Finance minister Nirmala Sitharaman presented her maiden budget amidst soaring expectations of reviving investment sentiment, accelerating economic growth as well as providing tax incentives and rate cuts. In the backdrop of a slowing economy, weakening consumption, rural distress and high unemployment, she had an arduous task of balancing – revival of public and private investment, driving consumption and yet keep the fiscal deficit under control.
The budget seems to have made a genuine attempt at stimulating the economy by incentivising businesses, promoting rural economy and improving education. The FM has endorsed the roadmap for India to become a $5-trillion economy. Some of notable corporate tax proposals are: Corporate Tax Rate: The longstanding demand of India Inc has been to reduce the corporate tax rate, including the abolishment of MAT. The budget has proposed to extend the benefit of concessional corporate tax rate of 25% to companies having a turnover up to Rs 400 crore (for the year ended 31 March 2018) with a coverage of 99.3% of companies. While this is welcome, it stops short of making this an across-theboard cut, which would have brought real cheer. Large companies have been left out of the tax cut although they contribute the maximum in terms of growth, employment and tax payments.
Startups: The government has committed itself to supporting the startups and taking measures to ensure a conducive growth environment for them. The budget has listed further relaxation of conditions relating to carry forward and setoff of losses and announcements addressing the angel tax issues. The angel tax issue, while acknowledged by the FM in her speech, does not find place in the Finance Bill. One can expect that there will soon be clarity in this regard. Further, startups are not required to justify fair market value of their shares issued to Category-I Alternative Investment Funds (AIF). It has been proposed to extend this benefit to Category-II AIFs also.
NBFCs: NBFCs and banks face similar market challenges. The recent surge in NPAs have left both in acredit crunch. It is a high time that NBFCs are given parity in tax treatment as well. As a step in the right direction, interest income in relation to certain categories of NPAs of NBFCs are also proposed to be taxed in the year of receipt like existing provisions for banks. The budget missed extending the exemption of limitation of interest deduction to NBFCs, which are available to banking companies.
Buyback Tax: Purchase of own shares by unlisted companies are taxed at a rate of 20% plus applicable surcharge and cess in the hands of the unlisted companies. Capital gains if any, earned by the shareholders on such buyback of shares are exempted from tax. This was done in 2013 to remove the arbitrage of lower capital gains vis-a-vis dividend distribution tax. As an ‘antiabuse’ measure, this budget now proposes to extend the buyback tax to listed companies as well. Whereas such arbitrage may arguably have existed in closely-held companies, the same doesn’t necessarily hold good for publicly listed companies and it may not be correct to call it a tax avoidance measure and therefore introduce this as an antiabuse provisions. Listed companies are guided by various considerations, and not necessarily only tax savings, in deciding on buyback. In this respect, such a levy was not warranted and in any case, it not as an anti-abuse measure.
Some progressive announcements such as making available pre-filled tax returns and faceless e-assessment of tax returns in a phased manner are good measures to enhance compliance, which would help in taxpayer base expansion. Given the headwinds the economy is facing, the government has not shied away from partially increasing the coverage of the lower tax rate of 25% and also announced the intent to provide targeted incentives to sunrise sectors. The corporate tax proposals thus align with the vision to propel India to $5-trillion economy and provide such vision with a firm grounding.