Set to be presented on February 1, the Union Budget 2018 will surely be a challenging one for the government. With bold steps like demonetisation and introduction of GST, it is time again for the government to prove its potential in its final budget before the 2019 general polls.
Corporate bodies have started putting forward their expectations, the foremost being rationalisation of tax rates and withdrawal of surcharge and cess on Income Tax. The proposal of the Finance Minister, in the Budget of 2015-16, to reduce the tax rate from 30% to 25% in four years and reduction in the US tax rates are the reasons why the corporates are hoping for tax rate cut.
Proposal to tax domestic companies at 25% is with the condition that they do not avail tax incentives/ exemptions. This would help reduce litigation around tax incentives and remove compliance burden. Consistent with the reduction in rate under regular provisions, the rate of Minimum Alternate Tax (MAT) must also be reduced and credit should be allowed to be carried forward indefinitely to avoid lapse of the same.
A domestic company, distributing dividend, is required to pay Dividend Distribution Tax (DDT) on the already taxed profit, at an effective rate as high as 20.36% after "grossing up" and investors in receipt of dividend above INR 10 Lakh are required to pay 10% income tax.
Even expenses incurred for earning the exempted dividend income are not allowable under section 14A read with Rule 8D and leads to litigation around this issue. Budget 2018 is expected to withdraw DDT and tax dividend income in the hands of the recipient shareholders.
Further, credit of DDT is only available to a recipient company holding 51% or more of the share capital of the company declaring and distributing dividend. Thus, an absolute removal of cascading effect of DDT is sought, providing for DDT credit without any conditions/ restrictions.
In pursuance of the government's key theme to take India higher in the "Ease of doing business" ranking, it is proposed that the Income Computation and Declaration Standards (ICDS) be scrapped altogether. Introduction of ICDS has led to an increased compliance burden as entities have been forced to maintain parallel set of books of accounts.
Along the same lines, clarification on carry forward of excess foreign tax credit is sought.
The Income Tax Act allows for set off in respect of foreign taxes paid on income earned abroad. However, no set off is allowed in case of loss.
Start-ups enjoy tax holiday for the first three years. However, if a start-up is earning profits, MAT has to be paid regardless of any tax free scheme. This provision renders exemption provided to start-ups ineffective and thus requires reconsideration.
Stringent laws and cumbersome procedures defeat the government's objective of "housing for all by 2022. For instance, a provision in the law requires taxing notional income of unsold properties, held as stock-in-trade by real estate developers. This amendment was brought about as a means to promote the real estate sector, it however has had serious impacts on the real estate developers who have been unable to sell their properties in the sluggish market.
In view of the genuine hardship faced by real estate developers, the government could either consider withdrawing the amendment or increasing the exempt period of one year. Our tax laws need to keep pace with the growing economy. In an economy that is dominated by the service sector, carry forward of losses only in case of amalgamation of companies that own 'industrial undertakings' is pointlessly restrictive.
Corporates currently incur heavy costs in the areas of social responsibility like education, health, sanitation, women empowerment, etc. This a compulsory obligation requiring compliance under the Companies Act, 2013 and thus requires tax deduction, which is currently not allowed. Providing suitable tax incentives in respect of such Corporate Social Responsibility costs would not only incentivize corporates to spend more but also help the government achieve the said goals.
Another section posing difficulties is Section 6(3), governing Place of Effective Management (POEM). POEM guidelines were finalized only in January 2017 whereas the POEM provisions are already applicable from A/Y 2017-18 and onwards.
Moreover, the CBDT is yet to notify the transition provisions relating to POEM. Undertaking a process before the law itself is brought into force causes undue hardship. The taxpayers must therefore be given some time to put together their affairs to comply with POEM Guidelines. It is thus desired, in the light of the above that the applicability of POEM be deferred.
Improving tax collection, reducing/ minimizing litigation and tax burden, rationalization of the provisions of the Income Tax Act, and removal of cumbersome processes should be priority for the government with respect to companies this year.
India has emerged as a strong yet liberal nation with clear signs of growth. However, post demonetization and reforms like the Goods and Services tax, it remains to be seen what the government will do to recover from the jitters.
The author is Managing Partner, Nangia & Co LLP, a chartered accountancy firm