Budget 2019: Here's how to make sense of changes in tax rules & regulations

Business Standard |
Pranay Bhatia , Partner
Tax and Regulatory Services
|

06 July 2019

Here are some insights on key issues

Reduction in corporate tax rates

Background

The headline corporate tax rate in India is 30 per cent, coupled with the dividend distribution tax of 20 per cent. With most tax incentives being phased out, it is imperative that the headline rate be reduced.

Further, LLPs are treated on a par with companies as a vehicle to undertake various activities. Even the phasing out of tax incentives were made applicable to both companies as well as LLPs. Hence, the benefit of reducing tax rate should also apply to LLPs.

Issue

Globally, key economies (the likes of the US and the UK) have lowered the corporate tax rate to attract foreign investments. A higher tax rate, with greater compliance challenges, does not make India a favourite destination for investment.

Small and medium businesses prefer LLPs/firms as these forms are relatively easy to conduct business.

Impact

Reducing the tax rate to 25 per cent for companies with a turnover of up to ~400 crore means that a majority of the companies get covered. The agenda five years ago was to gradually cover all companies in the 25 per cent bracket, which still remains unaccomplished.

Other business forms such as LLPs and partnership firms are not given the relaxation of the reduced tax rate, thereby making India a country with a higher headline corporate tax rate of 30 per cent.

Tax impact on start-ups

Background

Start-ups are an important area. The start-up India initiative has led to a flourishing ecosystem. Eligible start-ups are given benefits such as tax sops.

However, a number of issues and ambiguities are adversely impacting businesses and investors.

Issue

Varied regulatory compliances, eligibility criteria to avail of tax exemptions, angel tax, etc. have dissuaded investors and hampered growth. The government responded to some of these through clarifications to provide relief and clarity.

All the clarifications need to be codified to provide statutory backing.

Impact

The government has addressed issues faced by start-ups, be it the angel tax, set-off and carry forward of losses or getting exemption on investing in start-ups. The issue of relaxing the eligibility criteria of a start-up for availing of benefits is left unaddressed.

Buyback tax for listed companies

Background

Buyback provisions sought to levy tax on domestic companies effecting a buyback of their shares. The buyback tax is computed at 20 per cent of the excess of the buyback price over the issue price of the shares sought to be bought back. These provisions are essentially anti-abuse measures aimed at curbing the practice of unlisted companies, reducing tax incidence by giving dividends in the garb of a buyback.

Issue

Recent years witnessed several listed companies with a sizeable reserve of accumulated profits announcing attractive buybacks. Since listed companies were not covered in the purview of the buyback tax, these buybacks have turned out to be tax saving for the firms (albeit consequential income being taxable to shareholders).

Impact

It is proposed to widen the ambit of the buyback tax for listed companies. Corresponding tax exemption on income in the hands of shareholders has also been proposed. It is worth noting that in a few cases buyback tax may continue to be tax-effective, since DDT is levied on the gross dividends paid. One will have to wait to see whether dividend pay-out will now increase.

Impetus to housing for all

Background

The real estate sector is suffering from regulatory challenges and lack of fresh demand.

This is partially because of lack of tax breaks in terms of deduction for interest on loans taken for self-occupied house property (the tax break is restricted to ~2 lakh). Notional income in relation to unsold inventory is also taxed in the hands of a developer.

Issue

Considering increased prices, coupled with rising interest rates, and restriction on interest deduction affect fresh demand in this sector. Further, tax on unsold inventory puts undue pressure on the developer, leading to higher tax cost.

Impact

Several policy initiatives on the housing sector are proposed, both in direct tax and indirect tax. An additional interest deduction of Rs 1.5 lakh to investors is a welcome move and might increase demand in the short run. However, home buyers with a property value exceeding Rs 45 lakh will not get this additional benefit. With higher property rates, this upper limit on value may act as a hindrance.

Incentivising move to IFSC

Background

With the intention to promote world-class financial infrastructure in India, International Financial Services Centre (IFSC) was established near Gandhinagar. Several tax concessions were provided to business carried out by units in International Financial Services Centre.

Issue

Though several incentives have been provided to units established in GIFT, certain operational hindrances and ambiguities on the taxation front have led to slow investments in GIFT City.

Impact

Some key taxation benefits such as no dividend distribution tax on accumulated income, 100 per cent profit linked deduction extended to 10 years, etc. will provide certainty on some tax aspects. A lot needs to be done from an operational and tax perspective so that Indian IFSCs are able to compete with IFSCs in Singapore and Dubai.

Relaxation for offshore fund manager

Background

Indian tax law introduced provisions to protect offshore funds from either having a business connection or a residence in India merely because their fund managers were based in India. The objective was to compete with advanced jurisdictions such as Singapore, Hong Kong, London, etc.

Issue

Certain conditions relating to the corpus, size, investor base, adequacy of management fees, etc. These conditions were practically difficult to fulfil and acted as a roadblock in attracting offshore fund managers to India.

Impact

The proposed amendment provides additional time for the fund to achieve the targeted investment. Further, the condition with regard to remuneration has been relaxed from being arm’s length to minimum prescribed. Though this changes are welcome, they do not seem to be adequate and attractive for the fund manager’s regime to be fully operationalised.

Source: https://www.business-standard.com/budget/article/budget-2019-here-s-how-to-make-sense-of-changes-in-tax-rules-regulations-119070600050_1.html