Budget 2017 - Expectations of infra, new-age businesses
Tax Partner, EY India
While this fiscal year started with India being recognised as one of the only bright spots in an uncertain global economic environment, demonetization is set to weigh in on the short-term growth numbers. Globally, too, there has been a growth in uncertainties – Brexit and Trump left the business community perplexed.
In such an environment, it would become vital to feed the economy with appropriate Budget reforms. Some of the key tax reforms/policies one would like to have are:
Rates of tax
Budget 2015 saw the finance minister (FM) announce a reduction in corporate tax rates from 30% to 25% over a 4-year period while proposing to phase out deductions and exemptions.
Budget 2016 referred to a plan for phasing out of deductions but very little relief was provided to corporates in terms of tax rates. The FM should look to reduce corporate tax rates (including that of LLPs) by at least 2% in the current Budget. Considering the above objective, the FM may also consider a phasing out of Minimum Alternate Tax (MAT, which is currently levied at 21.34%).
Amendments in Finance Act 2016 based on global tax trends
Equalisation levy at the rate of 6% was introduced on specified services (currently, online advertising). The levy is, in substance, a form of indirect tax levy which is a cost for Indian residents. Further, even the scope of the specified services is proposed to be increased. In this regard, the FM should look to bring down the tax rate of the levy to ease the cost burden.
The provisions on the Patent Box Regime were introduced to drive indigenous R&D. While this was a welcome move, the provisions are restrictive and may not entirely achieve the desired purpose. For example, they provide a beneficial tax rate of 10% for royalty income derived from 'patents'. The FM should consider broadening the scope of the provisions to include income derived from all intellectual property rights including know-how, copyright, trademark, etc.
Further, the FM should also consider applying the lower rate of tax to capital gains arising on sale of such patent and on patented products.
Indirect transfer – corporate reorganisation
In his Budget speech in 2015, the FM clarified that the capital gains in case of indirect transfer shall be exempt in respect of transfer of shares of a foreign company deriving its value, directly or indirectly, substantially from the shares of an Indian company, under a scheme of amalgamation or demerger. Corporate reorganisations abroad can happen without formal mergers/demergers. The FM should consider exempting all forms of corporate reorganisations where the ultimate beneficiaries do not change.
Permanent establishment (PE) taxation
Further, taxpayers constituting a PE in India have for long wanted certainty on the mechanism for profit attribution. Rules similar to the Safe Harbour Rules could be proposed to enable greater certainty and clarity for non-residents who have a PE while undertaking business in India.
Tax incentives for start-ups/technology businesses
Start-ups, typically make losses in the first few years. The FM's proposal to provide start-ups with a push by providing a tax holiday for any 3 of the first 5 years may not achieve its desired objective. To provide real purpose to the provisions, the FM must look to provide start-ups with the option to avail such exemption on tax profits in any 5 of the first 10 years post commencement of business subject to no change in ownership. Further, the government could consider providing an additional deduction of 30% to new employees employed by technology and service companies as a measure to boost employment.
Incentivising infrastructure development
The FM, in Budget 2016, announced the revival of 160 airports and large-scale road development to boost regional connectivity. Further, metro rail and mono rail projects are also in different stages of implementation in several cities across India. However, infrastructure development at such a vast level will certainly warrant some tax benefits. Accordingly, the government could consider extending a tax holiday for such businesses under section 80IA of the income tax Law.
The housing market, especially urban housing, suffers from slow growth and high prices. To ease the same, the FM may consider enhancing the deduction in respect of interest on loan taken for purchase of residential house property by resident individuals.
To conclude, Budget 2017 provides an opportunity for FM to give desired impetus through tax concessions in infrastructure space, employment generating sectors, new businesses embracing technology and digitalisation.