Budgeting is a tightrope walk when it is driven by the philosophy ‘prudence lies in adhering to fiscal targets’ and the challenge is to spruce up domestic demand in order to revive growth. Faced with weak global economy against the backdrop, a logical way out was to increase government spending in the rural and small business segment, the segment that drives growth in India; and which is what the finance minister has done. The direct tax proposals show the stress on the finance minister to make both ends meet.
Far looking, indeed some of them are. For example, 10% tax rate on income from specified patent exploitation will be seen as an indicator of government support to indigenous research; three-year tax holiday to start-ups if incorporated till 2019 will be as seen as support to start-ups; so very necessary where the stress is on job creation instead of job seeking. Compliance window for domestic taxpayers to declare past transgressions at a capped rate of 45%, one-time scheme for cases pursuant to retro panel to pay and exit from all litigation and new dispute resolution mechanism mark the government’s earnestness to unlock the tremendous fund lock up in tax litigation even at the cost of letting go of a sizeable chunk. The question is whether the taxpayer will bite the bullet considering the benefits that they will bring to him.
One noticeable feature is the reduction affected in the level of discretion available to field officers; this is evident in the overhaul of penalty provisions where it is now 50% or 200% depending on the type of default as compared to 100% to 300% under the existing regime, changes in the stay of demand regime where stay would be granted with 15% downpayment of demand and there will be access to the senior officer for problem redressal in stay matters.
These steps were badly wanting in administration.
It is heartening to see that several proposals of the Easwar Committee as well as the TARC have been accepted; major ones among them being rationalisation of TDS provisions for small taxpayers, dispensing with PAN registration for foreign companies to avail of concessional withholding tax rate. E-assessment of taxpayers in seven mega cities, expanding the presumptive taxation scheme to turnover exceeding Rs 2 crore and covering professionals in its ambit with turnover limit of Rs 50 lakh. All these will certainly go to improve ‘ease of doing business’ in India. Proposals for certain regulatory changes such as in Shops & Establishment Act to allow businesses to remain open for all seven days is also a step in the right direction.
The country has got a breather from PoEM by another year. This was absolutely necessary considering the plethora of changes in legislative and other fields that businesses were faced with and the advanced level of evidence gathering and handling that a PoEM examination requires.
It was widely expected that there would be changes in the present regime to bring in some aspects of BEPS and that has happened in the form of CbCR in transfer pricing and imposition of a 6% equalisation levy on e-commerce transactions relating to online advertisements. In this, the government picked up one of the options suggested in the BEPS Action Pan 1 to tax the digital economy. However, one wishes more thought were given on whether the party that suffers this levy will be able to get credit against home country taxation. If they face problem in that, considering that the nature of the levy is indirect rather than direct taxation, it will add to the cost of doing business and hence risks the possibility of being seen as an impediment to growth—a risk that the government can ill-afford at this stage.
According to the Budget speech, long-term capital gain will result if unlisted shares are held for at least two years as against three years under the present regime. This should help in drawing more investments to the corporate sector; though one wishes the Gogvernment took a bolder step in doing away with listed-unlisted distinction when the need of the hour is to have more investments into business.
Worldwide, pension funds actively participate in business of economies by way of investing in shares. This culture has been slow in picking up in India. The National Pension Scheme that was formed earlier did not draw much fan-following because withdrawals from the scheme were taxable. The government has taken a step in the right direction by way of exempting 40% of the withdrawals at the time of retirement. This will draw more participation in NPS and consequently make available more funds at the disposal of NPS to invest in appropriate sectors.
The government’s programme to reduce corporate tax rate with simultaneously phasing out exemptions and deductions has started off in this Budget with cap on accelerated depreciation to 40%, reducing percentage of weighted deduction on R&D expenses from 200% to 150% and then to 100%, non-extension of tax incentive for power and R&D sector etc. These are all major curtailments. In comparison, the rate reduction is hardly perceptible. Rate reduction is evident only for new manufacturing companies incorporated after April 2016, where it will be taxed at 25% and smaller companies with turnover below Rs 5 crore will be taxed at 29% but subject to MAT.
The proposal to tax dividend in the hands of shareholders over Rs 10 lakh even though there will be simultaneous levy of DDT is retrograde; it is not clear why the government steadfastly refuses to acknowledge that taxing dividend is a case of double taxation.
By Rahul Garg, Leader, Direct Tax, PwC India