Budget impact: Direct tax proposals are futuristic and far reaching

Tax exemption on withdrawal from NPS at the time of closure or opting out will be enhanced from 40% to 60%

Direct taxes
 
The finance minister presented the first Union Budget of the re-elected government with the aim of stimulating growth, incentivising affordable housing, encouraging start-ups, promoting digital economy, simplifying tax administration and bringing in transparency.
 
Beneficial measures for the common man

The Budget proposes various measures having far reaching impact.
 
For the first time, interest paid on loan for purchasing e-vehicle will be tax deductible up to Rs 1,50,000 p.a. This proposal has multiple benefits – pollution control (Air Quality Index of some cities in India mentioned in Table 1), conservation of natural resources, growth in manufacture of new age products apart from reducing effective cost of vehicles.
 
First time home buyers can get deduction of Rs 1,50,000 of interest paid on new housing loan for purchase of residential house valued upto Rs 45,00,000. Although ambiguous, this deduction will be in addition to the currently allowable deduction of Rs 2,00,000. This will encourage purchase of affordable housing and accelerate turnaround of the real estate sector.
 
Tax exemption on withdrawal from NPS at the time of closure or opting out will be enhanced from 40 per cent to 60 per cent. This will give additional disposable funds for the subscribers and make the scheme more attractive.
 
Aadhaar and PAN are now interchangeable. A taxpayer won’t need PAN while filing tax returns. On a long term basis one may expect the country to move to a single identification number for all purposes.
 
Pre-filled tax returns will be made available to taxpayers and will contain details of salary, capital gains, interest, etc. and tax deductions. This will significantly reduce time taken to file the return and ensure accuracy. The revenue will also have access to more data to enforce legitimate tax payments. The information returns to be filed by various entities is a move in such direction.
 
Higher tax rate for high income earners
 
High income earners (above Rs 2 crore) will have to shell out more tax upon levy of higher surcharge.
  

Income	Effective tax rate
Above Rs 2 crore but  upto Rs 5 crore	39%
Above Rs 5 crore	42.74%

This rate is similar to that prevalent in the 1990s. This measure is in line with the concept of sharing mentioned by the FM in her speech. India will now have a maximum marginal tax rate like many developed countries (see Table 2).
 
Corporate tax rate
 
Hitherto, the beneficial tax rate of 25 per cent was applicable for companies having turnover up to Rs 250 crore The said beneficial tax rate has now been extended to companies having turnover up to Rs 400 crore in FY 2017-18, which cover 99.3 per cent of the corporate taxpayers. This will not only reduce tax cost for MSMEs, but will increase tax compliance. The effective tax rate (corporate tax + DDT) for most of the domestic companies will be at par with foreign companies. LLPs will continue to have a substantial tax advantage (see Table 3).
 
Boost to the economy
 
Sunrise and advanced technology areas
 
Investment linked incentives are proposed (in the FM’s speech) for setting up mega manufacturing plants for semi-conductor fabrication, solar cells/electric charging facility, lithium batteries, computer hardware etc. It is expected that the tax incentives will be legislated upon announcement of the investment scheme. This is really farsighted and will propel economic growth through Make in India. Investment linked incentives are not dependent on profits and hence more attractive to investors.
 
Start-ups
 
A slew of measures have been announced to remove tax difficulties peculiar to start-ups –
 

• Investments by specified angel investors will be exempted from rigour of scrutiny for valuation based anti-abuse provisions. E-verification will be conducted to confirm identity of the investors and source of investments. This will be extended retroactively through administrative measures.

 

• Exemption from “angel tax” on excess of market value over share issue price extended to funds received by venture capital undertakings from Category II AIF.

 

• Carry forward of losses will continue upon change of ownership provided all the original owners or owners holding 51 per cent stake remain.

 

• Rollover of capital gains from sale of residential property for investment in start-ups extended up to 31.03.2021. Further, minimum investment criterion in start-up lowered from 50 per cent to 25 per cent.

 
Number of start-ups have increased phenomenally in the recent past especially with entrepreneurial inclination of technocrats (Table 4). The new measures should ensure removal of the bottlenecks in funding of start-ups thereby boosting futuristic industries.
 
 
Shift to digital economy
 
There has been ample growth in digital payments over the past few years (see Table 5). New measures have been proposed to promote digital economy and bring more transparency:
 

• Inclusion of digital payment methods such as mobile wallets, UPI, credit cards, etc. 

