‘No-nonsense Budget’ will Include More in the Tax Net
Budget 2017 created a history of sorts — discontinuing the colonial practice prevalent since 1924, the finance minister, Arun Jaitley, presented a combined Union and Rail Budget on February1, 2017. At a macro level, one has to commend the outcome of a contained fiscal deficit, without reducing the focus on infrastructure and rural spend. Some key themes on the tax front are discussed below.
Firstly, given that we are in the midst of the demonetisation ‘stick’ and the GST trigger, this Budget tactically contains ‘ carrots’ to nudge the large majority of those outside the tax net, to come in. Measures around reduction of the corporate tax rate from 30% to 25% to Medium and Small Enterprises having a turnover of .₹ 50 crore or less, halving the tax rates for individuals having income between .₹ 2.5 lakh and .₹ 5 lakh, exemption from scrutiny to individuals filing returns for the first time having income below .₹ 5 lakh, are some of the thoughtful measures in this regard.
Of course, there are also the ‘sticks’ of barring payments of .₹ 3 lakh or more through cash, and a reduction of the allowance limit for non-cash transactions from .₹ 20,000 to .₹ 10,000.
Secondly, keeping a watchful eye on inflows into the country, two important changes have been made around equity and debt inflows. Foreign Portfolio Investors have been exempted from the rigours of the indirect transfer provisions – this ne- gates the impact of the controversial December Circular which was quickly kept in abeyance in the beginning of January, though more needs to be done to allay concerns of some FPIs and most other financial investors, including the important private equity capital. A three year extension of the liberal 5% tax on interest paid on cross border debt would be welcomed by lenders and borrowers alike, as also its extension to Masala Bonds.
Thirdly, one of the largest employment generators – real estate – has reason to cheer. In line with the Prime Minister’s dream of ‘Housing for All’, affordable housing has emerged as one major beneficiary of this Budget.
The proposal to grant ‘Infrastructure’ status to it would make it a beneficiary of a volley of benefits, including lower borrowing costs. Alignment of the holding period of immovable property to unlisted equity (2 years) and clarity around taxability for joint development agreements are two other positives, while a restriction of .₹ 2 lakh imposed to house property tax loss set off will curb tax benefits that may have been availed in the past.
Fourthly, there is a saying ‘when it is not necessary to change, it is necessary not to change’. Concerns around inheritance tax, holding period for listed shares, residency rules for individuals had been doing the rounds, and a status quo approach ensures that these negatives have not outshined the larger good coming out through the Budget, though tax payers in the .₹ 50 lakh to .₹ 1 crore bracket would have to shell out more tax.
Keeping in line with the global BEPS developments, provisions are being introduced to restrict interest deductibility to 30% of EBITDA. Certain other tax avoidance provisions include expanding the net of the ‘gift tax’ provisions and including trusts within the purview of the additional tax payable by recipients on dividends. The proposal to tax sale of carbon credits at10% should put to rest interpretations on this front.
The intent of ease of doing business has come through in the form of restricting domestic transfer pricing provisions to cases where one of the parties involved enjoys profit-linked deduction, abolition of FIPB and reduction of timelines for tax assessment. The comment on introduction of accountability on tax administrators is a very significant one, but the devil would lie in the detailing and more importantly, the speed and quality of implementation.
One thing which needs a relook is the proposal to tax listed equity gains where STT has not been paid at the time of acquiring such shares – in one sense, this could be viewed as a retrospective applicability of the law, a principle which this Government has otherwise been very consistently staying away from.
Overall, it’s a ‘no-nonsense’ Budget in the right direction, keeping in sight the government’s aim of ‘Transforming, Energizing and Cleansing’ India. And for those who had any doubts on the last part, get ready for tax Inclusion. (Partner and Leader Tax
& Regulatory, PwC)