Budget 2019: Not just tax cuts, here’s how Modi 2.0 can help companies without revenue loss

Updated: Jun 26, 2019 4:14 PM

Union Budget 2019: The reduction in the corporate tax rate is not the only way to make India Inc. happy. There are various other areas where Budget can provide relief to the corporate sector without taking a hit on its kitty.

budget 2019, union budget 2019 India, NBFC crisis, Modi 2.0, Finance Minster  Nirmala Sitharaman, expectations from Budget 2019Union Budget 2019: India Inc. is hoping that their unanswered wish of a lower corporate tax rate would get answered
  • By Rakesh Nangia

Union Budget 2019: Elected the second time, India Inc. is definitely expecting the government to bring some policy changes that can boost the growth of Indian businesses! Budget is that time of the year when taxpayers expectations for tax perks rise high. Since this is the second budget for FY 19, India Inc. is hoping that their unanswered wish of a lower corporate tax rate would get answered and all the corporates would have a lower corporate tax rate of 25%. This sounds like just wishful thinking considering the stringent revenue targets of the government. Where on the one side, the tax authorities are seeking a reduction in revenue target, it is unlikely that the Budget 2019 (No. 2) will reduce the corporate tax rate.

Interestingly, the reduction in the corporate tax rate is not the only way to make India Inc. happy. There are various other areas where Budget can provide relief to the corporate sector without taking a hit on its kitty. There are some changes that the government can make, which will give relief to the businesses without impacting the revenues kitty:

  • MAT rate has risen from 7.5% to 18.5%, but the reduced gap between normal tax and MAT has slowed down the utilization of MAT credit resulting in the accumulation of huge MAT credit. This is an unwarranted consequence and hence the limitation of 15 years period should be removed to provide respite to companies and let them utilize their accumulated MAT credit.  Also, a provision should be there to provide for carry forward of MAT credit in case of amalgamation/demerger by amalgamated/resulting company.
  • ICDS should be withdrawn as it is leading to maintenance of parallel sets of books for tax purposes over and above the prescribed books maintained under the Company Law, thereby resulting in duplication of compliances. Further, most items are in the nature of timing difference which gets reversed in a business cycle over years, hence per se no gain or loss to the revenues kitty.
  • Start-ups funding should have a relaxation from conditions restricting set off and carry forward of losses. Provisions of section 79 of the Act should not be applicable to startups for ten years where a change in shareholding pattern is due to infusion of funding by investors.
  • The budget is a great platform to insert a chapter in the tax-book to prescribe guidance on the application of the law in case of ambiguity. The chapter could also define what does ambiguity mean, e.g., if there are different rulings at certain levels or conflicting rulings, a clarification to resolve this should be issued by CBDT.  This will reduce litigation to a great extent and will save the time of both taxpayer and department.
  • Dividend taxation has evolved over time and now dividend is effectively taxed thrice. First, the company pays corporate tax on the profits generated and then pays a Dividend Distribution Tax (DDT) at the time of distribution of the said dividend to its shareholders. Thereafter even the shareholder (individual, HUF or firms) receiving such dividend (in excess of Rs. 10 Lakh) pays tax on such dividend income. This triple taxation is, to say the least, “unfair taxation”. Its high time DDT is abolished, it will not only lead to fair taxation but also limit the litigation on section 14A.
  • Tax incentives should be introduced for the Electrical Vehicle sector. This shall serve various economic purposes. Electrical Vehicles are environment-friendly, which is the need of the hour for India. Setting-up of new units will create more jobs when our economy is struggling with low employment. This shall encourage ‘Made in India’ which is the flagship program of the government and improve the manufacturing sector of India. India will also pose itself as a strong global competition amongst the other worldwide economies trying to lure the Electrical Vehicles sector by offering various tax incentives.
  • Government’s ‘Make in India’ initiative would get a massive boost if India develops it indigenous capability in technology across various sectors. This requires massive investment in R&D sector which will not only boost indigenous capabilities but also give massive employment opportunities as well. Many developed and developing countries offer big incentives in R&D spheres and India should also grant specific benefits in this regard. The 150% deduction should thus be extended beyond FY 20-21 by at least 5 years.
  • Genuine business transaction valuation such as Group restructuring, Family settlements, Illiquidity discounts and Minority shareholding should be excluded from the operation of 56(2)(x) of the Act and allowed to be valued differently.
  • Secondment arrangement of employees in India has exposure of taxation of foreign company seconding the employee. Worldwide accepted the concept of ‘economic employer’, should be accepted for the purpose of determining taxation in secondment arrangement. This shall facilitate ease of doing business in India and improve the inflow of foreign expertise.

As we can see that there are various long lost unattended policy matters that if addressed appropriately, will make India Inc. happy! Let’s hope for a taxpayer-friendly tax regulatory framework.

  • Rakesh Nangia is Managing Partner at Nangia & Co LLP. Views are the author’s own. 

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