Tax relief to companies, easier flow of credit for exporters on cards
The government is exploring a raft of measures — including tax relief to companies and easier flow of credit for exporters — to spur growth, as economic slowdown has accentuated. But given the limited resources, the finance ministry will undertake further deliberations on the impact of any such package on fiscal deficit before it is announced, according to a source.
Nevertheless, considering the intensity of slowdown (the government is worried demand compression across sectors like auto, FMCG and real estate will cause large-scale job losses), a sector-specific relief package could be unveiled soon after clearance from the Prime Minister’s Office. Already, Prime Minister Narendra Modi on Thursday held a meeting with finance minister Nirmala Sitharaman and top bureaucrats of his office as well as the finance ministry to review the state of the economy and potential stimulus measures.
The finance ministry is weighing proposals to “ring-fence” foreign portfolio investors (FPIs) structured as trusts from the higher surcharge and review the dividend distribution tax (DDT) and the long-term capital gains (LTCG) tax.
While a cut in the corporate tax rate to a standard 25% for all companies may be recommended by the direct tax code panel in its report (to be released on Monday), the revenue department fears any such cut for large companies this fiscal (currently, firms with annual turnover of up to Rs 400 crore are subject to 25% while the rest pay 30%) will derail tax collection from the target. Such large companies make up for almost 80% of the total corporate tax collection.
“Any worthwhile stimulus package will mean the government has to expand the fiscal deficit target of 3.3% for FY20, unless it prunes capital spending. And that call has to be taken at the highest level of the government and not just the finance ministry. So a clear assessment of fiscal stimulus is being done first and the response will be calibrated accordingly,” said another source.
The economic expansion plunged to a five-year low of 6.8% in FY19. Many analysts have trimmed their GDP projections for FY20 below 7%, that, too, if private investors return and consumption expenditure rebounds. GDP growth collapsed to just 5.8% in the March quarter and many believe private consumption has only exacerbated after that.
As for the relief to the FPIs, one option could be a one-time capital gains tax waiver for such FPIs wanting to convert. With the surcharge on categories of taxpayers with income above Rs 5 crore rising by 22 percentage points, LTCG tax on FPIs using the trust structure would now be 14.25%, against 12% earlier, while short-term gains tax would rise to 21.4% from 17.9%.
Sources said the DTC could recommend (and the government may accept) the abolition of the DDT at the hands of the companies and moving to a regime of taxing the same at the recipient’s end. Currently, the effective rate on dividend is 20.6% (including surcharge and cess) for companies and is also taxed at 10% on proceeds exceeding Rs 10 lakh for individuals and some other categories.
In the Budget last year, the LTCG tax was introduced at 10% on proceeds in excess on Rs 1 lakh without indexation. This is applicable on equity-oriented instruments.
To boost exports, while the government is considering “full reimbursement” of various imposts on outbound shipment, the Reserve Bank of India has proposed to ease priority-sector lending norms for exporters. Currently, exporters with a turnover of up to Rs 100 crore each are eligible for credit under the priority-sector norms. This limit is likely to be scrapped or doubled so that more exporters are benefitted. The maximum sanctioned limit of loans is also likely to be raised to Rs 40 crore per borrower from the current Rs 25 crore. Even the cap on export credit at 2% of banks’ total loans could be relaxed soon.
However, the central bank has rejected a proposal to allocate a part of its foreign exchange reserves for export credit–as is being demanded by some exporters, an official source had told FE. Once tweaked, the revised priority sector lending norms and certain enabling guidelines are expected to release additional credit of anywhere between Rs 35,000 crore and Rs 68,000 crore for exporters. Recently, commerce and industry minister Piyush Goyal told the Rajya Sabha that banks’ outstanding export credit, which rose from Rs 1,85,591 crore in March 2015 to Rs 2,43,890 crore in March 2018, dropped to Rs 2,26,363 crore at the end of March 2019.