Budget 2017 - A progressive, targeted Budget
National Leader, Policy Advisory Group, EY India
Given the uncertainties that the Indian economy has been facing in the last six months, both on account of demonetisation and the global geo-political developments, expectations were rife that the Finance Minister will present a populist budget that will lower the tax burden on taxpayers. However, the FM has chosen not to give in to the pressure of expectations and present a Budget that is balanced, targeted and provides relief to the deserving sections. The overarching focus is to pave the way for a transparent, formal economy through digitisation and provide mechanisms and legislative provisions that minimise opportunities for any leakages.
It is commendable that despite the recommendations of the FRBM Committee that provides for an ‘escape clause’ and allows a deviation upto 0.5% of GDP from the stipulated fiscal deficit target, the FM has chosen to peg the fiscal deficit for 2017-18 at 3.2% of GDP and 3% in the following year. At the same time, he has pointed out that India remains a non-tax compliant society that prevents the government from improving its tax-GDP ratio. Backed by the tax department’s well researched data, the FM has cautioned that the government will be expanding the tax net by data mining and intelligence and tracking various transactions and payments so that the tax collection is commensurate with the income and consumption pattern.
To provide balm to the low and middle income segments who have been suffering on account of the demonetisation move, the FM has chosen to extend tax relief only for the income slab of Rs.250,000 to Rs. 500,000 by lowering the tax rate from 10% to 5%. Effectively, the proposal will reduce the tax liability of persons below Rs 3 lakh income to zero.
Similarly, the promise to lower the corporate tax rate to 25% has been kept this year only for the SMEs with turnover less than Rs 50 crores. It is a welcome move that will provide considerable relief for the small companies and enable them to expand their capacities. To make the relief truly meaningful, the FM should have also removed the minimum alternate tax for such companies as they do not get many exemptions. The extension of the period for claiming MAT credit from the current 10 years to 15 years is a welcome step.
The reduction in the period of holding of immovable property for long term assets to two years and extension of benefit of 5% withholding tax rate on interest on ECBs and Masala bonds from 2017 currently to the year 2020 shall provide a much needed boost to the real estate and infrastructure sectors.
Infrastructure status to affordable housing will attract greater private participation. The liberalization of the provisions of Section 80-IBA to promote affordable Housing will help provide boost to the housing sector in line with the government’s objective of ‘Housing for All by 2022’
The industry was looking forward to amendments providing for harmonisation of tax provisions with IND-AS in context of corporate restructurings, particularly demergers. The Budget, however, does not address these genuine concerns.
The exemptions to FPIs from the provisions of Indirect Transfer provisions is positive step and will bring clarity in the law. It is credible that the government has responded positively to this long standing demand. It is expected that a clarification to the effect that indirect transfer provision shall not apply in case of redemption of shares/interests outside India as a result of redemption or sale of investment in India, which is chargeable to tax in India, will be issued soon.
The budget restricts the interest deduction to 30% of EBITDA in case of cross border intra-group funding between related parties. This could pose some challenges for the industry, especially for leveraged sectors like infrastructure.
The Transfer Pricing Rules are proposed to be amended to provide for secondary adjustment, wherein any transfer pricing adjustment would need to be billed out and collected from the associated enterprises (AE) and interest would accrue upto the receipt of the amount from the AE. The proposal will increase the burden on taxpayers and dissuade them from voluntarily offering tax to avoid controversy.
A series of tax measures have been introduced to discourage cash expenses (capital and revenue) and to encourage digital / bank payments. In a substantive move, electoral funding through issuance of electoral bonds has been introduced.
The government remains committed to improving the ease of doing business. Reduction in the time limit for filing tax returns and completion of tax assessments is a positive step towards improving the tax administration and expediting the grant of tax refunds to corporate India.
The government has been announcing many transformative measures all through the year. This Budget sends a clear message that the government will remain committed to its goal of transforming governance in the country. The Finance Minister should be commended for a balanced and reforms oriented Budget.
(Views expressed are personal)