More exemptions and rebates: Direct tax sops likely in Budget

Feel-good measures may include revision in tax slabs and rates for individuals and corporates

To soften the “pain” of demonetisation, the central government might announce a number of direct tax sops for individuals as well as the corporate sector in the Union Budget for 2017-18, which is likely to be presented on February 1 — earlier than usual.  

The Budget might have revisions of the tax slabs, reductions in the corporate tax rate, and more tax exemptions or rebates in certain cases. While a clearer picture is emerging, nothing is likely to be finalised till mid-January. 

Policymakers have stated — publicly and off the record — that the Prime Minister’s Office and Union finance ministry are working on certain “populist” measures on taxes. This would fit in with the now expected “feel-good” Budget.

Minister of State for Finance Arjun Ram Meghwal had told Business Standard earlier that there was scope for reduction in direct taxes in the Budget. “There is a likelihood of reduction in direct taxes next financial year. That will be a part of ‘ease of doing business’. This will be deliberated on in pre-Budget consultations.”To soften the “pain” of demonetisation, the central government might announce a number of direct tax sops for individuals as well as the corporate sector in the Union Budget for 2017-18, which is likely to be presented on February 1 — earlier than usual.  

The Budget might have revisions of the tax slabs, reductions in the corporate tax rate, and more tax exemptions or rebates in certain cases. While a clearer picture is emerging, nothing is likely to be finalised till mid-January. 

Policymakers have stated — publicly and off the record — that the Prime Minister’s Office and Union finance ministry are working on certain “populist” measures on taxes. This would fit in with the now expected “feel-good” Budget.

Minister of State for Finance Arjun Ram Meghwal had told Business Standard earlier that there was scope for reduction in direct taxes in the Budget. “There is a likelihood of reduction in direct taxes next financial year. That will be a part of ‘ease of doing business’. This will be deliberated on in pre-Budget consultations.”

An official aware of the pre-Budget deliberations said, “We are still in the process of finalising the Budget. However, there is room for direct tax sops. Any potential loss in revenue could be offset with the expected proceeds of the new income-disclosure scheme.”

The latest disclosure scheme, Pradhan Mantri Garib Kalyan Yojana, allows those depositing money in the old series Rs 500 and Rs 1,000 notes to enjoy immunity from certain taxation laws by paying a 50% tax on the undisclosed income. However, they would have to deposit a fourth of the undisclosed income for a four-year lock-in.

Another government official said the Centre could look at reduction in the corporate tax rate of up to two percentage points from 30% in the next financial year.
 

“While it is too early to talk about direct tax reduction, there will be discussions on the feasibility of re-looking at the tax slabs. Corporate tax will definitely see an across-the-board cut this time of up to two per cent,” said the official.

For general taxpayers, the current income tax exemption ceiling is Rs 2.5 lakh per annum. Salaries from this limit to Rs 5 lakh per annum attract 10% tax; up to Rs 10 lakh attract 20% tax; and above Rs 10 lakh attract 30% tax. Budget-makers are looking at tweaking tax rates as well as slabs.

Part-B of Union Finance Minister Arun Jaitley’s Budget speech, which presents taxation proposals, might only have announcements related to direct tax and customs announcements as indirect tax measures under the goods and services tax (GST) will be decided by the GST Council. 

Of course, all this hinges upon GST being rolled out by April 1, which seems unlikely with the Centre and states being unable to reach a consensus in the council meeting on Saturday. The council is going to meet again on December 11 and 12 and try to break the deadlock.

Experts, too, are expecting a revision in tax slabs and rates. “I am expecting something positive on the tax front in the Budget to compensate people for the hurt caused by demonetisation. Fear and tax uncertainty seem to be back on the table. The government may increase some tax slabs to compensate people or come out with some incentives to save taxes. It might do to couple that with stricter and stringent enforcement provisions for non-compliance,” said Neeru Ahuja, partner, global business tax, Deloitte. 

In the 2015-16 Budget, Jaitley had promised a reduction in corporate tax rates to 25% by 2019. Towards that, the government has laid down a road map to simultaneously phase out exemptions given to the corporate sector to reduce the tax rate, simplify administration and improve India’s competitive edge globally.

While corporate tax is 30%, the effective rate of taxation is close to 23% on account of a large number of exemptions. The revenue forgone in 2012-13 on account of tax deduction stood at Rs 68,000 crore. In the next financial year, the corporate rate might hover around 28%after the corporate tax cut. With this, the government is looking at aligning Indian taxation levels to global standards.

Confederation of Indian Industry President Naushad Forbes said corporate tax should be reduced to 18% by withdrawing exemptions of all sorts. 

“There is no need to have exemptions. In 2014-15, as per our calculations, the effective tax rate for corporate was 19.4% after all exemptions. So basically, we have pitched for a reduction to 18%in the Budget,” he said. Forbes added it would make the tax structure much simpler. “The intention is to go for a complete exemption-free system right away and make it more attractive for foreign investors.”

In the past Budget, the corporate tax rate for companies with a turnover of Rs 5 crore or less was lowered to 29%, plus surcharge and cess, from 30%, plus surcharge and cess. Besides, a lower corporate tax rate of 25% was also announced for all new manufacturing companies incorporated from March 1, 2016, given that they do not claim any exemptions. The revenue forgone in 2015-16 on account of exemptions stood at Rs 62,000 crore.