The Indian economy has witnessed some unprecedented events in the past few months. At a global level, the Brexit and US presidential elections surprised everyone whereas on the domestic front, the sudden demonetisation announcement created an uncertain economic outlook in the country.
This year’s Budget, likely to be advanced to February 1, is therefore more eagerly awaited than ever before. The key expectations at a broader level are fairly straightforward—fire up growth, encourage digitsation, help the aam aadmi and curb black money.
Last year’s Budget proposals were categorised into nine pillars wherein several recommendations of the Income Tax Simplification Committee chaired by Justice R V Easwar were adopted. Further, steps were taken to reduce the corporate tax rate accompanied by removal of deductions in a phased manner to bring the corporate tax rate in line with the effective tax rate of approximately 25%.
Continuing on these lines, it can be expected that corporate tax rates may be rationalised further for more categories of companies in addition to the new manufacturing companies and companies with smaller turnover (< R5 cr) which are now eligible for a tax rate of 25% and 29%, respectively. This can also be justified by a healthy growth of about 12% in direct tax collections for the first three quarters of this fiscal year. It will be interesting to see if the benefit of tax reduction is also extended to partnership firms and LLPs which are presently taxed at the same base rate as corporates. A lower tax rate will not only bring India in line with international investment destinations such as Singapore but also encourage greater compliance and promote trust amongst the corporate community.
Similarly, there are expectations that a road map will be laid out for the phased reduction the MAT rate, in tandem with the corporate tax rate.
Considering personal income tax collections have grown by over 20% YTD and also to compensate the aam aadmi for the demonetisation hardships, an upward revision in the lowest tax slab of Rs 2.5 lakh and perhaps also the highest tax slab of R10 lakh can be expected. Coupled with this, it is also expected that the investment limits under sections 80C, 80CCC and 80CCD be increased from current R1.5 lakh so as to ease the tax burden of honest taxpayers. Further, to promote the government’s agenda of affordable housing to all, an increase in deduction of interest on housing loan from current Rs 2 lakh may be warranted. For small businesses with turnover not exceeding R2 crore, the government has already announced a reduced presumptive rate of 6% to compute taxable income where the turnover is received through banking channel/ digital means. This is likely to promote digital economy amongst a vast section of the taxpayers in the country.
Also, it will be interesting to see if banking cash transaction tax is reintroduced by the government on cash withdrawals so as to encourage moving to a less-cash economy, thereby promoting digital transactions.
Separately, to encourage and promote start-ups, the government may look at extending the tax holiday period from existing three years to, say, five or seven years subject to a turnover limit. A greater tax holiday period will ensure that start-ups are given an adequate gestation period to flourish during which the tax savings can be ploughed back into the business.
On the issue of capital tax gains, while the holding period for unlisted securities has been reduced from three years to two years for computing the ‘long-term’ threshold, there have been indications from the government that this period may be increased for listed securities from the current one year to perhaps two or three years. If indeed this period is increased, it will mean domestic investors suffer short-term capital gains tax (at present 15%) if the shares are sold within a period of two or three years from its purchase. This may prompt the investor community to remain invested for a longer term, thereby bringing in more stability in the capital markets.
As far as tax deductions are concerned, most of them have been planned to be phased out already over a period of time. On the other hand, incentives for start-ups and patent registrations in India were introduced last year and are expected to be rationalised. Further, with a view to provide an impetus to the manufacturing sector extension of investment allowance for new plant and machinery acquired beyond March 31, 2017, can also be expected.
At a macro level, there are many changes expected on policy issues such as introduction of General Anti Avoidance Rules (GAAR) and Controlled Foreign Corporations (CFC) rules in line with India’s commitment to the BEPS project. However, given the recent unprecedented events the government may want to present a Budget which has a greater appeal and creates the desired impact for a wider section of the population.