 

• Companies with turnover exceeding Rs 50 crore now mandatorily required to provide a digital payments option for their customers.

 

• TDS at 2 per cent on cash withdrawal from bank/post-office in excess of Rs 1 crore in a year.

 
This will give impetus for creation of necessary infrastructure for making digital economy a reality and prevent generation and circulation of black money. Having said that the banks need to incorporate the flagging mechanism in their system to ensure appropriate compliance. The 2 per cent TDS may create liquidity issues for MSMEs especially if their tax liabilities do not cover the taxes withheld.
 
Incentives to IFSC
 
The incentives proposed for International Financial Services Centre (IFSC) will give a tremendous boost to investor confidence and lead to development of world class financial infrastructure in India (see Table 6). This proposal has re-emphasised the importance of GIFT IFSC as an emerging global financial services hub.
 
Anti-abuse measures
 
The government is furthering its anti-abuse by extending 20 per cent++ buyback tax on shares of listed companies, to plug tax arbitrage between buyback and dividend. Such buyback will be exempt for shareholders. However, since the amendment is applicable from July 5, 2019, the companies already in the process of buy-back may be burdened with additional taxes.
 
Gifts by residents to persons outside India will now be taxable in India. This will make it mandatory for non-resident recipients to disclose such gifts originating in India and pay tax on it. The tax treaty benefits will apply. It remains to be seen if this measure can withstand the test of courts.
 
Stringent provisions have been introduced for denying benefits to charitable trusts/institutions for violation under of any other laws.
 
Transfer pricing
 
The Budget proposes a few far reaching amendments:
 

• Master file (MF): An entity within an international group (with turnover exceeding Rs 500 crore) having operations in India will be required to submit MF, irrespective of any international transaction. This may result in additional compliance burden for taxpayers. Given that transfer pricing is pre-conditioned by international transaction, this compliance requirement may be subject to challenge. However, a clarification is awaited through rules.

 

• Secondary adjustment: Where a taxpayer does not intend to remit a transfer pricing adjustment into India, it may opt to pay tax at 18 per cent++ of the remittable amount. This measure, though expensive, will bring certainty in the settlement. It will replace perpetual taxation of the interest on the unremitted amount.

 

• Post APA assessment: The power of the assessing officer in a post APA modified assessment will be restricted to modifications in the income for implementing the APA and not assess or reassess any other issues. This proposal will avoid unnecessary litigation.

 
Ease of doing business
 
E-assessment: The FM has proposed introduction of ‘faceless assessment’ which means that there will be no human intervention while scrutinising the tax returns. The government will need to train their personnel for undertaking this exercise judiciously, before implementing this paradigm shift. The taxpayers also will need to provide robust explanation and data for appropriate assessments.
 
Online applications can now be made to the tax officer for determination of tax on payments to non-residents. This is in line with the recent change made for obtaining lower withholding certificates. 
 
Widening of tax base
 
The filing of return of income made compulsory for assessees having deposit of more than Rs 1 crore in current account in a year, spending more than Rs 2 lakh on foreign travel or more than Rs 1 lakh towards electricity, etc. This measure coupled with the linking of PAN and Aadhaar will be a deterrent to tax evasion, especially in the marginal cases. Even persons with income below tax threshold due to capital gains deductions will be covered under this rule.
 
Individual/HUF (not liable to tax audit) will now have to deduct tax at 5% from payments for contractual/professional services exceeding Rs 50 lakh without obtaining TAN for the same.
 
Other proposals
 

• Clarification provided on demerger of Ind-AS compliant companies.

 

• STT on options to apply on difference between strike price and settlement price.

 

• NBFCs to pay tax on interest from NPA on receipt basis.

 

• Brought forward business loss not to lapse on change in shareholding pursuant to NCLT order (in relation to oppression and mismanagement) under section 242 of the Companies Act, 2013.

 

• Non-resident/not ordinarily resident now covered under Black Money law if they were resident in the year in which undisclosed foreign asset was acquired or to which undisclosed foreign income relates.

 

• Exemption for interest earned by a non-resident on rupee denominated bonds issued during September 17, 2018, to March 31, 2019.

 
Grapevine proved wrong
 
Inheritance tax was not introduced.
 
Conclusion
 
Although limited in number, the proposals are futuristic and far reaching. The Direct Tax Code is on the anvil. The current measures probably are a precursor to the same.