A path to $5-trillion economy

The Budget focused on redistribution of wealth with tax administration reforms

The build-up to this year’s Union Budget witnessed unparalleled optimism and ambition from industry following an “unambiguous” mandate by citizens reaffirming faith in the Modi government. To set the ball rolling for the New India under Modi 2.0, this year’s Budget was presented by India’s first full-time female Finance Minister (FM), Nirmala Sitharaman. From 1970, it has been a tradition that the serving FM carries a hardbound briefcase. However, this tradition was broken since the FM opted for a bahi-khata, instead of a briefcase.
 
The theme for the Budget was a categorical statement by the FM that it is well within India’s capacity to become a $5 trillion economy. Historically, it took India over 55 years to reach $1 trillion economy. Whereas the New India filled with hope, trust and aspiration, in five years of the Modi government added $1 trillion to the economy. Presently, the Indian economy stands at $2.7 trillion and the aim is reach $3 trillion by the end of this fiscal year. To corroborate her statement, the FM cited from Chanakyaniti (a collection of aphorisms) sutra “Kaarya purusha kare na lakshyam sampa dayate” which means “with determined human efforts, the task will surely be completed”.

 
The Economic Survey, unveiled on the Budget eve, emphasised “blue sky thinking”, highlighting an ambitious agenda of applying principles of behavioural economics to achieve 8 per cent sustained GDP growth, to make India a $5-trillion economy by 2024-25.
 

At the tax policy level, the government put forth tax proposals that aim to stimulate growth, incentivise electric vehicles, affordable housing, encourage domestic manufacturing, reduce disputes, encourage start-ups by releasing entrepreneurial spirits and gearing towards promoting digital economy. For the corporates, the FM started her direct tax proposals by stating that widening of lower rate of 25 per cent to certain class of companies. Presently, the rate is only applicable to companies having annual turnover up to Rs 250 crore, which the Budget has proposed to widen to companies having annual turnover up to Rs 400 crore. This will cover 99.3 per cent of the companies, to compensate for loss, two additional slabs of surcharge has been introduced to tax super rich individuals having income above Rs 2 crore. To boost  economic growth and promote Make in India, the government has proposed to launch a scheme to invite global companies through a transparent competitive bidding process for setting up mega-manufacturing plants in sunrise and advanced technology areas and provide them investment linked income tax exemptions (section 35 AD). This seems in line with investment linked tax holiday for mega projects entailing capital outlays and promote employment generation.

 
Start-ups in India are pillars for the New India and their continued development needs to be invigorated. To tackle the angel tax issue, the Budget has provided a big sigh of relief to start-up investors who file requisite declarations in their returns which will no longer be subjected to scrutiny in respect of valuations of share premiums. The issue of establishing identity of the investor and source of funding will be resolved by putting in place a mechanism of e-verification. With this, funds raised by start-ups will not require any scrutiny from the Income Tax department and for pending assessments of start-ups, CBDT shall notify an action plan.

 
Proposals for widening and defending of tax base include a provision for deeming gifts as income, made by persons being residents to persons outside India, which were claimed to be non-taxable. It has been clarified that treaty benefit, if any shall not be impacted.

An anti-abuse provision by way of 2 per cent withholding tax has been provided for cash withdrawals above Rs 1 crore (for each bank) for business purposes, to discourage unwanted flow of cash and track its trail.
 
What is more encouraging for me personally is administrative reforms to strengthen the tax assessment procedure by introduction of faceless e-assessments. The existing system of scrutiny assessments in the Income Tax department involves personal interaction, besides endless documentation, which leads to undesirable practices. To streamline the procedure, instill greater accountability and give shape to the vision of the Prime Minister, a scheme of faceless assessment in electronic mode, without disclosing the name, designation or location of the assessing officer, has been proposed to be launched this year. To start with, the Budget has proposed such e-assessments shall be carried out in cases requiring verification of certain specified transactions or discrepancies, based on data mining exercise.

 
On the indirect tax front, a dispute resolution cum amnesty scheme, the Sabka Vishwas Legacy Dispute Resolution Scheme, 2019, has been proposed for resolution and settlement of legacy cases of central excise and service tax which have got subsumed in GST. The relief under the scheme varies from 40 per cent to 70 per cent of the tax dues for cases other than voluntary disclosure cases, depending on the quantum of tax under disputes. The scheme provides relief from payment of interest and penalty and tends to address disputes at all appellate forums up to the Supreme Court. This will unlock the dispute resolution capacity allowing them to focus on new GST law.

 
On regulatory policy, the Budget scores well by making a further increase in the FDI investment limit with a proposed hike of the FDI limit for insurance intermediaries to 100 per cent (from the current 49 per cent). For aviation, media, animation and insurance sectors, the FM was clearly in favour of further opening up of Indian economy and expressed that the government will examine suggestions to hike FDI limits in consultation with all stakeholders. The upper limit for FPI investment in a company can now be increased from 24 per cent to prescribed sectoral limits with an option given to concerned corporates to limit it to a lower threshold.

 
There is lot in fine print by way of amendments to several statutes including foreign assets, benami transactions and RBI Act.
 
I reckon this year’s Budget was focused on redistribution of wealth with tax administrative reforms keeping in mind the transparency agenda and increased digitisation of transactions. It certainly lays down a blueprint for the next Budgets.
 
With inputs from Shreyash Shah and Karan Dhanuka

The writer is managing partner, BMR Legal