The Union Budget is preceded with a number of expectations of various stakeholders. The expectations this year are even more given the temporary slowdown expected in the economy on account of demonetisation. The government’s stated policy objectives such as reducing the corporate tax rates, bringing in certainty in tax law and a non-adversarial tax regime further add to the expectations of the corporates.
Corporate tax rate
One of the most anticipated announcement in the upcoming budget is the reduction in corporate tax rate. In his previous budget speeches, the finance minister had clearly laid down the government’s vision to reduce corporate tax rates from 30% to 25% with a simultaneous and phased withdrawal of various direct tax exemptions. In this direction, a lower corporate tax rate of 25% was introduced for new manufacturing companies which are incorporated on or after March 1, 2016, provided they do not claim other exemptions in the 2016 budget. The corporate tax rate was also lowered to 29% for companies with turnover not exceeding R5 crore. However, the general corporate tax rate still remained same at 30%.
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The finance minister may only bring down the corporate tax rate in the range of 27-28%, even though the expectation of India Inc. would be to see a further lowering of rates at the earliest possible. A lower tax rate would bring some cheer for India Inc as it would help neutralise any short term slack in growth due to demonetisation. A lower tax rate would also bridge the gap with the global norm for corporate tax rates in various countries and help make the domestic industry more competitive.
India Inc would also like to see a reduction in Minimum Alternate Tax rate from the current 18.5% even though presently no road map has been provided by the government for such a reduction.
Incentives to promote less cash/digital economy
The government is keen and determined to move the direction of the economy to a digital or less cash economy. The demonetisation drive resulted in people trying the electronic payment options. The Government looks resolute to leave a mark as it forges ahead with all measures necessary to achieve a more transparent and digital economy. A robust tax policy including tax incentives and exemptions to promote the cashless and electronic payments may prove to be a milestone in achieving this vision. The government has already proposed to reduce the deemed profit rate from 8% to 6%, with respect to total turnover or gross receipts received through banking channel or digital means for the current financial year. This tax relief applies to any individual, HUF (Hindu undivided family) or a partnership firm other than limited liability partnerships (LLP) carrying on any business other than transportation, agency, brokerage and commission and having a revenue of R2 crore or less. The necessary legislative amendment in this regard shall be carried out through the Finance Bill, 2017. On the same lines, some further incentives could be expected in the Budget to give an impetus to digital economy.
Expansion of equalisation levy
Considering the potential of new digital economy and the rapidly evolving nature of business operations, a new levy called “Equalisation Levy” was introduced with effect from 1 June 2016 @ 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India. The aforesaid levy initially covered online advertisements and provision of digital advertising space or facilities.
The finance minister, in his 2016 budget speech, had stated that the Equalisation Levy was aimed at taxing Business to Business (B2B) e-commerce transactions. The Government may expand the scope of the so-called equalisation levy in the upcoming Budget, seeking to bring more digital economy transactions under the tax net. The ambit of equalisation levy on e-commerce transactions could be expanded to include transactions such as downloading of songs, movies and books, online consumption of news, software downloads and online sale of goods and services.
Deferral of PoEM
It is desired that the Place of Effective Management (PoEM) provisions in respect of the residency criteria of foreign companies should be deferred by at least one year. Ever since the PoEM provisions were introduced by Finance Act, 2015, there has not been much clarity relating to its applicability and criteria. The CBDT has also released draft guidelines for determination of POEM in December 2015, though the same has not been finalised so far. The Union Budget 2016 had extended the application of PoEM from April 1, 2017 onwards. In absence of any final guidelines yet, Budget 2017 may further defer the applicability of PoEM unless the government promptly issues the much delayed clarifications on PoEM.
Whereas the above are only few anticipated direct tax changes which the corporates expect from the upcoming budget, the wish list of India Inc. as well as the common man is as high as always in a budget season. The challenge for the government is to strike a balance between the expectations of taxpayers as well as achieving its fiscal targets. One certain thing which can be expected from the upcoming budget is that it is going to have a touch of prime minister’s vision of a digital economy, measures to promote it along with a stable and certain tax policy environment.
(With contribution from Sachin Garg, tax director, EY)
The author is partner-tax & regulatory services, EY India.
Views are personal