 "Interim Budget 2024: Some key imperatives that are need for the economy")
Finance Minister Nirmala Sitharaman has presented five Budgets in a row and the interim one on Thursday will be her sixth. However, given that the elections are round the corner, this Budget may be more like a vote on account. The difference being that a vote on account is only to meet the essential expenditure for the remaining term of the government, whereas an interim Budget usually includes a statement on the state of the economy and can include some changes in tax rates.
In any case, it is unreasonable to expect any major changes and at the most there could be some changes in tax rates or measures to push manufacturing.
Tax rates
Corporate tax rates are very reasonable at 25 per cent now. In relation to new manufacturing units, there is an even more benign rate of approximately 17 per cent but only if manufacture is commenced by March 31, 2024 which is just two months away. Manufacturing’s share in India’s gross domestic product (GDP) is only 13 per cent, as opposed to 28 per cent in China, 25 per cent in Vietnam and 18 per cent in Indonesia. Also, the China Plus One opportunity needs to be leveraged. In this context, there is a strong case for extending the March 2024 deadline. The government is anyway doing a lot in terms of the production-linked incentive (PLI) scheme, but one would think that the extension of March 2024 by at least a couple of years could give a further and much needed boost to Indian manufacturing, which has significant employment spin offs and will have a positive snowballing effect on various other sectors.
In terms of partnership firms and LLP, which entities constitute a bulk of the MSME sector, which needs a boost, the rate of tax is approximately 36 per cent (much higher than the corporate tax rate of 25 per cent) on the basis that there is no tax on withdrawal of profits from partnerships and LLPs as opposed to a company situation where profits are withdrawn in the form of dividends. Two points need to be recognised here: One is that companies do not declare all post-tax profits as dividend and indeed; statistics show that only 30-40 per cent of post tax profits are declared as dividend. Also, shareholders also pay tax at their individual rates, and if one assumes a 25 per cent average rate for shareholders and a 30 per cent post tax distribution by companies, that would translate into 7.5 per cent tax; adding that to a 25 per cent corporate tax rate, the aggregate burden on the company and shareholders put together would be 32.5 per cent. Accordingly, the tax rate on companies effectively (including on the shareholders) could be 32.5 per cent (it is 36 per cent on partnerships and LLPs). Considering all these factors, the maximum rate on partnerships and LLPs should be capped at 30 per cent, including surcharge and cess; this is more logical and also will be an incentive for entrepreneurship.
The situation in terms of individual tax rates, in any case, should be addressed because the minimum basis at which the higher level of tax rate kicks in is only Rs. 10 lakh and that should be increased to at least Rs 15 lakh; in fact, a mechanism to linking it to indexation could also be put in place. Also, the higher tax rate of 43 per cent over Rs 5 crore is an obstacle, and needs to be rationalised to a maximum of 35 per cent.
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Other possibilities
Corporate entity restructuring and mergers and acquisitions are critical for growth of the economy and in this context, there are many tax provisions which are significant deterrents; for example, a very restrictive definition of tax neutral demerger, restrictive provisions for set off of losses, and artificial provisions on transfer of shares of closely held companies are acting as major deterrents to mergers and acquisition activity, and are also contrary to ease of doing business. Many of these provisions are outlier provisions to deal with exceptional situations and some are legislated in a completely different era; for example, if a loss making financial services entity merges into another financial services entity, the loss is not allowed to be carried forward, because the loss set off provision for amalgamating companies are restricted to manufacturing entities and a few others. This possibly was based on the assumption that service companies including financial service companies would usually not be loss making anyway, but various examples are starkly in front of us and are a clear manifestation of the fact that this assumption is itself an incorrect one. Similarly, capital gains provisions have been drafted at a point of time when concepts like earn out payments, were not (or were less so) in the commercial arena, and therefore, there is a significant amount of tax ambiguity on such concepts.
ESOP taxation is another issue where the tax triggers at the point of exercise of option rather than monetization and that is clearly not logical or fair.
There are also several other aspects that badly need to be addressed; at a broad brush level, the big ticket ones are very harsh penalty provisions and extremely onerous withholding tax provisions; the latter also needs to be seen in the light of the fact that a taxpayer who is liable to TDS is actually functioning as an agent of the Government, and helping the Government to collect taxes.
One can hardly expect even an interim Budget to deal with provisions like ESOP and restructuring, but it would be good to bear in mind and deal with such matters once the new government is in place. We are in a very volatile world with significant geopolitical risks and economic uncertainties, and simplifying life on the tax front would help somewhat in navigating these turbulent times.
The writer is founder, Katalyst Advisors, a boutique structuring and advisory firm, and former managing partner (West) and joint tax leader of PWC India. These are the personal opinions of the writer. They do not necessarily reflect the views of www.business-standard.com or the ‘Business Standard’ newspaper