To his credit, the FM has delivered on some of the promises given that retrospective Taxation , MAT on foreign companies and some key transfer pricing controversies have almost been buried. The expectations from this Budget were built on the promise of lowering of corporate tax, providing no adversarial tax regime, simplification and tax reforms that has been part of the discussion agenda all through the past 12 months.
The promise that the headline Corporate Tax would move from current 30% to finally rest at 25% in line with similar global benchmarks did not materialize with the rate dropping by 1% only for a select few companies. With this rate, India remains a country with one of the highest corporate tax in the world what with most economies dropping the rate between 20 25% that includes even countries like Germany and UK.
On the other hand, the FM has acted with alacrity to the final plan of phasing out exemptions across the board with most deductions being phased out by April 01, 2020, which was counter promise to reduce corporate tax rate. This is going to be cause of disappointment and anxiety whether the tax rates will ever drop.
In line with the promise of Prime Minister, Mr Narendra Modi, the Startup India program has been given the requisite tax steroid with 100% deduction of profits for 3 out of 5 years with a caveat that minimum alternate tax would still apply to such companies. Investors in such companies are entitled to reinvestment benefit of capital gains from any other asset, subject to conditions.
However, these companies have not been granted relief from Indirect taxes, angel tax i.e. taxing premium it receives from investor in specified circumstances and tax on ESOPs in this Budget. Importantly, these companies have hit the radar and hopefully, things would only get better from here for them. However, equally intriguing was introduction of 10% tax on dividend income in case of Individuals etc where such income is in excess of Rs.10.00 lacs.
This tax would hit promoters of companies hardest who would be saddled with 3 levels of tax; one, corporate tax on income @ 30% second, dividend distribution tax @ 18%, both liable to surcharge & cess and now 10% tax on dividend income. Clearly, this is not going to go down well with promoters and large investor community.
Taking a cue from the recommendation of Justice Easwar Committee canvassing reduction in litigation, the FM's effort to reduce 1st level appeals before Commissioner where nearly 3 lakh cases are pending with Rs.5.50 lakh crores locked in litigation with payment of tax, interest and waiver of penalty is laudable, but misplaced.
The key assumption here is that majority of the appeals filed by the Taxpayers are either frivolous or suspect and therefore, such an offer would actually reduce litigation, whereas it is a common knowledge that in most cases the first appeal is filed by a harassed Taxpayer on account of aggressive assessment by the tax authorities.
Apart from an overall disappointing budgetary provisions for corporates and individuals across the board, the FM has accepted a few recommendations of Tax Administration Reform Committee and Justice Easwar Committee which would come as a limited relief to Taxpayers with the hope for efficient administration of tax reforms that would benefit both the Government and the Taxpayer.