39 changes to the finance law are a meaningful statistic

The annual budget process for FY23 was completed when Parliament approved the Finance Bill 2022 last week after accepting 39 government-proposed amendments to the law and rejecting those proposed by the opposition via vote.

Laws requiring a large number of changes are not uncommon. It is routine for governments to make amendments soon after legislation is tabled in Parliament. But that’s no reason to refrain from asking, what has changed so drastically in 50 days that the government has had to make so many changes to a budget bill supposedly prepared with a 25-year horizon?

As is the case with most legislation, several of the proposed changes have been necessitated by careless wording. Examples are trying to replace “a resident” with “each resident”, “194R” with “194R(1)”, “(a)” with “(i)” and “(b)” with ” (ii)’.

Another type of amendment is to clarify the budgetary provisions. For example, by introducing a definition of the word “pendency” in a specific subsection as follows: “For the purposes of this subsection the term “pendency” means the period from the date of lodging the application for such succession of business in the High Court or …”

Similarly, there is an amendment to clarify the ambiguity of the term “transfer” in a provision in the Finance Act on the tax payable on virtual digital assets. The provision prohibits the offsetting of losses from transactions involving virtual digital assets when calculating tax liability The amendment clarifies that the provision applies to virtual digital assets, regardless of whether they are classified as capital assets or not.

Another class of amendments aims to clarify the budget proposals in response to taxpayer concerns about certain provisions. For example, for not counting taxes and surcharges as deductions. With this provision, the government wants to correct what it sees as an anomaly stemming from years of court rulings that allowed taxpayers to claim severance payments as an expense. This reduced their tax expenses. The finance law presented on February 1 aims to make this correction retrospective, which has upset companies because the proposal entailed a penalty of 50% of the amount of tax saved by claiming the tax deduction. Therefore, the government is proposing an amendment to give taxpayers the opportunity to request non-imposition of a penalty. To do this, they must contact the assessment officials and seek a recalculation of total income less the surcharge or levy as an expense.

While governments need to amend the proposals in response to stakeholder feedback to allay fears, confusion and concerns, and less ambiguity is also welcome, particularly as it reduces litigation in the already overburdened courts, reflects the fact that changes within weeks of the bills being tabled in Parliament reflect badly on the overall approach to policy making. Many of the changes would not be necessary if checks and balances and filters were in place as part of government decision-making processes.

Sloppy drafting, sloppy proofreading, failure to complete consultations with stakeholders and seek feedback prior to introducing bills in Parliament indicate low standards of professionalism and a high government tolerance of frequent changes and additions, and a poor ability to think through proposals carefully, before finalizing decisions. At the extreme, this stance leads to political flip-flops and uncertainty that investors loathe. From demonetization to the Goods and Services Tax (GST), frequent changes that are often confusing, contradictory and distorting, increasing inconvenience and transaction costs for citizens, are the norm, not the exception. And it will remain so unless thinking through the consequences of decisions well before political action is encoded into the decision-making process.

Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman have urged India Inc. to put the shock of the pandemic behind and start investing again. One of the reasons companies are not yet taking the bait and making new investment bets is political uncertainty, a significant risk.

In 2019, the economic report had made suggestions on how the government can improve its political certainty. First, policies should be predictable. To do this, policy makers need to provide guidelines for political stance, and that stance must then be reflected in the policies adopted, and policy implementation free from ambiguity and arbitrariness. Investor confidence in policy predictability can be assured by requiring disclosure of the time horizon over which a policy will not change. Second, the government must measure and report its economic policy uncertainty using a scientifically constructed index that should cover all aspects of fiscal, trade, banking, tax and monetary policy. The third recommendation was to have the quality of policy implementation certified by the implementing bodies, only private companies compete for quality certifications to support their track record.

And if all this is too difficult, the government can make a humble start by hiring competent proofreaders.