Budget may boost job creation, consumption

To encourage consumption, the Budget can be expected to increase liquidity

The Union Budget for 2017-18 will be distinctive in many ways. It will be for the first time that the Railway Budget will be merged with the Union Budget. Further breaking from tradition, the Union Budget will be presented a month in advance, on February 1. This being the mid-tenure Budget of the current government, it presents an opportunity to course-correct the economy, after the disruption caused by demonetisation. Therefore, one can expect proposals to give a boost to consumption, job creation and investment.
 
To improve overall sentiment and encourage consumption, the Budget can be expected to increase liquidity in the hands of individuals by reducing their effective tax burden. This can be achieved by a reduction in the existing tax rates of 10, 20 and 30 per cent, or by increasing the respective slab-rates. As any upward revision in the tax slab rates could result in a lot of people moving out of the tax net, a more rational measure would be a reduction in existing tax rates, keeping the slab rates intact.

 
In line with government’s aim of providing housing to all and to provide an impetus to the construction and real estate, cement, steel and logistics industries, all of which provide large-scale employment to unskilled and semi-skilled labour, the deduction for interest on housing loans may be increased from the current Rs 2 lakh to Rs 3 lakh.
 

To channel savings and investments into financial assets/desired sectors, one may expect an increase in the current investment limit of Rs 1.5 lakh under Section 80C, with clear directions for investments in specified instruments and sectors. Various tax benefits enjoyed by salaried taxpayers, such as reimbursement of medical expenses and conveyance allowance, have outlived their economic utility and do not provide any meaningful benefit. Instead, they only add to the administrative burden of employers. Therefore, these benefits may be done away with and instead a special benefit like the erstwhile standard deduction may be re-introduced.

 
For corporate taxpayers, Union Budget 2017 should revolve around the central theme of tax rationalisation and tax simplification. Speculation about a decline in the headline tax rate applicable to corporates by 1.5 percentage points, bringing the tax rate down to 28.5 per cent, is rife. However, as announced by the government in the past, this would come in conjunction with the withdrawal of tax holidays and deductions. At the same time, the demand for a reduction in Minimum Alternate Tax (MAT) is also picking up. This is based on the premise that, with the withdrawal of tax benefits, the gap between the tax and book profits would narrow down, and as a result MAT would become inconsequential over time.

 
Indian Accounting Standards (Ind-AS) have become applicable to large corporates. These standards primarily operate on fair valuation of transactions. Thus, accounting would be in divergence with the actual transactions on some critical aspects. The government has also introduced Income Computation and Disclosure Standards (ICDS) with a view to providing guidance on taxation in the post-Ind-AS regime. There is inherent conflict between ICDS and Ind-AS in many important areas and this is only adding to the confusion. Thus, further clarity is required on this account.
 
On the international tax front, some concrete action is expected on the Place of Effective Management (PoEM) regime. In view of the ambiguity and confusion caused by the draft guidelines and the fact that final guidelines are yet to be issued, a practical option could be to do away with the PoEM, and instead introduce a focused and clear Controlled Foreign Company (CFC), in line with the OECD and global best practices.

 
One can also expect an enabling provision to sign multilateral instruments, thereby providing a vital tool to the revenue authorities for speedier implementation of BEPS-related initiatives. Also, expansion of the purview of the equalisation levy to include more services may be expected.
 
Coming to indirect taxes, implementation of the nationwide Goods and Services Tax (GST) is being looked at as India’s single largest tax reform. Though uncertainty prevails over its implementation timeline owing to lack of consensus between the Centre and the states on issues of dual control, the structure of IGST and jurisdictional matters, it is likely to see the light of day soon. Thus, we may not see major announcements on the existing indirect tax structure, except relating to rationalisation of tax rates and the credit regime, to bring these in line with the forthcoming GST regime.

 
In the recent past, the government has taken many commendable steps to bring in consistency, clarity and transparency, and to reduce litigation. We should see more measures being taken in the current year’s Budget in line with various recommendations, including those under the recent Justice Easwar Committee Report (second report).
 
Overall, as in the past, there are a lot of expectations from this year’s Budget. However, there is limited room for the government to manoeuvre and meet the demands of varied groups — large industry, small and medium enterprises, salaried individuals and development projects. Thus, we may see a fine balancing act in the Budget and that should be enough to cheer up sentiment in the economy.

 
The writer is National Leader-Tax, Grant Thornton India LLP. This article has been written with assistance from Gaurav Mittal, a chartered accountant