In individual taxation, the basic exemption limit of INR 2.5 lakhs may see an upward revision as a post-demonetisation gift
While the demonetisation announcement may have adversely impacted the businesses in short term, the industry now eyes the forthcoming Union Budget. Departing from age-old tradition of presenting the budget on last working day of February, budget 2017 may be presented on February 1, 2017.
The expectations of 'feel-good' factors featuring in the budget are high as an incentive to unanticipated decision to abolish high currency notes. To outweigh the pain, the Finance Minister is likely to unveil reforming policies and tax sops to cheer the economy and stakeholders. Listed below are some key expectations that may find place in Budget 2017:
Policy initiatives
The budget may embark upon an exercise to promote digitisation by extending benefits for cashless modes of transaction. To stimulate activity in affordable housing category, proposals may be directed at schemes, rebates/tax breaks for real estate developers, investors and home buyers. Further, social sector (education, healthcare) spending may be increased initiating consumption and disposition of accumulated income.
Direct tax
1. In individual taxation, the basic exemption limit of INR 2.5 lakhs may see an upward revision as a post-demonetisation gift. To align India's tax rates with globally compatible tax rates, reduction in current corporate tax rate of 30% and corresponding MAT rate is likely. Reduction is likely to be possible since more and more businesses will enter the mainstream leading to higher income base allowing overall lower taxes.
2. As an impetus to start-ups, 100% profit linked tax holiday for 3 out of 5 years was offered. Practically most of the start-ups may not make profits in initial years, thus tax holiday may not provide a meaningful benefit. The Government may consider raising tax holiday period along with exemption from MAT levy to boost their growth.
3. Under the indirect transfer provisions, capital gains arising on transfer of shares of foreign company, deriving its value substantially from Indian assets, is taxable in India. The onus of reporting such transactions is cast on the Indian entity, who may not be always aware of the off-shore transactions. It is hoped that the Finance Minister will take a re-look at the reporting requirement and provide some relaxation.
4. A new test of tax residence based on place of effective management (PoEM) was recognised for foreign companies. Resultantly, such companies may be liable for taxation of global income in India. Since the final guidelines for determination of PoEM are not yet released, the provisions may be deferred for at least one more year (as was postponed in budget 2016). As an alternative to PoEM, the budget may introduce Controlled Foreign Company framework that seeks to tax only the passive income (interest, dividend, etc.) of foreign companies.
5. Equalisation Levy, popularly known as 'Google tax', was enacted by Finance Act 2016 to tax revenue earned by non-residents from digital advertisement services to Indian residents. The scope of levy may be enlarged to cover cloud computing and entertainment services and app purchases from digital platforms.
6. Following transfer pricing proposals are looked forward to:
i. To reduce litigation, Safe Harbour rules were framed, whereby if the taxpayer earns minimum margins as prescribed, transaction is accepted to be at arm's length. In view of higher margins prescribed, this framework has not found favour with taxpayers. It is expected that realistic margins may be provided for alongwith concession in compliances to induce taxpayers to opt for safe harbour window.
ii. Master File and Country-by-Country report (CbCR) is required to be maintained and furnished as part of three-tier structure of transfer pricing documentation. The contents and formats for these are expected to be notified. Though threshold has been indicated for CbCR report in last budget, no such limit is prescribed for Master file. To relieve the small MNE groups from such detailed compliance burden, the upcoming budget may stipulate a threshold for Master File as well.
Indirect tax
In the face of unresolved issues revolving around GST, we expect the Finance Minister to announce the timetable for its rollout. The customs duty structure could also witness some change along with amendments in other indirect tax rates, especially service tax, to align them with the GST rates.
On a closing note, the intentions of the Government towards speeding up the economic growth, broadening tax base coupled with a moderate tax structure and taxpayer friendly administration are likely to hold importance in framing of budget 2017 proposals.
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