It was a Union Budget of many firsts—the first to be announced on February 1 to facilitate implementation from April 1, the first that merged the Railways budget with itself and the first after the abolition of the Plan/non-Plan expenditure classification. As per finance minister Arun Jaitley, the Budget’s theme is to “transform, energise and clean” (TEC) India. The proposals deliver an inclusive budget—offering something to the small taxpayers, small and medium-sized companies and also to the anxious FIIs.
The minister gave a marginal relief to the taxpayers in the lowest bracket of taxable income. Those upto R5 lakh per annum have a reduction in their tax rate from 10% to 5%. It also gives a marginal relief of about R12,500 to those in the higher tax bracket. However, a surcharge of 10% has been imposed on those who earn between R50 lakh and R1 crore. The intent for not exempting those earning upto R5 lakh from income-tax altogether may possibly be to keep them in the tax net. Fortunately, the finance minister has not brought new taxes such as inheritance tax (one would remember that India scrapped estate duty in the 1980s). Other measures, such as rationalising the cost inflation index for capital gains tax purposes from 1981 to 2001, reducing the long-term capital asset holding period for immovable property from three years to two and liberalisation of the taxation of joint development agreements will certainly help. As they say, the devil is in the details—notably, the limitation of R2 lakh on deduction on account of borrowings for rented house property against any other income of that year like salary or business income.
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On the corporate side, those with a turnover of R50 crore will be subject to a 25% rate. This is nearly two years before the four-year road map laid out by the finance minister. Giving start-ups a longer period to opt for a tax-holiday and the amendments proposed to propel affordable housing are helpful. For large corporates, the key expectation was reduction in the corporate tax rate and the abolition/diluting of the minimum alternate tax (MAT) regime. These were not fulfilled, though the longer, 15-year MAT credit period is welcome. Similarly, extending the concessional 5% withholding tax rate till 2020, clarity on computation of MAT under the IND-AS regime, rules for taxation of carbon credits, revision in the indirect transfer provisions and rationalisation of domestic transfer-pricing are good steps.
Alongside the roll out of the General Anti Avoidance Regulations from April 1, 2017, and the ongoing global BEPS project, the following will be very relevant for Indian and foreign MNCs:
In Secondary adjustments under transfer-pricing regime, whereby the Indian taxpayer will be required to bring into India the amount of transfer-pricing adjustment, failing which it will be treated as a loan and interest income will be imputed thereon; and
* Quasi thin-capitalisation rules, whereby the interest payments by an Indian company’s or an Indian branch of a foreign company to non-resident related parties will be capped at a lower bound of 30% of its EBITDA or the interest actually paid.
There are three concerns that emerge from the tax proposals—first, the secondary adjustment for transfer-pricing is not as globally prevalent as stated in the accompanying documents and, hence, India is again embarking on tax experimentation—such as the equalisation levy introduced last year—that has caused concern to investors. To avoid harsh implementation, detailed guidelines are needed for the working of the secondary adjustment in transfer-pricing. Second, the tax proposals seek to penalise transaction in cash in excess of R300,000. This causes a worry that the tax laws are now being sought to penalise the use of our national legal tender. Finally, the tax proposals seek to shift the economy from cash to digital—one needs to understand the socio-economic consequences, coming so close after demonetisation, for our informal economy. Our informal sector is the custodian of jobs, possibly far more intensely, as percentage of GDP than job creation in the formal economy enterprises.
In summary, it is a workman budget with good outlays and tax proposals mostly helpful.
With inputs from Kaushik Saranjame, director (direct tax), BMR & Associates LLP
The author is leader (direct tax), BMR & Associates LLP. Views are personal