Budget 2017 - Will there be gain after demonetization?
Tax Partner, EY India
On November 8, 2016, the unexpected and sudden announcement of the “demonetisation scheme” has had a “knee jerk” reaction on the sentiments in the country. Post this drive, Prime Minister Narendra Modi, had indicated on various forums, that demonetisation had caused "some pain" and there would be "more gain" in the weeks and months to come. To make this a reality and providing a healing touch to the people of India, the Finance Minister may use the Budget window. This would be fourth budget of the instant government and not to mention, would be second last budget before the 2019 general elections. Given the above, it is expected to bring a sigh of relief in direct taxes and may entail some populist measures.
Expectations from Budget 2017
In the wake of demonetisation, it is expected that government would introduce certain measures that will incentivize credit or debit card transactions and disincentivize cash transactions. It is thus expected that the proposals that were presented by the government under the “Draft Proposals for Facilitating Electronic Transactions” may take a legal form. For instance, tax benefits could be provided to merchants for accepting electronic payments, income tax rebates to consumers for paying a certain proportion of their expenditure through electronic means. One such proposal had already indicated by the Prime Minister in his speech on New Year’s Eve that income of small businesses from digital transactions will be calculated at 6%.
Further, it is desired that personal income tax slabs may also be augmented resulting in increased disposable incomes, thereby supporting demand. There could be expectation of increase in exemption limit for various allowances.
To provide some relief to the business sector, some cut is likely in the tax rate for small and medium companies that have faced the brunt of demonetization, given that roadmap for the phasing out of incentives has already been laid down. The Finance Minister has already made a beginning of lowering the tax rates to 29% in regard to companies having a turnover up to Rs 5 crore. New manufacturing companies set up after March 1, 2016, were offered an option of 25% tax plus surcharge. It is expected to announce some reduction in the tax rate for all corporate entities.
With the phasing out of exemptions and deductions, it is desired that Minimum Alternate Tax (‘MAT’) rate also be gradually reduced. Further, as a result of transition to Ind-AS, certain adjustments would be required to be made by the companies including adjustment in the opening values which may have significant impact on the computation of book profits for MAT purposes. Hence, there could be changes in the MAT rules for computation of book profits in view of Ind-AS.
To provide certainty to foreign investors, the government is also expected to issue the guidelines for implementation of GAAR and to implement it from 1st April, 2017. Further, the draft guiding principles issued in January 2016 for determination of POEM are expected to be finalized and made public. There is a demand that POEM may be made effective from the next financial year given the delay in issuance of guidelines.
The government may expand the list of services on which equalisation levy will be charged and introduce more measures in line with the BEPS Action Plan. Presently, the imposition of a 6% Equalisation Levy is on payments of over Rs. 1 lakh in a year made for online advertising to foreign e-commerce companies having no permanent establishment in India.
Last year, the government introduced the Income Disclosure Scheme giving an opportunity to black money hoarders to disclose the undisclosed money upon payment of interest & penalty. Given the demonetisation effect, a new scheme is introduced ‘The Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’, providing further opportunity to file the declaration till 31 March 2017. This reflects the clear intention of the government to penalize non-compliant tax payers. Owing to this, some more provisions can be introduced to deal with non-compliant tax payers.
With a view to avoid long pending litigations and provide a mechanism for quick resolution of disputes, it is desired that Government may take further steps to improve dispute minimization and resolution mechanisms like expanding the scope of Settlement Commission or Authority of Advance Rulings to allow more cases to be disposed through such forums or increasing the number of benches.
In October 2015, a 10-member committee, Income Tax Simplification Committee (‘Committee’) headed by Justice R.V. Easwer, was formed to simplify the direct tax provisions. First set of draft recommendations was released on January 17, 2016 that largely dealt with simplification of withholding tax provisions, rationalisation of provisions relating to assessment proceedings, granting of timely refund to taxpayers, deferment of ICDS, etc. It is learnt that the Committee has submitted its second report. Though the recommendations are not yet made public, it is expected that some recommendations of the Committee may be introduced in the upcoming budget.
Widening of the tax base and formalization of the informal economy should be given priority in the forthcoming Budget. From an average taxpayer to tax experts, all eyes are transfixed on this Union Budget 2017. Given the high expectations from the budget and the scenario that has emerged pursuant to demonetisation, it will be interesting to see how the budget unfolds.