In February 2019, the then Interim Finance Minister Piyush Goyal adopted a pragmatic approach by providing a pro-growth and fiscally prudent Budget with a bag of surprises for the farmers, salaried employees and the middle-class. Now as Nirmala Sitharaman gears up to present her maiden Budget as the new Finance Minister, the expectations are even higher. Interestingly, she has solicited ideas from social media users about what the upcoming Budget should contain. This patently lays down her intention to gauge the wisdom of the citizens and also inculcate a sense of involvement of the citizens of the country in this important exercise. Some of the key expectations of the corporate sector from the Union Budget on the direct tax front are summarised below.
Rationalisation of tax rates
In 2015, the erstwhile Finance Minister had promised that the corporate tax rate would be gradually lowered to 25 percent from 30 percent over a period of four years, during which period the exemptions available to companies would be phased out. Over the past few years, tax incentives have largely been phased out and tax rate has been reduced for companies with turnover not exceeding Rs 250 crore. The Finance Minister may do well to now bring down the corporate tax rate for all the companies, irrespective of the turnover criteria. The need of the hour is also to bring down the tax rate of Limited Liability Partnerships so as to bring in parity with the tax rate of companies. The Finance Minister should also do away with surcharge and cess, which artificially inflates the tax rate. This is likely to make the Indian economy competitive with other major countries, where the corporate tax rate is generally lower than that in India [for instance, US (21 percent), China (25 percent), UK (19 percent) and Singapore (17 percent)].
Elimination of MAT
With phasing out of exemptions and deductions under the Income-tax Act (the Act) and with a view to avoid complexities arising from adoption of Ind AS, there is a need to do away with the concept of MAT, which has been the subject matter of protracted litigation.
Angel tax issues
Section 56(2)(viib) of the Act considers the amount of any investment made by an Indian entity in an unlisted Indian company above its fair market value (FMV) as taxable income of the company. Ascertaining FMV of companies is a highly subjective exercise and in several cases, the tax authorities have challenged the valuation of companies (especially startups that are valued based on their business idea, rather than based on their profits or assets). Thus, the amount of the alleged 'excessive investment’ gets taxed as income, which is causing a lot of heartburn to companies. While the DIPP and CBDT have taken certain steps to ease this pain for start-ups, these steps are not adequate to quell the issue and significant litigation still continues on the subject matter. The Finance Minister may do well to scrap section 56(2)(viib) from the Act. If the tax authorities sense non-genuineness of a particular transaction, there are adequate anti-avoidance provisions in the statute, which provide a mechanism to bring such transactions under the purview of taxation.
Double taxation in case of transfer of unquoted shares at less than FMV
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 sole consideration for the purpose of computing capital gains. Further, 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. Accordingly, if shares are transferred at less than FMV, the same income is taxed twice, once in the hands of the recipient of shares [u/s 56(2)(x)] and in the hands of the transferor of shares [u/s 50CA]. A suitable amendment may be made to the Act to prevent this unjust enrichment of the revenue at the cost of the taxpayer.
Demystifying taxation of digital economy
Recognising the gravity of the issues surrounding taxation of the digital economy, India has set a precedent globally with the introduction of Equalisation Levy (EL) on payments for online advertisements in 2016, as well as bringing in the concept of significant economic presence (SEP) in 2018. While the intention of SEP was to tax digital transactions, the language of the provision seems to cover the scenario of sale of physical goods as well. In the context of services, it appears that even where the service is completely rendered outside India, it could still lead to the constitution of SEP in India. It will help the cause of the industry if the finance minister can suitably address the above aspects.
Amalgamation of companies
In case of amalgamation of companies, as per section 72A, the losses of the amalgamating company are allowed to be carried forward to the amalgamated company only to a certain class of companies. Section 72A of the Act should be amended to allow the benefit of carrying forward of losses to all companies irrespective of their line of business.
New direct tax code
Apart from the above, this full Budget could also be a window for the government to make some announcements in relation to the proposed new Direct Tax Code, aimed at repealing the current law, which is perceived to be complex, lengthy and a subject matter of immense litigation.
In the backdrop of the Indian economy hitting a low growth of 6.8 percent in 2018-19, the government has given every indication that recovery of the sluggish economy is its top priority. With that in mind, the industry has a lot of expectations from the Budget. All speculations around the Budget will rest when the story is unravelled on 5 July 2019.
(Parekh is Head, Coporate and International Tax, KPMG in India while Kotadia is a chartered accountant)
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Updated Date: Jun 28, 2019 18:02:48 IST