Budgets and Taxes
With revenue targets having been met, will the upcoming Budget—the last full one before the general elections—provide relief to taxpayers?
WWHENEVER THE BUDGET is around the corner, there is huge media speculation about the changes that the Finance Bill will likely introduce. This year is no different and the expectations from India Inc. and other constituents are as high as every year, if not more. The good part this year is that there is good tax buoyancy and the revenue targets have also been considerably exceeded. Plus, this is the last substantive Budget before the general elections begin, and hence, we are not likely to see many revenue-raising measures.
The one priority of this government is the Make in India programme. And the leading proposal from India Inc. is that the 15 per cent tax rate for new manufacturing companies—available to ventures that were registered on or after October 1, 2019, and commence manufacturing before March 31, 2024—be made a longterm part of the tax laws (without any sunset clause). Given the opportunity available for India to emerge as a China+1 or Europe+1 alternative for manufacturing coupled with the time it takes to set up a new industrial unit, the suggestion seems very reasonable.
The second issue is the higher surcharge on high-income earners. After a regime of high taxation and tax evasion, the country had settled on a reasonable tax rate of 35 per cent on such individuals. When the surcharge was levied, the maximum marginal tax rate applicable on high-income earners was pushed to 42 per cent. Surcharges should be a temporary measure for a specific cause. In this case, there is a need for a serious relook at the surcharge and bring back the maximum marginal tax rate to 35 per cent.
The spotlight this time, however, is on the multiple-rate tax structure generally and on capital gains tax in particular. Capital formation in India and its inflows into the stock markets are, in part, attributable to the favourable regime of lower tax on capital gains. While this regime is very welcome, over a period of time, unwittingly, it has indeed become very complex with different tax rates applicable on corporates and noncorporates. Within corporates, we have different rates for companies availing tax incentives (with different rates for different turnovers); for companies not availing tax incentives that are not into manufacturing; and finally, for newly set up companies engaged in manufacturing.
Further, the concessional rate of 15 per cent for newly set up manufacturing units is available only to a company and not to other taxpayers (say an LLP, or a firm, etc.). We have separate tax rates for capital gains— long- and short-term—and, for listed and unlisted shares. For instance, short-term capital gains on listed shares are taxed anywhere between 15.6-17.94 per cent, depending on the rate of surcharge that varies with the quantum of total income. Plus, longterm capital gains (where securities transaction tax or STT is paid) is taxed between 10.4-11.96 per cent, and long-term capital gains (without STT but with indexation) is taxed between 20.8-28.4 per cent depending on the rate of surcharge. There are also different tax rates that apply to a non-resident or a foreign company.
As if this was not enough, we have indexation available in certain cases, and we have currency protection available in others. We have tax-treaty protection available for investors from certain countries, something that domestic law cannot do much about; we have grandfathering of exemptions from tax as per certain tax treaties. And if all of this is not sufficient, we need to deal with situations where mergers, demergers or any other reorganisation takes place in a corporate where one is holding shares and one can visualise all the complications that can arise. There is, indeed, a need to define a single holding period for what constitutes long-term holdings and rationalise the provisions related to indexation. More importantly, there are serious gaps today on what happens to the
grandfathering provisions when corporate restructuring has taken place. These need to be clarified and set at rest rather than leaving them for litigation to sort out at a later date.
Which brings us to the question of what one can expect this Budget to do in terms of simplification of the tax structure. Whilst there cannot be a single rate applicable to every type of income, there is certainly a need to reduce the complexity of the current tax structure to the extent possible and to streamline or rationalise the tax rates, not just for capital gains but across the board.
For instance, while the headline tax rate (except for newly-set-up manufacturing companies) is reasonable, there are concerns about the effective tax rate payable after taking into account dividend tax. Another concern repeatedly voiced by investors is the recurrent litigation that takes place in tax-related matters, and the time it takes to resolve them. Our efforts to provide certainty to taxpayers through the mechanism of Advance Rulings has been almost abandoned. Our programme for Advanced Pricing Agreements—at one time true torch-bearer—needs to be given a push. These are the issues that concern foreign investors particularly as they evaluate ease of doing business in India. These are not issues that are difficult to address. What is needed is a focussed effort to simplify the tax regime and our ambition of making India as an important alternative base in the global supply chain mechanism will be achieved.
Last but not the least, there is a need to make a conscious distinction between a widening and a deepening tax base. Several of the measures introduced in the last few years with the stated objective of widening the tax base have only deepened it instead. It indicates that tax costs in India continue to rise, despite the headline rate being relatively stable over the years. For example, taxation of subsidies, expanding the scope of section 56 (related to the taxation of income from other sources), etc. are classic cases where the coverage of income for existing taxpayers has been widened instead of bringing in more people into the tax net. More attention and resources need to be deployed to bring more people into the tax net rather than attempting to bring existing taxpayers to pay tax on a larger portion of income, or by widening the definition of ‘income’. But when that may happen is a question only the upcoming and subsequent Budgets can answer.
The writer is CEO of Dhruva Advisors LLP. Views are personal
The spotlight this time is on the multiple-rate tax structure generally‚ and on capital gains tax in particular