this Budget will give a positive and definitive statement on what is going to happen.
As Mukesh has said that clarity and certainty these are the two main things and for that your point about the retrospective amendment, very clearly it has to be spelt out.
Q: What can they spell out? Without saying that we are doing a U-turn, we are amending it, what can they do? Do you expect a clarification coming in?
Majumdar: I expect some clarification coming in.
Q: You don't see them doing a U-turn on it?
Majumdar: Whatever it is, certainty should be there and clear cut statement should come out.
Q: On retrospective tax law, what is your best case and what is your worst case, worst case of course is status quo they say nothing?
Butani: I won't put that as a worst case, the best case is obviously repeal of the retrospective law. The not so good case would be to make the law implementable.
Q: After saying end tax terrorism, retrospective is retrograde we don't believe in retrospective taxes do you really see them going down the implementation route?
Butani: Unlikely, but the government has presently a lot of challenges from a constitutional view point as to how do they repeal a law passed by the Parliament. Though there are many instances where this law has happened, take for instance the fringe benefits tax (FBT) law, it was law that was legislated by the previous government which was taken away.
So, I personally don't see a challenge to repeal a law which has had its effects as we can see it. However, the issue is that retrospectivity of the law is being confused now with a single case that the government has in hand.
Q: Maybe they could say - that is a case, that is now going towards arbitration, we have appointed now an arbitrator and let those proceedings continue and this is what we intend doing as far as the broader law is concerned?
Butani: Exactly, so take a holistic view, don't just look at one case in isolation. Look at several cases that could get impacted as a result of the law and it is not just one part of the law we know which is important, take a case of royalties and fees for technical services. There are many aspects of this retrospective law which go much beyond one single isolated case.
Q: Is this the single biggest thing that foreign investors are going to be watching out for; as you speak to foreign investors who are looking at potentially investing in India - is this their number one concern today?
Jain: It is one of the key concerns, it is not the only one. Foreign investors globally are concerned with a series of steps that the government has taken over the last four to five years which has created a trust deficit which just fails to go away. What the government has done or can do is to essentially declare almost like a declaration of intent as we have just spoken about which conveys a path over the next three to five years which it intends to follow.
Q: So what is the path that you would like this government to follow to allay apprehensions that foreign investors have?
Jain: One is certainty of outcome in terms of tax and other laws that they follow over here. Equally important is a strategic withdrawal of the government from the economy. The government has continued to dominate the economy to a degree that it distorts the entire decision making process of the government and foreign investors are not able to make sense of where the opportunities really arise and how they enter and how they exit, it is all convoluted at this moment.
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