Budget 2018: Prime Minister Narendra Modi set the scene in his plenary address at the World Economic Forum, in Davos, for the finance minister’s impending Budget on February 1, 2018, by laying before the world his dream and vision for a “new India” occupying her rightful place on the world stage.
Budget 2018: Prime Minister Narendra Modi set the scene in his plenary address at the World Economic Forum, in Davos, for the finance minister’s impending Budget on February 1, 2018, by laying before the world his dream and vision for a “new India” occupying her rightful place on the world stage. There has been considerable debate among economists as to whether the FM should religiously stick to the fiscal deficit target of 3% for 2018-19, or relax it a bit to accelerate investment-led growth in the economy. Whilst there are obviously various options available for the FM on the expenditure side, here is a list of some ideas which the FM may consider to align tax policy with the macro-economic vision set out by the PM for a “new India”:
Corporate tax rate
Whilst the road map announced by the FM in 2015 indicated an eventual corporate tax rate of 25%, it came with the caveat of elimination of a majority of incentives and deductions. Since then, a phase-out plan for some major incentives, such as deduction for special economic zones, was introduced, essentially grandfathering investments made until 2020. Simultaneously, an optional lower rate of 25% was introduced later on but only for new manufacturing companies, provided no special incentives or deductions are claimed in lieu of the lower rate. There is merit in extending this lower rate without any special deductions to all corporates, as the impact on revenue may be quite muted if no deductions are allowed while exercising this option.
Dividend distribution tax
Since its introduction, the DDT has doubled from 10% at inception to 20% now. For a profitable company that declares the maximum available dividend, the effective corporate tax rate comes to a phenomenal 46%, which pegs India as one of the highest corporate tax rate countries in the world. It is time for India to consider going back to the classical system of dividend taxation, whereby tax is levied at the shareholder level with credit available at each subsequent stage of dividend distribution. Small shareholders can be exempted from such tax on dividends.
Alternate minimum tax
Currently, companies are subject to a minimum alternate tax (MAT) and non-corporates are subject to an alternate minimum tax (AMT). The advantage of AMT is its simplicity, as it entails a taxpayer to pay the minimum tax applicable on taxable income (at 18.5%) without deducting any incentives. Whereas, under MAT, there are tremendous complications to be navigated in terms of accounting treatment in the books of account, leading to uncertainties. This measure should be largely revenue-neutral for the government.
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Regional R&D centres
Many countries around the world, including China, Malaysia, Singapore, the UK, etc, have special schemes to attract setting up of R&D centres. One of the main concerns for such firms in India has been transfer-pricing adjustments, where companies are perceived to add significant value in the development of technology. Given the pace of technological disruption and adverse impact on job creation, it is imperative that India urgently takes steps to attract such investments by extending the “safe harbour” mechanism to all such firms, whether small or large. Under the safe harbour rule, a reasonable profit margin can be prescribed for such activities, which will form the basis for taxation instead of subjective assessment of value drivers, resulting in uncertain profit attribution.
Presumptive tax for small firms
It would be a good idea to prescribe an optional basis of taxation for small companies with a turnover of up to `100 crore, where the book profits as per audited accounts would be taken as deemed taxable income with no further deductions under the income tax law and the applicable tax rate of 25% would be levied therein. This will considerably reduce the compliance burden for such small companies besides providing much needed certainty of their tax liability.
This is a laudable scheme, which has been brought in to encourage developments of patents in India income, taxable at a lower rate of 10%. However, some of the prescribed conditions have made it very difficult to claim such benefit. For example, in practice, patents are jointly registered in the company’s and employees’ names. The current law does not seem to allow a deduction in such a case. Also, the benefit does not extend to software development. It is imperative that such conditions are removed to make the benefit more popular and truly encourage innovation in India.
Deduction for R&D
Under the current law, deduction for R&D is subject to approval from department of scientific research, which prescribed guidelines for covered activities from time to time. It would be better if clear guidelines are prescribed on the basis of which the taxpayer can claim the deduction. There are enough provisions in the law empowering the tax officer to challenge the deduction in case of any irregularities. This step will encourage more firms to undertake R&D without the uncertainty of the approval process.
There is now a strong case for increasing the taxable income threshold to `3 lakh, as the current limit of `2.5 lakh has been unchanged for many years. Similarly, time has come to bring back a standard deduction for employees in lieu of a plethora of minor deductions, which have continued over the years.
The above measures will enhance the disposable incomes for both corporations and individuals alike, leading to greater consumption and investment in the economy which, in turn, will likely create a virtuous cycle of increase in tax revenues as a result thereof. The time for taking some bold measures and big bets is now, as the government embarks upon the laudable objective of a “new India” by 2022.