Published Editorial

Budget 2017 - Booster for DeMo as FM limits cash donations to political parties at Rs.2000

February 2017

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Economic Times

By

Sudhir Kapadia
National Tax Leader, EY

The Economic Survey yesterday tantalisingly flagged the tagline " Demonetisation : To Deify or Demonize?" and suggested follow up actions to achieve its stated objective of curbing black economy. It seems the Finance Minister has taken the bull by its horns and implemented some key recommendations of the Special Investigation Team( SIT) like disallowing any cash transaction above Rs 3 lacs as a tax deduction( capital or revenue) and of the Election Commission( EC) to limit cash donations to Rs 2000 to a political party.

The FM has gone further to address the holiest grail of all viz tax exemption for political parties to be dependent upon compliance of donation norms and filing of timely tax returns. An innovative electoral donation scheme through bonds has also been announced to facilitate non cash donations to political parties.

On capital gains taxation, whilst there was a foreboding feeling of some changes in long term capital gains tax exemptions on listed securities,the FM has actually sprung a pleasant surprise instead by reducing the holding period for land and building assets from three to two years to characterise as long term.

On corporate tax front, the FM has chosen to provide for the full reduction in corporate tax rate from 30% to 25% for MSMEs with turnover upto 50 crores whilst retaining the 30 % tax rate for larger companies. Since the rate reduction extends to 96% of registered companies, it will have a salutary impact but will disappoint large contributors to the economy whose tax rate including dividend distribution tax( DDT) continues to be over 42% if they declare full dividends. Also, for larger companies, the proposal to limit interest deduction to 30 % of EBITA may increase their tax outgo. Finally, the move to reduce personal tax rate to 5 % for income slabs upto 5 lacs will leave larger disposable incomes to spend in the economy whilst at the same time protecting the country's tax base.

The Economic Survey yesterday tantalisingly flagged the tagline " Demonetisation : To Deify or Demonize?" and suggested follow up actions to achieve its stated objective of curbing black economy. It seems the Finance Minister has taken the bull by its horns and implemented some key recommendations of the Special Investigation Team( SIT) like disallowing any cash transaction above Rs 3 lacs as a tax deduction( capital or revenue) and of the Election Commission( EC) to limit cash donations to Rs 2000 to a political party. The FM has gone further to address the holiest grail of all viz tax exemption for political parties to be dependent upon compliance of donation norms and filing of timely tax returns. An innovative electoral donation scheme through bonds has also been announced to facilitate non cash donations to political parties. On capital gains taxation, whilst there was a foreboding feeling of some changes in long term capital gains tax exemptions on listed securities,the FM has actually sprung a pleasant surprise instead by reducing the holding period for land and building assets from three to two years to characterise as long term. On corporate tax front, the FM has chosen to provide for the full reduction in corporate tax rate from 30% to 25% for MSMEs with turnover upto 50 crores whilst retaining the 30 % tax rate for larger companies. Since the rate reduction extends to 96% of registered companies, it will have a salutary impact but will disappoint large contributors to the economy whose tax rate including dividend distribution tax( DDT) continues to be over 42% if they declare full dividends. Also, for larger companies, the proposal to limit interest deduction to 30 % of EBITA may increase their tax outgo. Finally, the move to reduce personal tax rate to 5 % for income slabs upto 5 lacs will leave larger disposable incomes to spend in the economy whilst at the same time protecting the country's tax base.