<b>Mukesh Butani:</b> More good, less bad, nothing ugly

The Budget tweaks tax rates to address the rich-poor divide

Finance Minister Arun Jaitley presented his fourth Budget amidst poetry couplets reminiscing Mahatma Gandhi saying “A right cause never fails” possibly referring to the demonetisation move, labelled by his opponents as having derailed the economy. Though in the context of rebuttal to detractors, the government did have a tough challenge to meet in the current Budget by keeping the right balance between welfare schemes, interest of the common man, the ease of doing business agenda and revival of confidence of investors.  

Undoubtedly, the balance seems to have been addressed with more good, less bad and nothing ugly. The administration has also kept a decent balance between economic reforms and increase in public investment in infrastructure/development projects, rebalancing the interest of the common man and the rich. The FM has been generous in allocating the expenditure budget for the infrastructure sector, which amounts to Rs 3.96 lakh crore for the coming fiscal in anticipation of the public sector driving the growth agenda. With due justification to the growing need for public expenditure, he has been modest on the estimate of the fiscal deficit at 3.2 per cent, which seems walking the middle path, keeping in mind FRBM panel recommendations. The pro-growth agenda and the long-term vision of the government are evident with 25.4 per cent increase in the capital expenditure in comparison to the last fiscal. 

Another interesting announcement is to restructure the oil and gas sector by creating an integrated public sector oil major to match the performance of international oil majors. This could lead to a possibility for seeking international markets for funding and/or of leveraging on large balance sheet for bidding for upstream assets, given India's thirst for oil. Reduction in customs duty on LNG points to India’s commitment to the Paris accord.

The Budget continues to push the “ease of doing business” agenda with the introduction of changes to FDI policy. In particular, the proposal to abolish FIPB seems like a bold move. This could reduce M&A timelines, create new investment opportunities for foreign investors and reduce timelines for investment under the approval route. It would be interesting to see how the government deregulates FDI in sensitive sectors such as defence and how controls would be enforced for approval for other sectors. 

There is a lot in the fine print on income tax, some proposals have been guided to boost foreign investment and provide relief to middle class individuals and MSMEs. Tax proposals for political contributions taxability is suggestive of a bold move and its determination to fight black money and corruption. An unexpected announcement in the Budget is the proposal to reduce the holding period from three years to two years for long-term gain on transfer of immovable property, which is likely to boost investment in the real estate sector.

Other proposals such as concessional tax rate of five per cent on external commercial borrowings and interest payments to FPIs on non-convertible debentures up to June 2020 are guided to attract debt capital. This is likely to increase debt funding for capital-intensive sectors such as infrastructure and large-scale manufacturing. A similar tax rate concession has been provided for Indian masala bonds. The proposal to exempt certain categories of FPIs from indirect transfer provisions reiterates the government's commitment to provide a non-adversarial tax regime.  

Steps such as introduction of secondary adjustments under Transfer Pricing provisions have been made to align the norms with international standards. Changes have been made in line with the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD transfer pricing guidelines). The secondary adjustment shall entail an adjustment to income in India in specified cases, including suo moto adjustments or made pursuant to advance pricing agreements.  

Another move is the introduction of partial thin-capitalisation rules, wherein it has been proposed to disallow interest expenses in excess of 30 per cent of earnings before interest, tax and depreciation. However, the disallowed interest would be permitted to be claimed as expense within the next eight years. Though the law is silent on whether this parameter would provide guidance to determine appropriate capitalisation of an entity, it would be interesting to see how tax officials invoke this while applying GAAR to be effective from April 1, 2017. 

Simplification of tax compliances have been high on this administration's agenda.  Consistent in improving the compliance burden, the law has reduced the time limit for completion of assessment from 21 months to 18 months as well as the timeline to revise the income tax return has been reduced from two years to one year. This could result in speedier refunds for taxpayers and speedy closure of tax assessments.  

Keeping post-demonetisation tax reforms in mind, proposals have been made to digitalise the payments, including denial of deduction for expenditure above Rs 10,000 in cash and prohibition to donate cash over Rs 2,000 to charitable trusts and political parties. Similarly, incentives have been introduced to encourage digital transactions by small entities, which are taxable on a presumptive basis. The government has proposed to reduce the presumptive tax rate from eight per cent to six per cent, provided transactions are undertaken digitally.

The FM acknowledging that the step to demonetise high-denomination currency and the move to a “new” normal has several reaping benefits but to alleviate the pain of citizens, he has reduced tax rates from 10 per cent to five per cent for citizens earning less than Rs 5 lakh. However, high net worth individuals with income above Rs 50 lakh would be hit by an additional surcharge of 10 per cent.

The most heartening part of the Budget was market fears on increase of tax on short-term capital gains and new levies such as inheritance tax, the underlying message being that tax rates would be used to address disequilibrium between the poor and the rich, but not at the cost of anti-business measures.
 

The writer is managing partner, BMR Legal. With inputs from Puneet Gupta, associate director. Views are personal