It is widely held that the latest budget is more political than economic — a polite way of pointing out that corporate India’s wish list was not entirely fulfilled.

However, going beyond television studios and drawing rooms, we may see that this budget is essentially a clever and practical balancing act. It provides generous allocations for sectors crying for attention, tries to make available basic needs to a large section of society and does this without significantly denting the corporate sector or the investment cycle.

Revenue collection is far less brutal that it could have been, given the generous spend commitments.

Hybrid instruments

There has been a key policy change. A seemingly innocuous paragraph in the finance minister’s speech declares that the Government will evolve a separate policy for hybrid instruments. Why is this a vital change? Globally, sophisticated investors use different types of instruments to invest in countries. As against pure equity that has unlimited upside and downside, or pure debt that promises fixed returns, investments occur through a ‘hybrid’ mechanism in a majority of cases. The investor and the investee work out a contractual mechanism of risk and return sharing and embed that in the investment instrument. Thus, an investor may agree to invest $1 billion in an infrastructure project if it is assured capital protection, even if it has to concede an upside cap. The investee based locally is more aware of the on-ground reality and may be happier for an investor to come in with such a structure so that it enjoys higher upside.

Under the current regime, such instruments are difficult to operationalise on a cross-border capital flow. Our regulations such as pure equity or pure debt and embedding risk reward sharing frameworks have their own complications. Addressing this openly is likely to open vast pools of foreign capital into the economy and hence, the cleverly worded para 134 deserves greater attention.

Tax rates

Now for the second point. Lots has been made of the fact that the tax rate has not come down. Ideally, this would have spurred a prosperous spending and investing cycle. However, in terms of the real constraints imposed by an absolutely necessary spend allocation, the budget has actually done pretty well by not taking the headline tax rate up. In fact, it has extended the benefit of the 25 per cent concessional rate to a larger category of MSMEs. And then has gambled a bit with a 10 per cent take on the listed equity gains — to arrest a possible sell-off, past gains have been grandfathered and only gains arising prospectively would be taxed. Having kept STT intact, the Government has left its options open going forward.

Those who point to the US and UK tax rates have missed some of the details — those rates apply pretty much to global incomes and come on top of other taxes, all of which our government has resisted introducing.

The one area where perhaps the Government could have done a bit better on the tax side is the ‘rationalisation’ area. While IBC cases have seen some relaxation, the entire framework of Section 56 seems to militate against the ‘listening-and-responding’ philosophy of this government.

Therefore, this budget manages to responsibly retain sanity in the current environment, where certain allocations were a foregone conclusion. And even if slightly less grand, the absence of hugely populist measure like inheritance tax or a super-rich tax makes sure that the capital creation cycle is not fundamentally disturbed.

The writer is partner and head, M&A Tax, KPMG in India

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