The much-anticipated Union Budget 2017 expectedly showcased the government’s intention to promote digital economy and curb black money. In the backdrop of global economic and political challenges, it focused on measures to accelerate growth by providing impetus to key sectors of the economy with the objective to eradicate black money.
On the tax front, finance minister Arun Jaitley’s proposals outline the intention to increase the tax base, improve tax compliance, reduce tax rates and promote ease of doing business in India. While some proposals provide clarity and relief to tax payers, several other proposals are clearly directed to widen the tax base.
In line with the objective to reduce taxation rates, the tax rate applicable to MSME companies has been reduced from 30% to 25%. This will encourage MSME businesses to migrate to a company structure.
To provide impetus to startups, the finance minister has extended the period within which tax holiday could be claimed from existing five years to seven years. Relaxing the restrictions on carry forward and set- off of business losses pursuant to change in effective shareholding conditions would also provide adequate clarity and relief to startups.
The government’s push towards a digital economy is reflected in several proposals aimed at discouraging cash transactions. This includes restricting deductions for expenses (both capital and revenue) paid in cash exceeding Rs 10,000 per day and prohibition on cash transactions of Rs 300,000 or more. To incentivize digital payments, it is proposed to reduce the presumptive tax rate from 8% to 6% of turnover from digital modes.
To provide impetus to the real estate sector, the budget proposes to reduce the holding period for land and building to qualify as a long-term capital asset from 36 months to 24 months and eases the restrictions on built-up area to claim tax incentives available for affordable housing projects. The budget also seeks to put pressure on the real estate developers to liquidate inventory by proposing to levy tax based on deemed rental value of such inventory.
Exemption from applicability of the indirect transfer provisions to Category 1 and 2 Foreign Portfolio Investors is a welcome move and is expected to have a positive impact on the capital market. These tax proposals are aligned to the larger objective of improving the investment climate and stimulating growth.
Continuing with the pro-active implementation of the OECD’s recommendations under the BEPS (Base Erosion and Profit Shifting) initiative, Jaitley proposes to limit deduction of interest exceeding Rs 1 crore paid on debt by an Indian company or a permanent establishment of a foreign company in India to its associated enterprise. The deduction is proposed to be restricted to 30% of EBITDA and the excess interest can be carried forward and claimed as deduction for next eight years.
The long-standing demand of reduction of Minimum Alternate Tax (MAT) impacting the industry at large has been deferred, though with a limited relief of increase in MAT credit period from 10 to 15 years.
With no clear plan to reduce the corporate tax rate to target 25% for non-MSMEs, MAT at current levels would keep the average effective tax rate of corporates at a high level. While the government has brought in the much-awaited amendment consequent to introduction of Indian Accounting Standards (IND AS) providing guidance on MAT computation, however simultaneous clarity was also expected in the manner ICDS would apply vis-à-vis IND AS for computing tax liability under normal provisions.
The government’s endeavor to reduce compliance burden will bring relief to taxpayers. Payment to related parties is now outside the purview of domestic transfer pricing transactions (except where one of the entities is claiming a profit linked deduction). Rationalization of time lines for processing of refunds, progressive reduction of time limit for scrutiny assessments and push towards reducing human interface in assessments will bring transparency and translate into improved tax compliance.
On an overall basis, from the perspective of the corporate sector at large, the Budget 2017 is in line with the government’s objective of provide clarity, promote digitization, curb black money and also promote ease of doing business in India.
However, a clear roadmap to achieve target corporate tax rate of 25% for non-MSMEs with corresponding phase out of deductions and exemptions, along with deferral of General Anti Avoidance Rules by a couple of years would have gone a long way to provide the much needed growth impetus to the corporate sector.
Naveen Aggarwal is partner-tax, KPMG in India. Views are personal.
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