Clarity on taxability of offshore transactions and tax incentives for Make-in-India are two areas it must address
The world is beginning to look at the Indian economy differently. A stable government that is reaching out to the world, promising to deliver strong governance with a focus on economic growth and an improved business environment, has raised the bar of expectations and hopes of Indians and the world at large.
The upcoming Budget can present an opportunity to the government led by prime minister Narendra Modi to reinforce its commitment by putting in place the necessary fiscal framework that could ensure stability and foster growth.
The key reforms to be considered in the upcoming Budget are promoting the ease of doing business in India agenda by providing clarity on tax laws; and considering the need to promote the agenda of the ease of doing business in India and to attract FDI into the country, the government needs to provide clarity on certain ambiguous provisions in the current tax laws. One also expects clarity on the manner of taxability on offshore transactions involving indirect transfer of assets in India by the introduction of rules in this regard. It is expected that the government comes out with detailed guidelines that prescribe the thresholds for taxability, recommend applicable exemptions and safe harbours so as to remove ambiguity in this regard. Also, the government may choose to defer the implementation of the General Anti-Avoidance Rules which are slated to come into effect from April 1, 2015, considering the uncertainty created by its introduction in the international investor community coupled with the perceived lack of readiness for its implementation.
The government may consider initiating steps that could promote some key identified sectors such as infrastructure and manufacturing. To incentivise the Make-in-India initiative, the government may consider partially restoring the tax sops for SEZs and promote infrastructure companies by prescribing a lower rate of Minimum Alternate Tax (MAT). In view of the increasing need for huge investments in infrastructure and other vital projects, the government may consider introducing a tax exemption in respect of any income earned from infrastructure companies to help ensure low cost for raising capital for projects. Also, the definition of the term ‘infrastructure’ may be widened to include new areas/facilities such as airport support services, etc, and also include the upgradation/extension of the current infrastructure facilities to avail the existing tax benefits.
The government may consider providing a stimulus to growth by increasing the disposable income in the hands of the individual taxpayers. The tax exemption limit may be increased to R5 lakh and similarly the threshold for the application of the maximum rate of 30% to R20 lakh. The Finance Act, 2014, marginally increased the age old deduction limit of R1.5 lakh towards interest on loan taken for acquisition/construction of a self-occupied house to R2 lakh. The government may consider revising it to an amount that is reflective of the current economic reality. Similarly, the government may look at increasing the overall deduction limit u/s 80C to at least R2 lakh to boost further investment and increase tax savings for individuals.
It could also be desirable to introduce more such tax-exempt investment avenues to mobilise funds for identified priority sectors, and the government may consider separate exemption limits for such avenues.
The government could consider introducing measures to make the tax administration system more taxpayer friendly, with an emphasis on increased transparency and reduced litigation. The government may resort to capacity-building in tax tribunals and introduce additional benches of the AAR for an expeditious settlement/reduction of tax litigation. The backlog in relation to pending AAR/APA applications could be cleared so that the investor community’s confidence in the ability of the system to provide clarity expeditiously is can be strengthened.
It is widely accepted that GST is expected to bring about a systemic change to the indirect tax structure. Whilst the negotiations between the central and state governments are on, it is imperative that critical areas such as tax rates, exemption lists, draft law, IT infrastructure are finalised. The finance minister in this Budget could allay the fears of the industry in reference to the time being taken to implement GST.
Timelines for the various pending items needs to be laid down. Further, the alignment of the excise and VAT exemptions need to be addressed in this Budget. This could help the industry to take steps to be better prepared if GST is to become a reality by April 2016.
It is expected that the Indian government creates stable macro and microeconomic conditions in which growth can flourish, jobs are created and investors are confident to invest. The government has done well to attract global attention to the Indian economy and it can be an opportune time to stand up and deliver a ‘reform Budget’.
Assisted by Krishnan TA, manager, M&A Tax, KPMG in India
The author is co-head (Tax) KPMG in India. Views are personal