Budget 2020: Finance Minister Nirmala Sitharaman must consider announcement of implementation of proposed Direct Tax Code

The year 2019 posed several challenges to the Indian economy. During the year, there was a significant dip in the GDP growth rate, which may be attributed to a slump in the manufacturing and real estate sectors, faltering consumer demand and global trade wars. The repercussions thereof are likely to spill over into the current year as well. All eyes are now on the upcoming India Union Budget 2020 with expectations that the finance minister will announce a series of measures to pump prime the economy. With this backdrop, some of the key expectations from the Budget on the direct tax front are summarised below. In September 2019, the government made the Big Bang announcement of significant reduction in corporate tax rates. This news was received with loud cheers by Indian companies. We believe this move will go a long way in improving the bottom line of corporates and make them more competitive with their peers in the Asian region. To achieve sustained growth in business, however, the demand for consumption of products and services must proliferate. This can be achieved by increasing the disposable income in the hands of consumers. Therefore, in a bid to spur consumption, the government may consider a rejig in the personal taxation rates and deductions available to individuals (especially those available in connection with housing loans and investment in houses). Coupled with this, the finance minister should consider reducing the tax rate of limited liability partnerships, which are currently taxed at 30 percent and bring them on par with the corporate tax rates. [caption id=“attachment_4305367” align=“alignleft” width=“380”] Representational image. Reuters[/caption] One of the major demands of corporates is that the government should replace the dividend distribution tax on dividends with the withholding tax (WHT) on dividends. This will enable overseas shareholders of Indian companies to get credit of the Indian WHT against the tax liability in their home country, thereby avoiding the risk of double taxation of dividend income. In the current judicial framework, a tax dispute that reaches the high court or the apex court takes more than 15 years to attain finality. According to a report of the Standing Committee on Finance of the Lok Sabha, there are lakhs of tax cases pending across different appellate forums/courts aggregating to direct tax disputes of around Rs 10 lakh crore. Considering the large chunk of cases that are stuck in litigation, the government ought to adopt radical measures to address this issue. In the upcoming Budget, the finance minister should consider coming up with a dispute-resolution scheme, on the lines of the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019, in relation to indirect taxes, to bring past disputes to an end. Section 56(2)(viib) of the Income-tax Act considers the amount of any investment made by an Indian entity in an unlisted Indian company above the Fair Market Value (FMV) of the shares as taxable income of the company. Furthermore, as per section 56(2)(x), if any person receives shares of a company for a consideration less than its FMV (as prescribed), the differential would be subject to tax in the hands of the recipient of shares. Section 50CA of the act provides that in case of transfer of unquoted equity shares at less than FMV (as prescribed), the FMV of such shares shall be deemed to be the sale consideration for the purpose of computing capital gains. With a view to provide flexibility to taxpayers in case of restructurings/transactions within the group, an exception should be carved out from the applicability of these provisions in such cases. The carve-out would be in accordance with the objective of these provisions, which was to act as anti-abuse measures rather than act as means for revenue generation. In a move to becoming digital and to stride towards a cashless economy, the interim Budget had introduced a provision that provides that every person having a turnover of more than Rs 50 crore shall mandatorily provide facilities for accepting payments through prescribed electronic modes. In that direction, the Central Board of Direct Taxes (CBDT) recently prescribed the electronic modes that include debit cards powered by Ru Pay, BHIM-UPI and BHIM-UPI QR Code. On failure to comply with these provisions, a penalty of Rs 5,000 per day will be levied. Prima facie, it appears that these provisions will apply even to Indian companies that route all transactions through banking channels or are 100 percent export-oriented with no local customers. The government should amend the law so as to provide relaxation from this provision in such cases. The Budget could also be a window for the government to make an announcement with regard to the implementation of the proposed Direct Tax Code, which aims to simplify the law and incorporate global best practices therein. There are high expectations from the upcoming Budget, especially in light of the slump in the Indian economy. Given the strength of the economy’s basic fundamentals, announcement of appropriate measures in the budget can act as a strong enabler to help India achieve its goal of becoming a $5 trillion economy. (The writer is Partner and Head, Corporate and International Tax, KPMG in India. Ravish Kotadia, chartered accountant, contributed to the article)   Follow full coverage of Union Budget 2020-21 here