Though the Budget session will go down as one of the worst in recent history—on one occasion in the past, though, expenditure proposals were not even examined by Parliamentary sub-committees—the good news is the government made several important changes and stood its ground on some others despite industry pressure. The most important change, of course, was in clearing the confusion over the Mauritius tax residency certificate (TRC)—the Budget’s fine print had said that a Mauritian TRC would no longer be considered sufficient for purposes of getting a tax exemption from Indian authorities. How important it was to fix this can be seen from the fact that while FII investments in equity were $8.6 billion in January and February this year, they fell to just $1.7 billion in March and to just $1 billion in April. While the Prime Minister’s Economic Advisory Council (PMEAC) has projected $100 billion current account deficit (CAD) for FY14, it projects $18 billion of FII inflows—well, in the first month of the year, inflows were just $1 billion, making it vital to ensure that nothing was done to spook FII sentiment especially when the India sentiment is, in any case, weak.
Reducing the withholding tax on FII investments in rupee-denominated bonds is another important step, and in keeping with the announcement that, from April 1, the sub-limits on FII investments would be collapsed into just two. In FY13, a total of $8 billion of FII investments took place in rupee-denominated debt where the good thing is that the exchange risk is with the FII whereas in the case of ECBs the risk lies with the borrower. Indeed, till the finance minister made this important change, India Inc, which raised around $12 billion from ECBs in FY13, was paying a withholding tax of 5% on interest on this as compared to 20% in the case of rupee-denominated FII debt. This was a distortion that actually made life more difficult for not just corporate India but also made little sense given FII investment in rupee-denominated debt has no exchange risk for the country.
Not reducing the duty on SUVs as demanded by industry on grounds they were being bought in rural areas—the proposal doing the rounds was to roll back the duty on lower-value SUVs—makes sense given diesel vehicles enjoy an advantage of being run on highly-subsidised fuels. Middle-class Indians buying gold will be disappointed with the decision to levy a 1% tax on those buying even less than 10 grams of gold, but this makes sense since people had begun to make several transactions of under 10 grams each to avoid the tax. Also, one way to bring back savings into financial instruments is to discourage investments in instruments like gold—apart from the fact that investments in gold mean that much of savings are not available for lending to industry, higher gold purchases ($50 billion in FY13) are mostly responsible for the dramatic deterioration in the CAD over the last few years.