Dr Suresh Surana
The Union Budget 2017 scheduled to be presented on 1 February 2017 is keenly awaited as it would reflect the government overall economic policy and direction in an uncertain and politically charged environment.
It needs to be seen whether the government takes a populist approach or a business friendly and growth oriented approach. Here are some of the industry expectations particularly from income tax perspective from this year's budget.
FULL COVERAGE: UNION BUDGET 2017-18
1. Reduction in Effective Corporate Tax Rates
Globally corporate tax rates have fallen from an average of 27.5% just 10 years ago to 23.6% today. On the other hand, corporate tax rate in India averaged 35% over last two decades. This coupled with MAT on book profits and Dividend Distribution Tax makes India as one of the highest tax regimes in the world for businesses. The Government had proposed to bring down the corporate tax rates to 25% in a phased manner. As a step towards this, the government is expected to reduce the highest corporate tax rate from 34.6% to 33% and the highest MAT rate from 21.3% to 20%.
2. Increase in Basic Exemption Limit to benefit Employment Intensive Businesses
The IT and ITeS, Gems & Jewellery, Textile, manufacturing sector, Real Estate sector, etc. have a large workforce, is expected to benefit from increase in the basic exemption limit from the current Rs. 250,000 to Rs. 300,000. It is possible that certain allowances which are exempt such as Children Education Allowance (Rs. 100 pm) and Children Hostel Expenditure Allowance- (Rs. 300 pm) are phased out. Alternatively, standard deduction for salaried employees is introduced to the extent of 30% of the salary with a limit of Rs. 50,000.
3. Extension of Deadline - Investment Allowance to Manufacturing Company
With an object to encourage and incentivize the manufacturing sector, additional deduction of 15% in respect of acquisition and installation of new plant and machinery (provided minimum investment of more than Rs. 25 crores p.a.) was introduced under Section 32AC. The deadline for making such investment is to expire on 31.03.2017. To address this concern of the small manufacturers and also to encourage 'make-in-India' drive, it is expected that the deduction time limit should be extended and also threshold be reduced from Rs. 25 crores to Rs. 5 crores.
FULL COVERAGE: RAILWAY BUDGET 2017-18
4. Tax Neutral Conversion of Mid-sized Companies into LLPs
At present, the conversion of a company in to LLP is tax exempt only if certain conditions are fulfilled such as turnover below Rs.60 lacs per annum and gross assets below Rs. 5 crores. In order to improve ease of doing business and promote LLP as an effective alternative to companies for mid-sized and small businesses, it is expected that the turnover limit may be increased to 5 crores and total assets limit may be increased to 10 crores.
5. Extension of sunset clause for Infrastructure facility/ Power sector
Infrastructure development is a critical component in driving economic growth and creating jobs. Government has announced the target of Rs. 25 trillion (US$ 375 billion) investment in infrastructure over a period of 3 years.
Finance Act, 2016 provided that any enterprise starting the development or operation and maintenance of infrastructure facility on or after 1 April 2017, no deduction shall be available in section 80IA(4)(i) of the Income Tax Act 1961 ('the Act'). Further, the sunset date under section 80-IA (4)(iv) for the power sector is 31.03.2017.
Incentives are needed to attract investments in these sectors and therefore, extension of these sunset clauses by up to 31.03.2020 is expected.
6. Rationalization of Domestic Transfer Pricing Provisions
Transfer Pricing provisions since its inception continues to account for widespread tax litigation in India. While several steps have been taken to bring down the tax disputes such as introduction of APA with roll back provisions, Safe Harbour Rules, there is still a lot to be done. The domestic transfer pricing introduced from Financial Year 2012-13 can be applied even in a tax-neutral scenario i.e. in cases where taxes have been paid at maximum marginal rate by both of the domestic related parties. To bring rationality into it, it is expected that a proviso be keep such tax neutral situations outside permissible adjustments, though reporting under Specified Domestic Transaction (SDT) can be continued with.
7. Wider Coverage of Safe Harbour Rules with lower margin
To reduce the widespread litigation in respect of international transactions between Associated Enterprises, the Safe Harbour rules (SHRs) were notified on 18 September 2013. However, even till date the Rules only cover certain sectors such as IT & ITeS, contract research in generic pharmaceuticals, core and non-core automobile components. It is expected that the scope of SHRs be extended to other sectors such as automobile sector, Gems & jewellery sector, Pharmaceutical sector and Textiles to make SHR broad based and also to bring down the litigation.
Further, the margins prescribed under the SHR are on the higher side and therefore should be reviewed to make it more realistic and in consonance with the general sectoral margins.
8. Restructure "Dividend Distribution Tax" as "Dividend Withholding Tax (DWT)" & Permitting Set Off
The present system of DDT is complex, archaic, not in line with global practices and in its current form has resulted in inefficacy to the shareholders. Thus, it is expected that it will be replaced by DWT and final tax at the rate of 15% which is fair and reasonable. (Many Indian tax treaties provide withholding tax @ 15%). The benefits under the DWT will be manifold. First, foreign Shareholder will be able to claim lower withholding tax under the Tax Treaty and the tax credit (of taxes withheld on dividend income) against their tax liability in the home country. Secondly, shareholders can heave a sigh of relief as litigation arising out of disallowance of expense under section 14A will come down substantially. Finally, introduction of DWT will align India with International tax norms and will make India a more attractive investment destination. Further, the DDT set off which is available presently only in case of parent subsidiary relationship should be permitted for all investments irrespective of the investor investee shareholding threshold.
Dr Suresh Surana, Founder, RSM Astute Consulting Group.