Budget 2020: Its time govt introduced forward-looking, simplified version of I-T Act; should focus on long overdue Direct Taxes Code

Budget 2020 is being presented at a time when the economy, Indian as well as global, is showing signs of stress. India’s estimated GDP growth of 5 percent is the lowest in the past decade or so. There is a dip in the private investment and consumption demand is falling. The Finance Minister has limited fiscal space with the tax revenue collections below expectations. A reformist Budget with the right policy levers is a fair expectation. We take a sneak peek at some of the key direct tax reforms that are expected from Budget 2020: Reduce personal taxes to boost consumption: To boost consumption, especially at lower income levels, it may help to lower individual tax rates. For example, the tax rate for income in the slab of Rs 5 lakh to Rs 10 lakh which is currently 20 percent may be reduced by either reducing the tax rate to 10 percent or by raising the thresholds from Rs 5 lakh to say Rs 8 lac for the 20% tax rate to be attracted. While the loss of tax revenues may not be material, this would provide more disposable income to the people and could boost the consumption demand. Higher GST collections should partly offset the loss of income tax revenues. Small tweaks in corporate tax needed: Significant corporate tax reforms have already been made through the Taxation Ordinance of 2019 and subsequently ratified through the Taxation Amendment Act, 2019. India’s corporate taxes are quite competitive in the global landscape, especially in the Asian region. This should help attract more FDI into the country. However, some smaller tweaks are expected. An extension of the present sunset date of 30 June, 2020 (section 194LC/194LD) for availing concessional withholding tax rate of 5 percent in respect of interest on foreign currency loans is a reasonable ask when globally countries are vying with each other to attract foreign capital. This will also prevent flight of foreign capital from India. [caption id=“attachment_7340511” align=“alignleft” width=“380”]  File image of Finance Minister Nirmala Sitharaman. PTI[/caption] Introduction of the 10 percent long term capital gains a couple of years back on the sale of listed shares/equity-oriented mutual funds is also being seen as a regressive step since it has not added much to the tax kitty, but has had negative sentiments on investors. The Budget should amend this and go back to the earlier exemption rule. Corporates that consistently and persistently invest in R&D outperform others. Several studies confirm a positive correlation between R&D and economic development. Further, leveraging new and emerging technologies like Artificial Intelligence, Internet of Things, BlockChain, etc., to the maximum advantage of the economy requires higher levels of innovation, keeping pace with the advancement of technology globally. However, currently, the IT sector continues to be deprived of the R&D tax incentive under the current law. While there has been a continued focus on encouraging IT adoption and allocation of funds in a few sectors, there is no specific incentive given to the IT companies for R&D. Key expectations from this Budget on this front are to include the introduction of additional depreciation on the tangible/ intangible assets used in R&D units/divisions of companies which would incentivize capital investments and reintroduction of the weighted deduction [under section 35(2AB)] for R&D activities carried out by such companies. Extension of tax holiday: On the SEZ front, to maximise the use of unutilized SEZ space, the government recently notified (December 2019) all existing SEZs as “multi-sector special economic zones” (co-existence of different sector SEZ units in the same SEZ). However, without an extension of the existing tax holiday sunset date of March 2020, there is not much incentive for companies to shift to SEZs. Therefore, one could anticipate an extension to the sunset clause, at least for the non-IT/ITES sectors. Alternatively, as recommended in the Baba Kalyani committee’s report on SEZ reforms, SEZ incentives should be linked to investments made and employment generated in the SEZs, rather than the current focus of how much foreign currency revenues these SEZs earn. Direct tax disputes’ settlement scheme: Lastly, the introduction of a tax dispute settlement scheme could prove to be a silver lining for the legacy tax disputes tormenting corporate taxpayers. The government could ask corporates to pay part of the disputed amount along with interest and penalties to end age-long disputes. It is thus anticipated that the upcoming Budget would bring into effect the said scheme and help release clogged tax demands. This will definitely boost the government’s tax kitty. Corporates would be a happier lot. A similar scheme was introduced under the indirect tax regime in Budget 2019. On the side-lines of the Budget, the government should also focus on releasing the new Direct Taxes Code, which is long overdue. The Indian income tax law is a 60-year old law and with amendments over the years, it has become a complicated piece of legislation. It is high time that the government introduces a forward-looking and simplified version of the income-tax law. Introduction of calculated tax measures along with strong macro policy changes would act as stepping stones for the country’s economic growth and therefore all eyes are on the Finance Minister. (Rao is Partner, Deloitte India and Nahata, Manager, Deloitte Touche Tohmatsu India) Follow full coverage of Union Budget 2020-21 here