Budget 2019 should look to align India’s tax framework to global standards; reduce corporate tax rate

New Delhi | Published: June 20, 2019 6:57:46 PM

Budget 2019-20: As the new finance minister lays out maiden Union budget of re - elected government, we expect a balancing act on 5 July 2019 – giving certain relaxations to spur demand and attractiveness of India as a tax jurisdiction

union budget 2019Budget 2019 India: The Indian corporates have also longed for a reform on the Dividend Distribution Tax (DDT). 

By Vaibhav Luthra, Tax Director, EY India

Union Budget 2019 India: The re-elected BJP led NDA Government is gearing up to present its first Union Budget 2019 of this term, and a slew of big ticket reforms are expected to improve the health of economy by attracting investments and creating employment opportunities. Various stakeholders such as corporate houses, businessmen, salaried professionals etc. expect tax to be one of the key drivers in this endeavour of the government.

While building on the foundation laid by its policies to create transparency and accountability for taxpayers in its first term, the government may look to further increase compliance from taxpayers and align India’s tax framework to global standards in terms of tax rates in the Union Budget. Accordingly, plans to reduce the current corporate tax rate may be on the cards. In the 2015-16 budget, the government had announced that the corporate tax rate would be gradually lowered to 25 per cent from 30 per cent over the next four years and exemptions available to companies would be phased out. In the subsequent years, the tax rate was reduced to 25 per cent for companies with a turnover of up to INR 250 crore. We expect even broader category of companies to be covered under the lower rate.

The Indian corporates have also longed for a reform on the Dividend Distribution Tax (DDT). The corporate tax rate coupled with DDT on dividend distributions results in a potential effective tax rate greater than 50 per cent on profits. With other countries lowering the tax rates to a moderate level (US – 21 per cent post tax reforms, most of EU countries inside 30 per cent), we could expect a reform on the DDT regime which could either involve possible reduction to rate under tax law itself or clarity on possible application of beneficial rates under existing Double Tax Avoidance Agreements (DTAA’s) or bringing back classical system of withholding tax on dividends.

Another wish from India Inc. and supported by various industry bodies for Budget 2019 is tax deductibility of corporate social responsibility expenditure which is currently disallowed for tax purpose under an express provision. The government may pay heed to this request and may allow a partial/ full deduction for such expenditure going forward.

Further, alignment to Base Erosion & Profit Shifting (BEPS) related changes should continue with this government, as has been the trend over the past few budgets. Earlier this month, the government ratified the Multilateral Convention (MLI) to implement tax treaty related measures to prevent BEPS. In order to make MLI effective, the government would now look to submit the ratified MLI with OECD. Also, government would want to bring corresponding changes under domestic tax law so that taxability thresholds under domestic law and DTAA’s are synchronised and not in contradiction of each other. This will further the government’s agenda to align itself to global tax landscape and benchmarks of transparency and substance.

An impetus to scientific research in terms of continuance of weighted deduction on scientific research expenditure, or introducing benefits in the form of research tax credits which can be used to offset future tax liability (like those given in developed economies) is also likely. This would be in line with the government’s ‘Make in India’ initiative and National Policy on Software Products, which was approved in February this year.

The current low tax compliance rate is still a cause of concern for the government and accordingly, certain measures focussing on increasing direct tax collections, taxpayer base and tax compliance could be proposed. These multiple objectives can be achieved by simplifying the tax laws, procedures and improving tax administration including timely settlement of disputes. This is also the theme of the Direct Tax Code (DTC), which is work-in-progress, designed to replace the existing Income Tax Act. The task force formed to draft the DTC is scheduled to be submit its report by 31 July this year. We expect some references to the code in the budget speech pending its finalisation.

As the new finance minister lays out maiden Union budget of re – elected government, we expect a balancing act on 5 July 2019 – giving certain relaxations to spur demand and attractiveness of India as a tax jurisdiction, while also ensuring compliance from taxpayers and going hard on tax evasion, avoidance and black money.

(Vaibhav Luthra is a Tax Director, EY India. Views expressed are personal)

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