The Budget has a transformative agenda built on nine pillars - agriculture and farmers' welfare, rural employment and infrastructure, social sector, education, skills and job creation, infrastructure and investment, financial sector reforms, governance and ease of doing business, fiscal discipline and tax reforms.
The finance minister has recognised the fact that reforming the tax system is critical to improve ease of doing business, and has announced several measures to simplify and rationalise the tax regime. This is in line with the Easwar Committee recommendations, which primarily deal with taxpayers' concerns relating to withholding of tax provisions, assessment, appeal, recovery and penalty proceedings.
The proposal to modify the scheme of penalty by providing different categories of misdemeanour with a graded penalty, thereby reducing the discretionary power of the tax authority, deserves special mention. Deferment of the Income Computation and Disclosure Standards (ICDS) is a recommendation that, perhaps, requires the government's consideration. Taxpayers are already grappling with regulatory changes in the Companies Act, 2013, the Indian Accounting Standards and the proposed goods and services tax. Therefore, industry should be allowed more time to deal with another change. Deferring the ICDS is also unlikely to adversely impact government revenues.
The Budget has proposed measures for improving the dispute resolution process, which include the introduction of a new dispute resolution scheme. The proposal to deny the tax authority the power to appeal the directions of the Dispute Resolution Panel should reduce the backlog of appeals. The new scheme would enable a taxpayer to settle disputes pending before the first appellate authority by paying the disputed tax and interest till the date of assessment. It remains to be seen if this proposal motivates taxpayers to settle their disputes. While it is important to guard against arbitrary settlement of disputes, taxpayers who are confident of the technical merits of their cases, may need an incentive that goes beyond back-stopping interest and relief from potential penalty to respond favourably to the new scheme.
In order to curb black money, the government has yet again introduced a one-time compliance scheme, the Income Declaration Scheme, effective from June 1 for a limited period. If successful, this would serve as a mechanism to curtail black money. However, taxpayers, who have already been subjected to assessment or survey proceedings, are not eligible for the scheme. It may be prudent to include such taxpayers, too, as long as the disclosure is in relation to the income. This was not the subject matter of assessment or survey proceedings earlier.
The proposal to provide a reduced tax rate for new manufacturing companies, extending the benefit of deduction for employment of new regular workers and changes to the Customs and excise duty rates on inputs, will possibly reduce costs and improve competitiveness. While it was expected that the corporate tax rate would be reduced, the limited fiscal space might have contributed to its deferment. Companies may, however, be happy with the extended time frame given for sunset clauses on tax incentives.
The finance minister has recognised that much ground has shifted in the global tax debate. Many countries -including those with relatively lower corporate tax rates - have enacted the so-called "patent or innovation box" regime to spur innovation and domestic manufacturing. The regime grants a lower tax rate on profits from intangibles, "boxing" them off from the rest of the system. Along with the road map for phasing out tax incentives, the Budget has introduced a "patent box" regime in India under which patent-related income would be taxed at 10 per cent.
With a strong technology and knowledge-driven economy, India may be in a sweet spot to attract investors, who now need to ensure that they do not fall within the ambit of harmful tax practices under the "nexus approach" as recommended by the Base Erosion and Profit Shifting project of the Organisation for Economic Cooperation and Development (OECD). That is, taxpayers can use intellectual property (IP) regimes only if they show that significant research and development occurs in that jurisdiction. The government should consider extending the scope of the regime to cover other forms of IP as well as to record income from the sale of products produced using the IP. The "patent box" regime, along with the package of measures for Start Up India may prove to be a catalyst to the progress from Make in India to "Innovate in India".
Transparency is also a key theme in the OECD project. The rise in the number of transparency obligations affects a majority of multinational companies worldwide. The Budget proposes new transfer-pricing documentation requirements and reporting of business activities on a country-by-country basis. It is difficult to argue against the premise that we are entering a new era of transparency. Whether a company sees this as a broad opportunity for finance transformation or simply an exercise in compliance, assessing readiness and preparation will be important.
The author is chairman, India Region, EY