Budget 2017 - An ode to the honest taxpayer
Chairman, EY India
The 2017 Union Budget comes in the wake of a set of unprecedented developments – Brexit, political changes in developed economies and two radical domestic policy actions: the GST and demonetisation. In many ways the Budget scores on prudency, consistency and boldness. The FM has achieved the fiscal consolidation target as set out in the FRBM. A number of themes such as ease of doing business, promoting digital India etc. resonate with the earlier Budgets presented by the FM. The Budget is also suitably embellished with a number of bold measures to fiscally clean India of the black economy. Coming soon after the foreign assets disclosure and income disclosure schemes, this Budget may be seen as the FM’s tribute to the honest taxpayer by ensuring that tax burden does not fall disproportionately on the compliant taxpayer.
While the FM did not announce an across the board corporate tax rate reduction, small and medium enterprises with turnover of less than INR 50 cr turnover in FY 2015-16 would be entitled for a reduced rate of 25%. In today’s globalized economy, a country’s tax rate is an important factor for businesses when they decide where to invest. Many countries, in recent years, have recognized this and moved to reform their tax codes to be more competitive. It must also be recognized that in recent times, countries have increased their tax-to-GDP ratio not by higher tax rates, but by simplifying tax rules and widening the tax base. A number of the measures which are proposed in the Budget may result in broadening the tax base which may allow the Finance Minister to announce a rate reduction in the next Budget.
The Budget has introduced a number of tax proposals which seek to improve ease of doing business in India, stimulate growth and promote the digital economy. The proposal to extend the eligible period of concessional tax rate of 5% on interest on foreign loans can be expected to result in increased debt flows into India. There is an anti-abuse measure which seeks to limit the interest deduction to 30% of the company’s EBITDA or interest paid or payable to Associated Enterprises, whichever is lower. The introduction of this proposal is in line with the best practice recommended by the OECD-G20 BEPS Action Plan 4.
Extending the period for claiming deduction by start-ups to three consecutive years in any seven years as well as allowing carry-forward of losses even in case of a substantial change in shareholding to eligible start-up companies can also be expected to stimulate the Indian economy.
Continuing to focus on the theme of ease of doing business in India the Budget provides clarity on applicability of the indirect transfer taxation provisions to foreign portfolio investors. After some flip flop, the Budget introduces an amendment to clarify that the certain categories of portfolio investors would be exempt from the application of the provisions. This is likely to give an impetus to increase capital flows into the country. The proposal to reduce the scope of domestic transfer pricing provisions can be expected to significantly reduce the compliance burden of taxpayers.
The Budget also seeks to strengthen the anti-abuse provisions in the tax law. Capital gains tax exemption on shares would apply only in cases where Securities Transaction Tax (STT) has been paid, with some safeguards to protect genuine cases such as shares acquired in an IPO, bonus or rights issue etc. In case of transfer of shares at less than prescribed value e.g. by way of gifts, the same would be taxed based on the fair market value (FMV), regardless of the actual consideration.
The Budget also proposes to rationalise the computation of books profits for purpose of MAT in light of Ind-AS and provides a framework for the same.
The Budget introduces a number of measures for promoting the digital economy. These include providing disincentives for cash payments in computing taxable income, measures to discourage cash transactions, promoting digital payments in case of small and unorganised businesses.
A measure for which the Budget will be remembered for and arguably the boldest proposal of the Finance Minister are the proposals relating to transparency in electoral funding.
To conclude, India has come a long way in terms of economic performance and reforms. But there is still a journey ahead to achieve both dynamism and social justice. Budget 2017 reflects government’s commitment to transform, energise and clean India. Given the above, I have no doubt that this budget will see significant acceleration in foreign exchange inflows.