India Union Budget 2010-11: A reflection

Tuesday, April 12, 2011 | Posted by: Grant Thornton
Categories: India, India Watch Issue 12 | Tags: business, tax, India, finance, investment, economy, Grant Thornton, global, governance, growth, India Watch, UK, infrastructure, South Asia Group, Grant Thornton India, GDP, South Asia, economic, inflation, IT

The Union Budget 2010-11 was tabled in the backdrop of an improving economic scenario both within India and globally, but fiscal consolidation and expenditure discipline have still been rightly treated as the foremost priorities in this budget.

The budget was keenly anticipated amidst expectations that it would signal a return to the heady days of 9% GDP growth. While the reaction to the budget has been mixed, it has been generally viewed as balanced.

If anything, this budget echo’s the tenets of last year’s budget which are - inclusive, equitable and sustainable growth based on fiscal prudence. The increase in slabs for individuals will ensure that they have more to spend which will spur consumption. The need for improving infrastructure in the country has been addressed with 46% of the budget allocation being earmarked for infrastructure development. Addressing the key issue of infrastructure financing, this budget brings forth some welcome initiatives in the form of tax-free bonds and raising the investment limits for Foreign Institutional Investors (FIIs) in corporate bonds with residual maturity of more than five years issued by infrastructure companies by US$20 billion. The investment inflows are likely to improve further with specified mutual funds now being permitted to raise funds through foreign investors.

However, there are reasons to be cautious. Despite the renewed focus on disinvestment, the burgeoning fiscal deficit ensures that there is very little leeway for additional expenditure in providing a stimulus to the economy. While reducing and eventually doing away with subsidies to petroleum and petroleum products is a long term necessity, in the short term it will further spiral the existing food price inflation.

The increase in Minimum Alternate Tax to 18% and roll back of the reduction in excise duty will adversely affect the bottom line. On a positive note, the policy statement on introduction of the Direct Tax Code, Goods and Services Tax and Companies Bill is a clear indicator that tax and regulatory reforms are very much on the radar.

To quote the Finance Minister from his budget speech “The opportunity is great. The time is right.’

Rationalisation of key policies

• Laying down fiscal road map for next five years through amendment to Fiscal Responsibility & Budget Management Act, 2003

• Implementation of Direct Tax Code (DTC) effective from 1 April 2012

• Implementation of Goods and Services Tax (GST) proposed in April 2011

• Simplified Foreign Direct Investment (FDI) regime and liberalised pricing & payment of technology transfer/royalty norms introduced

• Further liberalisation in Foreign Direct Investment (FDI) expected

• Emphasis laid on improvement in Corporate Governance and regulation by Introduction of New Companies Act

• Strategy to deal with the generation and circulation of black money

• Discussions concluded on Tax Information Exchange Agreements with 11 jurisdictions

• Double Taxation Avoidance Agreements with 13 countries

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Partner, Tax

Grant Thornton India

Other articles in this issue of India Watch include:

Grant Thornton Index shows strength against other indices

New M&A wave witnessed by India Inc.

Sustained growth expected for India economy

India business optimism soars but skills shortage threatens growth