1. Column: Budget 2016 – A mixed bag on the direct tax front

Column: Budget 2016 – A mixed bag on the direct tax front

The changes in administration processes are welcome. But govt should have avoided double taxation of dividend

By: | Updated: March 2, 2016 12:32 AM

Budgeting is a tightrope act 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, a logical way out was to increase government-spending in the rural and small business segment—the segment that drives growth in India—and that is what the finance minister has done. The direct tax proposals show the stress on the finance minister to make both ends meet.

Indeed, some of these proposals exhibit a lot of foresight. For instance, a 10% tax rate on income from specified patent exploitation will be seen as an indicator of government-support to indigenous research. A 3-year tax holiday to start-ups incorporated by 2019 will be seen as support to start-ups, given the stress is on job creation. A compliance window for domestic taxpayers to declare past transgressions at a capped rate of 45%, a one-time scheme for cases under the retrospective tax law (to pay tax principal and end all litigation) and a new dispute resolution mechanism mark the government’s earnestness in breaking the jam in tax litigation—even at the cost of foregoing a sizeable chunk of tax demands. The question is whether concerned taxpayers will bite the bullet considering the benefits.

The reduction in the quantum of discretion available to tax officers is a noticeable feature; this is evident in the overhaul of penalty provisions—these now stand at 50-200% (depending on the type of default), compared to the 100-300% under the existing regime—in the changes made to the demand regime, where a stay would be granted with 15% down payment of demand and there will be access to relevant authorities for redressal in stay matters, etc.
It is heartening to see that several proposals of the Justice Easwar committee as well as the TARC have been accepted, chief among these being the rationalisation of TDS provisions for small taxpayers, dispensing with the requirement of PAN registration for foreign companies in the availing of  the concessional withholding tax rate. Also noteworthy are the push for e-assessment of taxpayers in seven mega-cities, expanding the presumptive taxation scheme to turnover exceeding R2 crore and covering professionals in its ambit with turnover limit of R50 lakh. All these will certainly go to improve ‘ease of doing business’ in India. Proposals for certain regulatory changes, such as in the Shops & Establishment Act to allow businesses to remain open for all 7 days, are also steps 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 chose an option suggested by the BEPS Action Pan 1 to tax the digital economy. However, one wishes more thought was given on whether the party that suffers this levy will be able to get credit against home-country taxation laws. If it faces any 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, it risks the possibility of being seen as an impediment to growth, a risk that the government can ill afford at this stage.

As per the budget speech, long-term capital gains will accrue 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 government took a bolder step in doing away with listed-unlisted distinction when the need of the hour is to have more investments.

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 the right step in exempting 40% of the withdrawals at the time of retirement. This will draw more participation in NPS, consequently making available more funds at the fund’s disposal for investment.

The government’s programme to reduce corporate tax rate by simultaneously phasing out exemptions and deductions has commenced in this budget, with accelerated depreciation being capped at 40%, the reduction of the percentage of weighted deduction on R&D expenses from 200% to 150% and then to 100% and the non-extension of tax incentives for power and R&D sector. 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)—they will be taxed at 25% and smaller companies with turnover below R5 crore will be taxed at 29% but subject to MAT.

The proposal to tax dividend over R10 lakh in the hands of shareholders—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.

The author is leader (direct tax), PwC India. Views are personal

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