Budget must draw a fine balance between tax certainty and the measures to curb black money
The year 2016 witnessed key policy changes, such as demonetisation of high denomination currency notes by the Union government, the income disclosure scheme to track black money in the domestic economy, amendments to India’s tax treaties with Cyprus, Mauritius and Singapore and introduction of the multilateral instrument by the OECD as part of the Base Erosion Profit Shifting (BEPS) project, which could affect the manner of doing business in India. Here are some of the expectations of businesses that Budget 2017 may meet.
Giving a boost to start-ups
The road map to a reduced corporate tax rate was laid down by the finance minister (FM) in the past, manifesting the government’s intention to bring it down to 25% over a period of four years while phasing out exemptions. Additionally, the government may consider providing relief to start-ups from applicability of minimum alternate tax and dividend distribution tax.
Relief for digital payments
In the backdrop of demonetisation, the focus of the government has been to move towards a cashless economy. Having said that, one may expect special measures for payments through digital modes.
Changes in capital gains tax on transfer of listed securities
In light of the statement made by the prime minister, that persons making monetary gains from the financial market should make a fair contribution to nation-building through taxes, changes to the capital gains tax regime cannot be ruled out. This could be in the following forms:
*Increase in the period of holding for listed shares or debt instruments for qualifying them as long term capital assets; or
*Increase in the rate of tax for short-term capital gains from transfer of listed securities from the existing base rate of 15% to a higher rate; or
*Restriction on ability to set off capital loss from transfer of listed shares.
Capital gains tax on transfer of unlisted shares
In order to bring the domestic investors on a par with foreign investors, the government may also extend the availability of the concessional base rate of tax of 10% on transfer of unlisted shares to resident tax-payers as well.
Clarifications in respect of mergers and acquisitions
It would not be unreasonable to expect that the Budget provides clarity on the following issues:
*Tax exemption upon conversion of one category of shares into another, and determination of the period of holding of converted shares from date of allotment of original shares, as is the case for conversion of debenture or bonds into equity shares, as against the date of issue of converted shares;
*Tax exemption from capital gains upon merger of a limited liability partnership firm into another limited liability partnership firm;
* Tax exemption to shareholders of foreign amalgamating company on transfer of shares in amalgamating company for exchange of shares in amalgamated foreign company. Especially, this is relevant in the funds industry where there is multiple tax incidences (direct transfer of shares of Indian companies at the fund level and indirect transfer at investor level) due to layered fund structures created for commercial reasons and not for tax purposes. CBDT’s recent FAQs have not addressed these issues;
*Applicability of buy-back tax where the company undertakes capital reduction due to existing tax treatment of capital reduction as ‘deemed dividend’ and also capital gains in the hands of the shareholders.
In addition to the above, one expects that the government takes measures to operationalise the additional benches of the authority for advance ruling (AAR), given that AAR is widely approached by foreign investors for seeking clarity on tax implications in India.
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In order to establish an investor-friendly climate and provide tax certainty to foreign investors without comprising with the tax base, the government could also consider providing a safe harbour for applicability of the General Anti Avoidance Rule which will come into force from April 1, 2017. One hopes that the Budget draws a fine balance between tax certainty, ease of doing business in India and the measures to curb black money.
Vinita Krishnan is associate director, and Ankit Namdeo is associate, Khaitan & Co. Views are personal